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Chile banking industry “The most profitable in the world”

Economist Parisi believes that measures should be taken to educate people so that they don't fall into such great debt

Chilean banks were among the most profitable in the world in 2006, with profits of 18.56 percent in 2006, according to recent figures developed by Chile's Bank and Financial Institution Supervisory Board (SBIF).

Recent studies by the Universidad Catolica show the high profits relate, in part, to interest rates on small loans and mortgages. But perhaps the most significant factor, say analysts, is the lack of regulation by the SBIF and limited competition among banks. Profit rates of the nation's four major banks show just how profitable Chile's banking industry was last year: Banco de Chile saw a rate of return on its investment of 30.54 percent; the Spanish bank Santander showed a 29.76 percent return; the Credit and Investment Bank (Banco de Credito e Inversiones) showed a 25.70 percent return, and the Banco Estado a 10.35 percent return. In fact, for the last 15 years, returns for Chilean banks have averaged 17 percent. The typical European return rate, in contrast, is about 12 percent. Such abnormally high return rates and profits have lead many to question Chilean banking practices. Chilean banks earned their greatest profits through loan interest rates. Although the base-line rate set by the nation's Central Bank is around 5 percent, the interest for smaller businesses and individuals varied between 8 and 30 percent. The same occurred with credit cards. While interest for normal credit cards is about 18 percent, it often reaches 45 percent for the poorest tier of credit card users. Why is there such a discrepancy between standard rates and rates for the poor? Universidad de Chile economist Franco Parisi explains: "They're risky; they can lose their job, which will mean that they can't pay their monthly installmentsâ€Ã‚¦. Those that have benefited most from the low rates are the wealthy." Parisi believes that measures should be taken to educate people so that they don't fall into such great debt. "Someone who earns US$300 a month, after paying bills, will have US$15 remaining. Obviously that person is going to be charged an extremely high interest rate." The story is similar for small and medium sized businesses. Banks protect their investment in smaller loans by charging high interest - often the highest rates of the interest ceiling set by law - and give the best rates to large, financially secure institutions. Evaluation fees add to the high cost of a loan for smaller businesses. When any business applies for a loan, it must pay a risk evaluation fee. This cost is minimal for a large corporation, but for small or medium sized businesses the evaluation itself becomes a large percentage of the loan. These high banking costs for a small and medium sized business - which depend on bank loans for growing and creating more jobs - contribute to unemployment and stifle the economy. But it is evident that Chilean banks do not yet see small and medium sized companies as first priority business prospects, given their continued success with large corporations and consumer loans. Chilean banks also profited greatly through commissions and usage fees. Almost half of bank earnings came from commissions, such as ATM usage and checking account maintenance fees. Unlike in developed countries, which use these commissions to lower interest rates, Chilean banks take them in as profit. A lack of competition among banks partly explains these practices. The five largest banks grant 74.1 percent of all loans, for example. Some have suggested making the Chilean financial system more accessible to foreign investors in order to create more competition. Competition for customers would help lower interest rates for small and medium sized businesses and lower Chilean banking profits to a standard international amount. Parisi believes better state regulation is the answer to help reduce the cost of banking, making services more affordable and accessible. "I think there's unwillingness on the part of the SBIF to create a better regulatory system," he says. "It's hard to explain in international terms how a bank can profit by 30 percent, if that same bank is earning only eight percent profit at its main branch in Europe. The biggest part of that profit is achieved through commissions, fees, etc, which is a situation that can clearly be regulated The Santiago Times - News about Chile