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• Santiago Aguirre Castiblanco

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Monetary and Capital Markets

Financial System in Colombia: A Bank Based Economy

“Challenges of the South American country” 2018/2019

Santiago Aguirre Castiblanco

Index Objectives ........................................................................................................................................... 3 General Objective........................................................................................................................... 3 Specific Objectives.......................................................................................................................... 3 Introduction ....................................................................................................................................... 4 Colombian Financial System: A Bank Based Economy ....................................................................... 5 Supervisory and Control Institutions: ............................................................................................ 5 1.

Colombian Central Bank ..................................................................................................... 6

2.

Financial Superintendence of Colombia ............................................................................ 7

3.

Guarantee Fund for Financial Institutions ......................................................................... 9

Financial Institutions: ................................................................................................................... 10 Banking Establishments or Banks............................................................................................. 10 Stock Market: Colombian Stock Exchange ................................................................................... 11 Conclusion ........................................................................................................................................ 13 References........................................................................................................................................ 14

Figures Index 1 - Structure of the Colombian Financial System ............................................................................... 5 2 - The Main Supervisory and Control Institutions of the Colombian Financial System .................... 6 3 - Colombian Central Bank Logo ....................................................................................................... 6 4 - The Legal Tender in colombia ....................................................................................................... 7 5 - Financial Superintendence Logo ................................................................................................... 7 6 - Banking Superintendence Logo..................................................................................................... 8 7 - Stock Superintendence Logo ......................................................................................................... 8 8 - Guarantee Fund for Financial Institutions Logo ............................................................................ 9

Tables Index 1 - The Most Relevant Companies that are listed in the Colombian Stock Exchange ..................... 12

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Objectives General Objective  Determine the impact of the Colombian Financial System in its economy.

Specific Objectives  Point out the most important institutions that control and regulate the Financial System in Colombia.  Stablish the paper that the Colombian Central Bank is performing in the development of the Financial System.  Remark the role that the Banks are playing in the evolution of the Colombian Financial System.  Show the initiation and the process of the Colombian Stock Exchange.

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Introduction The Colombian Financial System over the years has become stronger, due to several changes in which the country has incurred in terms of improvement of institutions and the emergence of the Colombian Central Bank in 1923, The Financial Superintendence of Colombia in 2005 and the Guarantee Fund for Financial Institutions in 1985, considering that the more of the institutions work efficiently, the processes and the results will be better. Moreover, the year 1923 was crucial for the Colombian Economy, taking into consideration that the Colombian Central Bank emerged to set order and to regulate all its activities. Furthermore, the banks have played an important role in the development of the Colombian Financial System. Including the Central bank, Colombia currently has 66 Banking Establishments, a number that over the years has slightly decreased, keeping in mind that since the 1870s approximately 95 banks were created within Colombia and were functioning within the scope of the liberalization of markets, new foreign banks have entered within the country. In addition, is important to point out that according to Sarmiento Jaime & Cristancho Laura (2009) the history of the Colombian Financial System has been based since its establishment, in the banking, as the axis of its Financial Establishments. However, the Colombian Stock Market that goes back to the beginning of the XX century, is no less important. Despite this there only exists one Stock Exchange in Colombia presently and is not as strong and large as the New York Stock Exchange or the Shanghai Stock Exchange, it has shown a high Stability.

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Colombian Financial System: A Bank Based Economy The Colombian financial System has been developing along the years, becoming very stronger. The main institutions in charge of the well-functioning of the financial system structure have played an important role within the economy. It is also relevant to highlight that the creation of strong and effective Institutions was highly necessary for the economy, because of the high quantity of banks that had emerged during the past years, turning the country into a Bank-Based economy. The Colombian Financial System is comprised by the next structure:

Colombian Financial System Supervisory and Control Institutions Financial Institutions Stock Market 1 - Structure of the Colombian Financial System

Supervisory and Control Institutions: These entities fulfill specific functions that try to guarantee the well-functioning of the financial system and to look for the stability of the economy in general.

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Supervisory and Control Institutions Colombian Central Bank “Banco de la República”

Financial Superintendence of Colombia

Guarantee Fund for Financial Institutions 2 - The Main Supervisory and Control Institutions of the Colombian Financial System

1. Colombian Central Bank

3 - Colombian Central Bank Logo

The Colombian Central Bank (Banco de la República de Colombia) is the main Financial Entity of Colombia. It was created by the Law 25 of 1923. In its beginnings, the Financial Institution started with an original capital of 10 million in gold. It was the only entity allowed within the country to issue the legal tender and it is also in charge of the International Reserves. The Board of Directors of the Bank is comprised of 10 members that come from both private and public sector. This bank functions as the regulator, as well as the monetary control under strict parameters. The origins of the current Central Bank go back to the year of 1880, in which the “National Bank” was created by the government, to become its main partner and to promote public credit. The National Bank was responsible for issuing the paper money.

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The bank started to emit several quantities of paper money and hence, it had to be liquidated in the year of 1894. Years later the “Central Bank of Colombia” was stablished in 1905 by the government in a second attempt but, like the first case, in the year of 1909 it was liquidated again. (Colombia, s.f.)

4 - The Legal Tender in colombia

2. Financial Superintendence of Colombia

5 - Financial Superintendence Logo

The Financial Superintendence of Colombia (Superintendencia Financiera de Colombia) is the entity in charge of the supervision, inspection and control of all the entities that work with financial, stock and insurance activities and operations, related to the management and investment of resources that are received by individuals and other entities. The origins of these Institutions come from two entities that were merged to become the current Superintendencia Financiera de Colombia:

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 Banking Superintendence:

6 - Banking Superintendence Logo

This governmental entity was created in the year 1923 by means of article 19 of the Law 45 of 1923. This year was extremely important for the development of the country, considering that a high quantity of legislative reforms was carried out by the state with the aim of make an appropriate environment for the growth of several important sectors of the economy. The institution was meant to be an entity for the stimulation of the creation of Savings and Fiduciary sections. At the beginning of its creation, the banking entities were functioning without any inconvenient but without any guarantees for all the account holders that wanted to acquire the services and another point to highlight, the state was not supervising and controlling the activities made by the banking entities. (SENA, s.f.)

 Stock Superintendence:

7 - Stock Superintendence Logo

In the year of 1979 by the Law 32 of 1979, the National Securities Commission was established, beginning its operations the next year. The main functions of this institution were to stimulate, to organize and to regulate the Public Stock Market. Among the initial functions of the institution established by the article 9 of the Law 32 of 1979, there were not any functions of inspection, supervision and control over the Market Agents so the functions were just concentrated in the administration of the National Registry of Stocks. 8

Therefore, with the aim of strengthen and specialize the supervision of the Stock Market, the Decree 2910 of 1982, transferred to the entity the control and administrative supervision of the Stock Markets functions that had previously belonged to the Banking Superintendence. (SENA, s.f.)

 Current Financial Superintendence of Colombia: In 2005, the Governmental Institution was finally created from the fusion of the “Superintendencia Bancaria” and “Superintendencia de Valores”, by the Decree 4327 of 2005. The mission of this important Governmental institution is to promote the stability of the Colombian Financial System, the integrity and transparency of the Stock Market and guarantee the protection of the Financial Consumer’s rights. (Colombia S. F., s.f.)

3. Guarantee Fund for Financial Institutions

8 - Guarantee Fund for Financial Institutions Logo

Guarantee Fund for Financial Institutions or FOGAFIN by its acronym in Spanish (Fondo de Garantías para las Instituciones Financieras), is a Financial Authority ascribed to the Ministry of Finance and Public Credit, in charge of protecting the savings that are deposited in banks by the citizens, financial Corporations, specialized companies in electronic deposits and to the national savings fund. This institution is a part of the safety net of the Colombian Financial System, comprised by the Ministry of Finance and Public Credit, the Colombian Central Bank and the Financial Superintendence of Colombia. The entity was created in 1985 to face the crisis that was affecting the country at that time. The main aim of the institution is to protect the trust of the depositors and creditors and hence, its functions are to ensure that the inscribed institutions have the means to 9

grant liquidity to financial assets and to goods received for payment, organize and develop the Deposit Insurance System, which is the insurance that protects Colombian customers against the eventual liquidation of an entity registered in FOGAFIN and guarantees depositors the total or partial recovery of their savings up to 50 million pesos. (Financieras, s.f.)

Financial Institutions: The functioning of the Financial Institutions in Colombia is under the control of the Superintendencia Financiera de Colombia. The main function of this institutions is to collect funds from the public by deposits, at sight or in term, to put them through loans and discounts. They include banking establishments or banks, financial companies, financial corporations and financial cooperatives.

Banking Establishments or Banks As mentioned before Colombia is a bank-based economy, according to the theoretical perspective, due to the strong banking system that was initially formed and the impact that it has in the behavior of the GDP. A banking establishment in Colombia is considered as a financial institution whose main function is to capture current account resources as well as other transactions like deposits at sight or term. Since the beginning, the Colombian Financial System is strongly linked to the Commercial Banks, say Sarmiento & Cristancho (2009), pointing out that the Bank of Bogotá (1870) and the Bank of Colombia (1875) are the banks that have evolved, and they have become the most important banks within the country.

Period of “Free Banking” The period between 1871 and 1923 is extremely relevant to the history of the Colombian Financial System. During this period the System was lacking a Central Bank that regulated the activities of the Banking Establishments. In this period 95 Banks were stablished in the country; 32 in the Region of Antioquia; 21 in the City of Bogotá; 18 in the 10

Atlantic Coast; and 23 in other Regions. During this period some of the banks in the mentioned regions were liquidated or were merged with other banks. (Mora Cuartas)

The emergence of the Colombian Central Bank 1923 is of high relevance to the history of the Latin American Financial System in question. This year the Banking Structure went from being a Regional Bank Structure to a National Bank Structure, related to the regulations that began to be carried out by the Central Bank. During the Period of Free-Banking, the Banking Establishments were working not just based on its main responsibility which is strictly banking but also, they were focusing on being owners of other companies out of the Banking sector. It was then regulated by the Central Bank, forbidding the commercial banks to be owners of other companies that were not related to their main objective.

Stock Market: Colombian Stock Exchange The Colombian Stock Exchange was mainly created the 3rd of July of 2001, it was a fusion of 3 initial Stock Exchanges: the Bogotá Stock Exchange (1928), the Medellín Stock Exchange (1961) and The Occidental Stock Exchange (Cali, 1983). This Stock Exchange is in charge of the Stock Markets, the Fixed Incomes and the Standardize Derivatives. It is also supervised by the Financial Superintendence of Colombia being considered as an Infrastructure Provider and a Securities Issuer. In addition, the stock market has advanced in the modernization of the systems it manages, reducing the risk factors for the entire value chain that participates in the business. For example, the first step taken by the BVC or Colombian Stock Exchange to move forward in this sense, was the acquisition of an electronic system of negotiation in which the commission agents could operate on a screen and they wouldn’t need to go personally to the Stock to fulfill the orders of their customers. 11

The Colombian Stock Exchange consists of 69 Listing Companies, from which 10 of them are the ones with the highest relevance. Below are the Companies with their respective Market Value: Name of Company

Market Value

ECOPETROL S.A.

154.187.605,09

BANCOLOMBIA S.A.

28.479.121,65

GRUPO AVAL ACCIONES Y VALORES S.A.

24.196.245,87

BANCO DE BOGOTA S.A.

21.864.516,66

GRUPO INVERSIONES SURAMERICANA

18.176.089,64

EMPRESA DE ENERGIA DE BOGOTA S.A. E.S.P.

17.581.954,07

INTERCONEXION ELECTRICA S.A. E.S.P.

13.203.520,51

GRUPO ARGOS S.A.

12.237.491,90

GRUPO NUTRESA S.A.

10.444.802,51

CEMENTOS ARGOS S.A.

9.294.894,97

1 - The Most Relevant Companies that are listed in the Colombian Stock Exchange However, the impact that the behavior of the Stock Market in Colombia is causing can’t be a good reflection of the Colombian economy, considering that only 69 companies are listed in the Colombian Stock Exchange.

Conclusion The Colombian Financial System has shown a relevant dynamism over its history, which is a good signal for the benefits of its economy. The adaptation of the Colombian Financial System to the new environment is also an important sample of the effort that the country is doing to reach a good level among the other countries. It is also important to highlight that despite the problems that the country have had to face over the years, the country has done a good work in terms of development. Is significant to determine that over the history of the Financial System in Colombia, the central axis of development has been the Banking Establishments and the Stock Market is not being seen with the importance that it requires, and the country should take into consideration that it is also important for the increment and grow of the economy.

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References Colombia, B. d. (s.f.). Banco de la República de Colombia. Obtenido de http://www.banrep.gov.co/en/node/31454 Colombia, S. F. (s.f.). Superintendencia Financiera de Colombia. Obtenido de http://www.redconsumidor.gov.co/publicaciones/superintendencia_financiera_pub Financieras, F. d. (s.f.). Fondo de Garantías de Instituciones Financieras. Obtenido de Fondo de Garantías de Instituciones Financieras: https://www.fogafin.gov.co/Default/que-esfogafin/quienes-somos Mora Cuartas, A. M. (s.f.). Las Entidades Bancarias en Colombia: Consecuencia de un Movimiento Constante del Sector Bancario. Obtenido de Las Entidades Bancarias en Colombia: Consecuencia de un Movimiento Constante del Sector Bancario: http://www.eafit.edu.co/revistas/revistamba/Documents/mba2011/3-entidadesbancarias-colombia.pdf Sarmiento, J. &. (01 de 2009). scielo. Obtenido de http://www.scielo.org.co/scielo.php?pid=S012168052009000100004&script=sci_arttext&tlng=en SENA, B. D. (s.f.). Banco Didáctico SENA. Obtenido de http://banccodidactico.blogspot.com/2009/04/historia-de-la-superintendencia.html

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