This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 TEGUCIGALPA 003321 
 
SIPDIS 
 
SENSITIVE 
 
STATE PASS TO USTR: ANDREA GASH 
STATE FOR WHA/CEN, WHA/PPC, EB/OIA, INR/B 
STATE PASS AID FOR LAC/CEN 
GUATEMALA FOR COMMAT: DTHOMPSON 
STATE PASS TO EXIM, OPIC, USED IDB, USED WB, USED IMF 
 
E.O. 12958: N/A 
TAGS: ETRD ECON EFIN EAID HO
SUBJECT: HONDURAS: TREASURY FINANCIAL SECTOR-LED GROWTH 
INITIATIVE 
 
REFS: A) SECSTATE 211927, B) TEGUCIGALPA 2201 
 
¶1. (U) Post submits the following information on Honduras' 
financial services sector as requested in ref A.  Ref B provided 
an overview of the banking sector in Honduras.  Washington 
agencies should note that the World Bank and Interamerican 
Development Bank are currently conducting a comprehensive review 
of all aspects of the financial sector in Honduras. 
Simultaneously, the Honduran banking association (AHIBA) has 
contracted a financial services consultant to provide a similar 
assessment to the banks.  We expect results from these ongoing 
assessments to become available starting in early 2003. 
 
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State of Development of Financial Sector 
---------------------------------------- 
 
¶2. (U) Honduras is a Highly Indebted Poor Country (HIPC) with 
about USD 4.5 billion in outstanding foreign debt.  The HIPC debt 
relief completion point for Honduras has been delayed by the 
GOH's problems in meeting IMF program targets and funding of its 
poverty reduction program.  The result is a constriction of world 
capital flows to the GOH, except for concessionary loans by 
international financial institutions.  The Honduran financial 
system is comprised of a troubled banking system, no capital 
markets to speak of, limited recourse to long-term financing, 
high interest rates, limited credit-worthiness of potential 
customers and an over-crowded insurance sector.  Consumer and 
business financial services (credit cards, mortgages, leasing 
etc.) are available but expensive.  Full development of the 
financial sector will depend on the speed and success of 
structural economic reforms by the GOH.  The repayment record is 
also fairly low in some sectors of the economy. 
 
¶3. (U) At this point, the future for financial services is 
cloudy.  As the USG's financial services offer reflects, the most 
important opportunities for U.S. financial firms are probably in 
the insurance industry if limitations on the provision of cross- 
border services are lifted.  Improved macroeconomic stability (if 
and when it comes) could spur improved prospects in investment 
banking, development of a securities market and increased 
opportunities for housing and commercial mortgages. 
 
¶4. (U) The Honduran banking system, currently comprised of 20 
private and 2 state-owned banks, is considered weak and in need 
of extensive consolidation.  Insider abuses and heavy losses in 
the agriculture and real estate sectors combined to contribute to 
a large overhang of bad loans (estimated at 18 percent).  Banks 
also have a large inventory of repossessed assets (ranging from 
mines to hotels to a medical center) with limited success in 
reselling.  Slowed domestic and world economic activity following 
Hurricane Mitch and September 11, 2001 decreased demand for loans 
and other credit services, although some corporate business 
appears to be rebounding in the second half of 2002. 
 
¶5. (U) There are few, if any, restrictions on foreign banks 
establishing or operating representative offices in Honduras. 
The limited presence of foreign banks is owed mostly to the 
smallness of the market.  Current reserve requirements, 
particularly for dollar accounts, have contributed to high 
interest rates.  With their lower interest rates, regional banks 
in Miami, Panama, El Salvador and even Guatemala are often the 
lenders of choice for the most credit-worthy Honduran customers. 
 
¶6. (U) Banking supervision is improving steadily, with assistance 
from the International Monetary Fund and others, and the Maduro 
government in particular has shown dedication to its 
strengthening.  Protection of property rights (particularly land 
tenure) and enforcement of contracts in the judicial system are 
weak.  There are bankruptcy laws but they are rarely used. 
Recent legal changes allow some investment of pension funds, but 
the administrators of these funds are skittish about repayment 
prospects (in an interesting portrayal of fears on this subject, 
a teachers demonstration turned unexpectedly violent in the 
autumn of 2002 the day after the Congress adopted a law allowing 
teacher pension funds to buy bonds that are being issued to fund 
low-income housing). 
 
--------------------------------------------- 
Comments by U.S. Financial Services Providers 
--------------------------------------------- 
 
¶7. (SBU) Econcouns met with Maximo Vidal, country director for 
Citibank in Honduras, on November 27 to exchange views.  Citibank 
is the only U.S. bank operating in Honduras, primarily because of 
the small size of the market.  Citibank confines itself to 
corporate lending and services, loan sindication and investment 
banking.  The office hopes to help structure future GOH 
privatization projects.  Vidal confirmed that foreign banks face 
few restrictions in Honduras.  Vidal shared a letter that 
Citibank recently sent to USTR expressing support for the 
upcoming U.S.-Central America free trade agreement (US-CAFTA) 
negotiations.  Citibank did not identify any particular trade 
obstacles in Honduras in this letter. 
 
¶8. (SBU) Vidal, who is currently serving on the banking 
association board, confirmed the widely held view that there are 
too many banks operating in Honduras and that the GOH should 
focus on encouraging mergers.  Commenting on the fragility of the 
system, he noted that about four to five banks have significant 
agricultural loan portfolios with high levels of bad debts.  In 
addition, Vidal highlighted the extensive holdings of repossessed 
property (activos eventuales); banks are supposed to sell these 
within a limited period of time but have encountered problems in 
disposing of the assets. 
 
¶9. (SBU) According to Vidal, regional banks (Panamanian, 
Salvadoran and now even Guatemalan) are making inroads because 
they are able to offer far lower interest rates than local banks. 
Individuals and companies with means are also able to travel to 
the U.S. and work with banks in Miami and other U.S. cities.  In 
Honduras, in contrast, the high reserve requirements (50 percent 
held in Grade AA banks in the U.S. and 15 percent deposited in 
the Central Bank) restrict dollar-denominated loans to 35 percent 
of dollar holdings (30 percent to exporters and 5 percent to 
other borrowers).  The Central Bank has expressed concerns about 
lowering the reserve requirements too much too quickly, because 
of the expansionary effect on the monetary base.  The high 
interest rates and small market constrains the credit card 
industry and other financial services.  Development of a reliable 
credit bureau would, however, be helpful to credit card issuers. 
 
¶10. (SBU) Finally, Vidal underlined the limiting effect of the 
lack of capital markets.  Honduras would need a medium-term 
issuer of three to five-year bonds in order to create a liquid 
secondary market.  The lack of a capital market means companies 
and applicants for mortgages generally face short loan terms. 
 
¶11. (U) The Honduran insurance sector is currently comprised of 
12 insurance companies, 2 of which are U.S. companies, American 
Home Insurance and Pan American Life.  The rest are Honduran- 
owned.  It is believed that there are too many insurance 
companies operating in the Honduran market.  The market is 
regulated by an August 2001 Insurance Law, which reduced the 
bureaucracy in obtaining the authorization to sell insurance in 
Honduras and which strengthened sanctions on individuals and 
companies purchasing insurance from non-registered firms.  There 
is one bill currently in the National Congress which would allow 
cross-border insurance services, but its prospects are not rosy. 
The Central Bank, in consultation with the National Banking and 
Insurance Commission, is responsible for authorizing operating 
permits for national and foreign insurance institutions. 
Insurance companies are required to invest at least ten percent 
of the company's projected minimum capital in government bonds 
and hold between USD 1.5 to 4.8 million in capital (depending on 
the type of service provided) prior to beginning operations.  An 
American Home Insurance representative commented that while 
foreign insurance companies seeking to operate in Honduras are 
subject to a slightly more exhaustive authorization process than 
national firms, there are no restrictions on foreign companies 
and that foreign and national companies compete equally in the 
Honduran market. 
 
------------------------------ 
USAID and Technical Assistance 
------------------------------ 
 
¶12. (U) USAID/Honduras, which is currently developing its 
strategy for 2004-2010, is waiting for completion of the World 
Bank and the IMF Financial Sector Assessment Program (FSAP) in 
Honduras in January 2003.  This assessment should provide a 
clearer idea of the current weaknesses in the Honduran financial 
sector and World Bank and IMF recommendations to strengthen it. 
The Interamerican Development Bank (IDB) has also been supporting 
bank supervision over the past four years through various 
Multilateral Investment Fund (MIF) operations.  The IDB 
activities have improved the legal framework for supervision of 
the financial system and the quality of the information produced 
by the National Banking and Insurance Commission.  Subsequently, 
the IDB has prepared a four-year USD 25 million Financial Sector 
Program proposal that is scheduled to go to their Board of 
Directors for approval in early January 2003.  USAID/Honduras, 
which has worked with microfinance institutions and financial 
policy programs over the past decade, is currently waiting to 
receive the results of the FSAP and the approval of the IDB 
Financial Sector Program before identifying the areas where the 
USAID bilateral mission should work to strengthen Honduras' 
financial sector. 
 
------------------------------------- 
Consumer Access to Financial Services 
------------------------------------- 
 
¶13. (SBU) Honduran consumer access to financial services includes 
car loans, credit cards, mortgages and consumer lending.  Credit 
cards are issued directly from banks, with interest rates (for 
balances in lempiras) ranging from 3.9 to 4.7 percent per month. 
Rates for mortgages in lempiras are 16 to 20 percent per year, 
and 12 to 14 percent per year for those in dollars.  Terms for 
mortgages in dollars are shorter (5 to 10 years) than those in 
lempiras.  Banks are cautious to see if a borrower has dollar 
income or dollar assets before issuing a mortgage in dollars.  In 
addition to financing through a bank, several retail stores are 
offering low-interest consumer credit.  Other financial 
institutions charge extremely high interest rates and are of 
varying soundness.  The National Banking and Insurance Commission 
is seeking additional oversight responsibilities for these 
institutions. 
 
¶14. (SBU) Interest rates paid on savings accounts are slightly 
higher than those paid on checking accounts, and are higher for 
lempira deposits than dollar deposits.  Below are the interest 
rates paid by Banco Mercantil as of September 2002 (interest 
rates will vary slightly between banks): 
 
Amount of Deposit        Interest Rate 
(lempiras)               (percent) 
-----------------        ------------- 
300-199,999                  5 
200,000-499,999              7 
500,000+                     9 
 
¶15. (SBU) Hondurans' access to savings accounts may be limited by 
minimum deposit requirements established by banks.  Several banks 
have considered raising their minimum deposit requirements from 
100 to 1,000 lempiras (USD 6 to 60).  Banks are beginning to 
charge between 20 and 500 lempiras (USD 1.2 and USD 30.0) monthly 
for accounts that fall below this minimum requirement.  Hondurans 
with substantial means tend to hold their savings in Honduras' 
largest banks and Lloyds (the one foreign bank that takes 
deposits) or overseas because of fears of bank stability. 
 
------------------------------------- 
Business Access to Financial Services 
------------------------------------- 
 
¶16. (SBU) Honduran businesses also have access to financial 
services that include commercial loans for start-up and 
expansion, trade finance, and leasing.  Working capital loans (in 
lempiras) are usually short-term (12 to 18 months), with an 
average interest rate of 18 to 22 percent.  Project financing 
loans are longer (five to seven years, depending on the project). 
One banker noted to Econoff that there is plenty of money to 
lend; the problem is finding credit-worthy borrowers who are 
willing to borrow at current interest rates.  Honduras' economy 
remained fairly stagnant in 2001 and the first half of 2002, thus 
reducing the demand for loans. 
 
--------------------------------------- 
Credit Provided by Foreign Institutions 
--------------------------------------- 
 
¶17. (U) Although there are few legal barriers to entry in the 
banking sector, the small size of the market and weak financial 
situation have discouraged greater foreign investment.  Only two 
banks had majority foreign ownership in 2001 (Citibank and 
Lloyds) accounting for only 5.7 percent of bank capital. 
Panamanian Banco del Istmo is currently in the process of 
purchasing Honduras' largest financial group, Grupo Banco El 
Ahorro Hondureno (BGA).  In an effort to strengthen the banking 
system, the Central Bank in 2002 raised the minimal capital 
requirement to operate a bank from 100 million lempiras (usd 6.1 
million) to 150 million lempiras (usd 9.1 million). 
¶18. (U) The benchmark spread between cost of funds and the 
lending rate is normally two to four percent, depending on the 
industry.  This gap exists because of the reserve requirements of 
the Central Bank of Honduras (BCH) and currency risk. 
 
---------------------------------------- 
Individual Access to Investment Vehicles 
---------------------------------------- 
 
¶19. (U) Long-term investment vehicles available in Honduras 
include savings accounts, certificates of deposit, and government 
bonds.  There are no corporate bonds or stocks available due to 
the lack of capital markets.  There are short-term and long-term 
(called bonos de caja) certificates of deposit available. 
 
Amount of Certificate 
Of Deposit (short-term)  Interest Rate 
    (dollars)             (percent) 
-----------------------  ------------- 
$5,000-24,999                2.0 
$25,000-49,999               2.5 
$50,000-99,999               3.0 
$100,000+                    3.5 
 
 
Amount of Certificate 
Of Deposit (long-term)   Interest Rate 
      (dollars)            (percent) 
----------------------   ------------- 
 
$25,000-99,999               4.0 
$100,000-199,999             4.5 
$200,000+                    5.0 
 
Pierce