Member Article

Savings and Credit Entities (SCEs) are regulated financial institutions of private capital authorised to develop lending activities. The operation of SCEs is governed by the Law of Cooperative Banks and Savings and Credit Entities, which came into force on July 1 2001, amended in January 1 2009 to its current regime.

This law establishes rules based on international principles of regulation, applicable to associations and credit and savings
unions (cooperative entities and credit and savings entities), federations of credit unions and savings and credit companies.

The regulator is the Superintendency of the Financial System (SFS), which is an autonomous institution integrated into the
Central Reserve Bank of El Salvador, its main purpose is monitoring the financial institutions that are subject to supervision to ensure its compliance with the laws and the stability of the financial system. As part of its duty to monitor and supervise, the SFS supervises among others private banks, state banks, financial conglomerates, and insurance companies, information offices of foreign banks, public credit institutions, money exchange entities, cooperative banks and SCEs.

As regulated financial institutions SCEs are authorised by Law to develop various Banking activities, in fact SCEs are subject to provisions of the Banking Law, since numerous Articles of the Law of Cooperative Banks and Savings and Credit Entities refer to Banking Law provisions.

One of the main focuses of the Law is that SCEs can be authorised to accept deposits from the public; nevertheless they
can operate as SCEs without the authorisation to accept deposits, just developing lending and credit activities.

Perhaps the most important advantage of SCEs is the minimum capital requirement. The Law provides the formation of two
different types of SCEs according to its purpose: non-specialised SCEs and SCEs that promote micro and small companies. Apart from its purpose, the main difference between the two types of SCEs lies in its minimum capital requirements so as to be authorised by the regulator to operate and develop banking activities.

In El Salvador, by Law Banks are required to be founded and to operate with a minimum capital of $16 million, while
non-specialised SCEs are required to operate with a minimum capital of $3,541,000. On the other hand, in order to promote investment and financial support to micro and small companies, the Law introduces a minimum capital requirement of $1,424,000 for SCEs dedicated to channel their credit and lending activities to micro and small companies.

The outcome of the above mentioned minimum capital benefits is possibly not as expected by the regulator, however as long
as the regulator maintains the appropriate resolutions in this respect and more importantly, the national economy begins to recover, micro and small companies will have more access to credit and loans, benefiting from new sources of credit with the appearance of new SCEs.

Among other benefits, from a tax law perspective, SCEs have an exemption on Transfer of Property and Services (VAT)
on the interest generated on lending operations they perform. This exemption gives SCEs the advantage to compete in the national financial market providing lower interest rates than Banks and other financial institutions.

A crucial aspect of the law is the development of accounting and prudential rules applicable to SCEs, which include, among others, the development of a standard accounting manual and catalogue that allows comparison of information between such entities.

On the other hand, an additional advantage is that SCEs are subject to the specific supervision mechanism of the Superintendency of the Financial System (SFS). Primarily, the Superintendency supervises SCEs through audits in situ and off site. In addition SCEs are
required by law to send information on a regular basis about their financial situation, credit portfolio, solvency, etc. This information is processed by the SFS through the various monitoring systems, to identify the most vulnerable  areas that may be at risk, allowing for the guarantee of constant monitoring from inside the SFS.

Supervision and monitoring mechanisms established by the Law means that SCEs turn into stronger financial institutions with steady but organized growth, improving their internal process and system in order to comply with the SFS.

Currently there are two SCEs operating in El Salvador expressly authorised to raise funds and deposits from the public, developing credit activities as its core business. The outlook is uncertain, but SCEs appear to be a safe and effective source to provide micro and small enterprises as well as the public in general more access to formal financial services at lower costs. On a long term basis small economies like the Salvadoran may overcome the effects of an economic crisis with the promotion of this type of entities and the entry into force of legal reforms like the present.