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El Salvador The Banking System
Since 1980 the entire Salvadoran banking system has been
owned and operated by the government. Under nationalization, the
Central Reserve Bank, through the Operative Fund (Fondo
Operativo), rationed foreign exchange to the commercial banks.
The Central Reserve Bank assigned each commercial bank a maximum
allowable balance of foreign exchange and required a weekly
balance report. The Central Reserve Bank also covered foreign
exchange deficits of the commercial banks but required that they
transfer large surpluses to the Central Reserve Bank. In turn,
these commercial banks agreed to disburse foreign exchange for
imports on priorities set by the Central Reserve Bank in exchange
for the services rendered. The highest priorities for foreign
exchange disbursements included food, medical supplies, raw
materials, and petroleum products, followed by intermediate
goods, money for medical expenses and activities abroad, and debt
servicing.
Prior to the nationalization of the banking sector, El
Salvador had numerous private financial institutions that were
called banks but that actually functioned like investment
companies. Members, who had contracts with the companies,
contributed funds on a regular basis and then used this capital
as collateral. Some of the more important "banks" included the
Investment and Savings Bank, the Credit and Savings Bank, the
Commercial Farm Bank, and the Popular Credit Bank. The Popular
Credit Bank had broader powers than the others and could accept
time deposits and savings accounts, deal in foreign exchange, and
extend letters of credit. The Salvadoran Coffee Company and the
Salvadoran Cotton Cooperative also provided seasonal credit to
their members. Their activities were not financed by deposits,
but rather by loans from foreign banks (mostly United States
institutions).
As a result of the civil conflict and the 1980 government
decree nationalizing the banking system, many Salvadorans
transferred their savings out of the country. Consequently,
private savings fell from a 34 percent share of GDP in 1979 to a
32 percent share in 1980. Capital outflows, however, were heavier
than this statistic would indicate because GDP fell by 8 percent
in the same year. By 1982, nonetheless, private sector confidence
in the banking system had been tentatively restored, and private
savings increased to 39 percent of GDP. The increase was
primarily attributed to a 1982 rise in interest rates, which
provided an incentive for saving.
Data as of November 1988
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