Academic journal article Academy of Accounting and Financial Studies Journal

Financial Swot of Ecuadorian Private Banks after Fall in Petroleum Prices, 2015-2016

Academic journal article Academy of Accounting and Financial Studies Journal

Financial Swot of Ecuadorian Private Banks after Fall in Petroleum Prices, 2015-2016

Article excerpt

INTRODUCTION AND BACKGROUND

The banking system in a country "contributes to financial growth from its preponderant role in attracting public savings and its orientation towards different destinations, in accordance with the incentives derived from the financial market" (Seffino & Hoyos Maldonado, 2016, p.1), allowing the public to make use of banking entities in the medium and long term.

The Ecuadorian banking system in 1991 was formed by 28 national private banks and 4 foreign banks of which between branches and agencies added 517 and 36 correspondingly. According to Jiménez (2002) the increase of branches played an important role in attracting resources, but increased operating costs and the cost of holding assets immobilized. In order to achieve financial banking stability, during 1993, laws such as: Securities Market Law, Modernization Law and amendments to the Hydrocarbons Law and Tax Regime were approved. The strengthening of public finances helped to improve the activities of the private banking system and notably stimulated the expansion of domestic credit and the inflow of foreign capital.

The General Law on Financial Institutions approved in May 1994, which replaced the Banking Law, changed the structure of the National Financial System and promoted the merging and conversion of financial institutions. The number of banks increased from 35 to 39 between 1994 and 1995, the number of companies and/or financial companies from 33 to 46 and the number of intermediaries from 26 to 6. Crespo (2002) mentions that the economic management during 1996 allowed to maintain exchange stability with a moderate inflation to avoid greater social costs, but with difficulties in the banking system due to an increase in its past due portfolio, as well as the unemployment rate.

From mid-1999 until early 2001, the banking regulatory authority tightened the regulations; the accounting standards were adjusted through the issuance of a new single catalog of accounts, a complete regulation was generated to control liquidity and market risks. The rules on credit and consumer transactions were tightened. It was commanded that financial institutions must obtain and publish a quarterly risk rating. The Central Bank of Ecuador (2010) mentions that microfinance regulations were strengthened, credit information bureaus were established and the process to redefine credit risk and its form of calculation was initiated; the follow-up carried out to several banking institutions resulted in the liquidation of some of them, as shown in the Table 1 below:

Since the liquidation of these banks, the Monetary and Financial Organic Code that came into force in September 2014 generated a movement in the structure of financial institutions in which mergers and sales of institutions will be consolidated and the transformation of some Unions, Cooperatives and Financial Companies into banks will be seen.

By 2010, the Ecuadorian economy showed a substantial improvement due to the recovery of oil exports, which meant achieving an average price of 83 dollars per barrel in 2008. Thereupon, great offers for Ecuadorian crude oil grew so that in 2011 the average price was 96.93 dollars per barrel and by the fourth quarter, it reached a historical price of 105.32 dollars per barrel on average. In the following years (2013 and 2014) it reached an average price of $ 95.63 and $ 84.16 correspondingly as shown in Table 2.

In 2015, those historical highs in the international price of oil have started to decline, which motivated forecasts of adjustments in the country's economy. This in a model that has as protagonist the State and that arose along with a second oil boom in Ecuador. This formula pushed the economy through investment and high public spending which generated greater consumption and increased indebtedness of companies and individuals.

The 21 private banks currently are: Banco Solidario, Banco Produbanco, Banco Pichincha, Banco Internacional, Banco Amazonas, Banco Procredito, Banco de Guayaquil, Banco General Rumiñahui, Banco del Pacífico, Banco de Loja, Banco del Austro, Banco Bolivariano, Banco de Machala, Banco del Banco, Banco Capital, Banco Comercial de Manabí, Banco Coopnacional, Banco D-Miro, Banco Finca, Banco Litoral and Banco Desarrollo. …

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