Record number of Ticos trust money to offshore banks.

The presence of offshore Banks in Costa Rica has grown exponentially in recent years. Within the last three years, the total amount of funds these banks have attracted has increased by 65%. This includes money private citizens and businesses have placed in savings and checking accounts, long or short-term money market accounts, retirement plans, credit loans and other financial services.

The amount of funds collected by Costa Rica’s offshore banks exceeded $2.245 million as of September of 2007. To get some perspective on this number, just imagine that it’s equivalent to 9% of the country’s Gross Domestic Product (GDP). A reliable source defines GDP as “the total market value of all final goods and services produced within a given country in a given period of time (usually a calendar year).”

A bank is termed ‘offshore’ when its official business address is located outside of Costa Rica. Typically, these banks are structured this way to take advantage of tax breaks and/or other advantages in a so-called tax haven. Some of the advantages offshore banks gain by doing this are: less restrictive regulation, low (or no taxes) and protection against local political or financial instability.

One of the main issues local banks in Costa Rica have with offshore banks is that they are not bound by the same laws. For example, offshore banks do not have to pay social security or taxes on their earnings which allows them to have lower operating costs and offer more attractive financial services (e.g. loans with lower interest rates). All of these perks make for a significant competitive advantage over local banks.

Needless to say, local banks like BCR and Banco Nacional, and some regulating authorities are against the continued presence of offshore banks in the market and deem their existence “unfair”. Oscar Rodríguez, Costa Rica’s General Superintendent of Financial Entities (Sugef), explained that offshore banks had a place in the 80s but the current financial market has changed. He went as far as commenting to La Nación, “Offshore banks are not justified today.”

Sugef currently has no legal way of supervising offshore banks and this can affect nationwide economic plans put into play by the Banco Central – Costa Rica’s equivalent to the Federal Reserve. According to Rodríguez, if a new law that is in the hands of the Legislative Assembly is approved, that would allow Sugef some control over offshore banks. The International Monetary Fund (IMF) and other international banking experts have also warned that the lack of a consolidated supervision of foreign banks in Costa Rica is a serious weakness of the local financial system.

One of the tangible downsides of the open banking market is that there is excessive competition. This competitive marketplace has caused banks to offer super low interest loans for car purchases & leases. On the surface, this seems like a great thing for consumers as their monthly payments are low but the total time it takes to pay off the entire loan is usually very long. Also, we are seeing how this practice is affecting Costa Rica’s already weak road infrastructure to the point where it’s falling apart from the sheer number of new cars on the roads.

Another negative factor of the uncontrolled banking industry is that consumers can fall prey to misleading services or promotions. One such product is credit cards which have seen a recent boom in Costa Rica. Unfortunately, most Ticos have little experience with credit cards and their potential dangers. With interest rates of up to 50% in some cases, consumers can quickly fall into deep financial problems. On the upside, many are now able to make their dreams come true by purchasing a home or starting their own business with the help of these banks.

Some of the offshore banks currently doing business in Costa Rica include Scotiabank, Promérica, Cuscatlán, HSBC, BCT and BAC.

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Filed under: Business on April 9th, 2008