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Honduras Enhances Banking Regulations to Combat Financial Crime
In the aftermath of Hurricane Mitch, which devastated Honduras in 1998, the country’s financial sector was left reeling from a surge in bad debt and significant financial losses. By 2003, the stability of the banking system had weakened significantly.
Vulnerabilities Identified
Weak compliance with international standards, inadequate loan loss provision reserves, low capital asset ratios, and high numbers of non-performing loans were just some of the major vulnerabilities identified by the Financial Sector Assessment Program (FSAP) update.
Technical Assistance Project
To address these concerns, a technical assistance project was launched in 2004 to support the adoption of a risk-based supervisory model, amend financial sector laws, and issue regulations governing implementation. The project also aimed to improve the capacity of the Central Bank of Honduras to detect illegal financial transactions and contribute to an increase in the number of suspicious transactions reported monthly.
Results
The project’s efforts bore fruit as the financial system of Honduras has benefited from improved performance and reduced risks. Supervision of the banking sector improved significantly, with lending by banks increasing from 31% of GDP in 2004 to 42% in June 2013. The total volume of deposits in the banking system grew from US$3.4 billion to US$9.1 billion between 2004 and 2013.
New Banking Technology
The Central Bank also successfully introduced new banking technology, including:
- A modern general ledger
- Automated foreign exchange auction module
- Real-Time Gross Settlement (RTGS) System
- Electronic document management system
These systems have improved the efficiency and security of large payments, reducing settlement times from up to four hours to less than a second.
Alignment with Millennium Development Goals
Honduras’ efforts to strengthen its financial sector align with Millennium Development Goal 8: Develop a global partnership for development. The regulatory reforms and capacity building at the Banking and Insurance Commission (CNBS) contribute to MDG Target 8A: Develop further an open, rule-based, predictable, non-discriminatory trading and financial system.
Project Costs
The project’s total cost was US$11 million, with the International Development Association (IDA) contributing US$9.9 million through a technical assistance loan. The Government of Honduras contributed US$1.1 million. Moving forward, the Bank and borrower are discussing options for further technical assistance to strengthen the oversight of insurance and banking systems.
Beneficiaries
The beneficiaries of this project include:
- Honduran financial institutions, whose performance has improved due to the strengthening of the regulatory framework and financial system infrastructure
- 21% of all adults in the country who hold an account at a formal institution, who will benefit from improved savings and greater availability of financing for investments