Interview with Luis Opazo, General Manager of the Association of Banks and Financial Institutions, Chile

LatAm INVESTOR: Please explain ABIF’s profile and purpose.

Luis Opazo: The Chilean Banking Association (ABIF) gathers all private banks in the country and the objective of the Association is to promote the development of Chile’s financial sector.

One way we do that is by helping our members in their relationship with public institutions, such as Congress or the Central Bank. We are a technical counterparty when the State is developing new legislation that can impact the financial sector, and we also propose ways to improve the financial ecosystem in general.

The second way we help to develop Chile’s banking sector is working on areas like financial education, operations, fraud prevention and cybersecurity. For example, we have a program with the University of Chile that gives financial education to 70,000 people per year. We also work with our members to create banking protocols that ensure better service for their customers.

LAI: What characteristics define Chile’s banking sector, compared to other countries in the region?

LO: Chile’s banking sector is very strong and efficient and effective service delivery.

As a result, Chile has high rates of financial inclusion. There has been a widespread penetration of financial products in the last 20 years and now nearly all households have access to transactional banking services like current accounts and credit cards.

Back in 2021 the Banco Central de Chile, calculated that 96% of Chilean households had basic financial products. By now that figure must be above 99%. That reflects the fact that the banks have developed low-cost products that are easy to distribute.

Chile’s banking system is characterized also by an efficient payment system. In 2008, Chile introduced automatic electronic transfer, available 24/7, without charge for clients. Electronic payment is common, indeed our statistics for digital banking is comparable to wealthier OECD countries. Another driver has been the fast adoption of pre-paid cards, which are great for financial inclusion. More than13 million pre-paid cards were issued in the last year. The pre-paid card segment is made up of both traditional banks and non-banking players, so it is very competitive and dynamic.

Finally, I should mention the solidity of our financial system. It is well regulated, and we are already finishing the implementation of Basel III. In this context, the capital in our banking system grew close to USD $ 20 billion over the last 10 years.

LAI: How has the banking sector been impacted by the political unrest in the country since 2019?

LO: 2020 was a difficult year for whole world, in Chile the challenge of the pandemic came shortly after the unrest of 2019. Of course that impacted the banking sector, because banking reflects the activity of the wider economy. Also, some of the knock-on effect of the political unrest in 2019 was the response of bad public policy, such as the pension funds retirements, which further impacted economic growth.

Chile saw continued weak growth and that affected demand for banking services. Chiefly it’s been reflected by lower demand for credit. In fact, the year 2024 was the third consecutive year of negative credit growth. That is the most prolonged period of negative credit growth in Chile since 1990. It also contrasts with neighbouring economies where credit is starting to expand.

I should point out that the Banco Central de Chile, has repeatedly found that the low level of credit is caused by a lack of demand, not restricted supply. It’s not that banks don’t have enough capital to offer loans.

LAI: Chile’s AFPs have long been seen as the bedrock of the financial sector; has the ongoing pension reform undermined this?

LO: Pension funds are key to the development the banking sector because they provide a local pool of capital that can be used to offer long-term credit, such as mortgages. However, in Chile pensions have been the subject of lots of debate in recent years. A decision made during the COVID pandemic to allow contributors to withdraw some of the value of their fund removed much long-term investment capital from our local market.

In Chile pensions have been the subject of lots of debate in recent years

I believe the recent pension reform is a net positive. It finally ends the uncertainty about what would happen to the pension funds, and it ensures that they maintain their most important characteristics. Funds will still be managed by the private sector, which is important, while the key principle – that each person’s pension scheme reflects their individual contributions – remains. Of course, it remains to be seen how the reform is implemented, but I hope that a technical approach prevails.

LAI: What is the one single government policy that could most improve Chile’s financial sector?

LO: I would highlight three big issues.

First, the decision to cap the maximum interest rates on loans has actually hurt financial inclusion because it has restricted access to credit, especially for people on lower incomes. This has been highlighted even by the World Bank and the regulator on their evaluations on this cap. Therefore, this cap on interest rates should be reviewed.

Another problematic piece of legislation was the 2021 anti-fraud law. It effectively means that banks need to prove a criminal – rather than civil – level of guilt when prosecuting financial fraud. It is almost impossible to prove this level of guilt when you have massive services, so as a result the instances of financial fraud have increased dramatically. Chile is the only country in the world that has this type of fraud law, which suggests it’s a mistake.

The third potential challenge is the proposed fintech law. Of course, fintech can bring lots of advantages to the banking ecosystem but it’s such a massive change, with so many potentially unforeseen consequences, that fintech legislation needs to be developed gradually. It will provide a big challenge for all financial actors, including regulators -because at present they are used to monitoring 16 banks but now they will be responsible for hundreds of entities. There are lots of questions like that, which should be addressed in order to have a good implementation.

LAI: By Latin American standards, Chile is a mature banking market, where do you see the opportunities in Chile’s financial sector?

LO: The interesting thing about Chile is that you have a situation where most of the population already has basic banking products like current accounts, credit cards and pre-paid cards. Those transactional services create a link between the client and the bank, which is more difficult to create in some other markets in Latin America where the unbanked population is much larger.

The opportunity now in Chile is to expand the type of products that people use. We still have a very weak penetration of voluntary insurance for example. There is also a market for more sophisticated credit and investment management products. That said, the growth of the banking sector doesn’t just depend on what the banks do, it is also impacted by where we are in the credit cycle.

The starting point is that we need to have higher economic growth. The banking sector can only thrive when the other pieces are in place. We need the political framework to be right and we need a secure investment environment.  However, the potential growth in Chile must take into account how to deal and reduce informality in the economy. At present the level of informal employment is 30%, which is far too high. With that level of informality, it would be difficult for population and the system in general benefit from economic growth.