Asunción during the mid-day siesta
Courtesy Tim Merrill

Financial System

In 1986 the service sector contributed 51.3 percent of GDP. Of that total, commercial and financial services accounted for 30.3 percent transportation and communications for 4.6 percent, and other services for 16.4 percent. The latter category included government services, information services, and toursim.

The nation's financial system had a long history, but it did not undergo major changes until the rapid growth of the 1970s. Large increases in investment and accelerated growth brought on the swift monetization of the economy during the 1970s. National savings soared, as did the number of financial institutions, making Paraguay a budding financial center in the Southern Cone. Observers estimated that total financial activity increased more than sixty times from 1960 to the mid-1980s. But with the arrival of the 1982 regional recession, bank losses increased markedly, and by 1987 three major American banks had pulled out of the country.

The commercial banks were the most important component of the financial system after the Central Bank and held a third of the assets of that system. The commercial banking system in 1988 comprised twenty-two banks with forty-eight offices in Asunción and forty-seven branches outside the capital. Although Paraguay's oldest commercial bank was established in 1920, the system's growth was most pronounced in the second half of the 1970s when seven new banks were registered. The newer banks that arrived were large, multinational banks that entered Paraguay to manage the massive capital investment associated with hydroelectric projects, to finance rapidly expanding agricultural exports, to participate in the intense economic activity along the Paraguayan-Brazilian border, and to take advantage of the liberal banking laws. Three banks--the Brazilian Banco de Asunción, the Spanish Banco Exterior, and the American Citibank--held over half of all deposits. Despite the departure in 1987 of Bank of America, Chase Manhattan, and the Bank of Boston, Paraguay's commercial banking assets remained largely in foreign hands.

The National Workers' Bank (Banco Nacional de Trabajadores--BNT) was the country's only mixed bank, owned 90 percent by contributory members and 10 percent by the government. Established in 1973, the BNT was created to serve as a savings and loan, a development bank, and a provider of a variety of financial services. BNT's clients were individual workers, unions, federations, artisans, and cooperatives.

Nonbanking institutions also were part of the burgeoning financial system. These included finance companies, insurance companies, and social security institutions. Most of these financial intermediaries were opened in the 1970s as consumer savings accumulated. The rapid growth of financial institutions was epitomized by finance companies, at least twenty-six of which were opened from 1975 to 1985. Unlike banks, most finance houses were locally ow 1000 wned. The majority were located in Asunción, but at least five operated in Eastern Paraguay. Representing approximately 6 percent of the financial system's assets, finance companies functioned mostly as short- to medium-term lenders for commercial activity and consumer durables. Some finance companies operated in conjunction with commercial banks, contrary to banking law.

By the late 1980s, Paraguay had forty insurance companies, the overwhelming majority of which had been established since 1960 and were locally owned. Services varied considerably, but the companies tended to have a marginal role in the financial system. There were also social security institutions, which offered health and retirement plans, but only one was in the private sector--a bank employees' pension program that was an important lender for mortgages and consumer durables.

The financial system also encompassed an array of development finance institutions, generally run by the government. Most notable among these institutions was the BNF, the major lender to agriculture and a significant provider of credit to industry, commerce, and livestock activity (see Farming Technology , this ch.). The BNF contained 14 percent of national assets.

The major lender to livestock farmers was the governmentoperated Fondo Ganadero (FG), which also provided technical assistance to cattle raisers. The FG--established in 1969 with resources from the United States Agency for International Development (AID) and the World Bank--provided nearly 70 percent of the credit issued to livestock activity, usually in the form of medium- to long-term loans for fixed and working capital. The FG represented approximately 7 percent of the country's financial assets.

The Central Bank played an unusually active role in direct lending through a variety of mechanisms, most notably the Special Development Fund (Fondo Especial de Desarrollo--FED), which also was created with AID and World Bank capital. The FED operated two direct lending programs for rural enterprises and small farmers and a program for guaranteeing loans to rural enterprises. The FED accounted for roughly 2 percent of national financial assets.

A more minor government agency was the Agricultural Credit Agency (Crédito Agrícola de Habilitación--CAH), which had operated since 1943 providing credit and inputs to small farmers. CAH comprised only 1 percent of the country's assets.

The government also managed or participated in several other financial institutions. The most important were those that financed and mobilized savings for mortgages. Of these, the two major groups were the National System of Savings and Loans for Housing (Sistema Nacional de Ahorro y Préstamo para la Vivienda--SNAPV) and the Paraguayan Institute for Housing and Urban Development (Instituto Paraguayo de Urbanización y Vivienda--IPVU). The SNAPV was affiliated with private savings and loans, which together formed the National Bank of Savings and Loan for Housing (Banco Nacional de Ahorro y Préstamo para la Vivienda). With 4 percent of the country's assets, SNAPV served as a major issuer of mortgages. The IPVU, which contained only 1 percent of assets, fell under the umbrella of SNAPV activities and specialized in credit for lowincome housing and urban development. The government also oversaw five public-sector entities that functioned as contributory social security agencies. These entities generally operated under the Social Insurance Institute (Instituto de Previsión Social--IPS), which provided health plans, workers' compensation, and unemployment insurance through a worker and employer contributory system.

Data as of December 1988