General Overview of the Banking and Financial Sector
The Honduran financial system is led by commercial banking, with seven financial groups and 15 private commercial banks, nine of which are of foreign capital and six of national capital. However, despite a greater presence of banks with foreign capital in the country, the main indicators are led by the national banking institutions.
In terms of loans, the five main commercial banks have more than 75% of the total market share. In December 2020, the total estimated value of assets in the Honduran financial system was USD24.351 billion, with private banks accounting for 96% of such total assets (57.5% of which corresponds to entities with Honduran capital).
Commercial banks offer 92% of coverage nationwide, with the main concentration of banking activity being in the departments of Francisco Morazán and Cortés.
There are few legal barriers to entry into the banking sector, but the small size of the market has meant that most foreign investment has been in regional banks, rather than Honduran banks.
The minimum capital requirement to operate a bank is HNL600 million (approximately USD24.9 million). In June 2021, the average active interest rate for local currency in the banking system was 12.99% (excluding credit card operations), and the average interest rate in US dollars was 7.57%.
The substantial drop in productive activities in 2020 due to the COVID-19 pandemic had a very strong impact on the Honduran economy, and specifically on M&A transactions and new investments.
During 2021-2022, the financial system is expected to continue to feel the repercussions of the economic shock derived from the pandemic and Hurricanes Eta and Iota2. As one of the measures adopted to address the financial impacts of the pandemic, the Honduran banking regulator approved a programme to defer loan payments for borrowers facing financial difficulties due to COVID-19.
Honduras has a stable and liquid financial system, without significant market distortions. However, the shocks to the Honduran economy during 2020 that altered the performance of the country's productive activity led to an increase in credit risk, a slowdown in loan recovery, a lower demand for new credits from some sectors and a rise in savings relating to the items least affected by such phenomena; on the other hand, they were met by a quick response from the country's Monetary Authority to allow a greater availability of resources from commercial banks.
In this sense, the liquid assets held by the banking sector expanded in a way not seen in recent years. However, as economic activity recovers, the savings maintained by the private sector in commercial banks are expected to reduce and loan portfolios are expected to expand, thus reducing the weighting of liquid resources within total assets.
The funding structure of the Honduran banking system is mainly composed of and supported by a large, stable and diversified customer deposit base, which according to official projections is not likely to experience any significant changes in the next two years.
During the pandemic-related crisis in 2020, bank deposits expanded by 19%, benefiting from the high volume of remittances and very low household spending.
The Honduran banking system has limited external funding alternatives (narrow and shallow debt capital market) and this translates into modest financial flexibility throughout the system. The risks of the industry are considered to be mitigated and do not have relevant or significant distortions, due to the absence of complex banking products.
The government has implemented regulatory modifications to develop the domestic capital and debt markets, which are currently dominated by bond issuances from the public sector, along with a few from the financial and banking sector. Although the risk rating entities evaluate these initiatives as positive, they also consider that this market will continue to be narrow and shallow in the short term and, in this sense, the capital and debt markets will not represent a considerable source of funding for national banks or companies in the coming years.
Financing options in the Honduran financial system
The Honduran banking industry has a moderate risk appetite. Due to the low GDP per capita and the high risk in granting credit to informal sectors or the rural population, the country has a limited target market, with a reduced number of potential clients; therefore, lending to corporate segments is a highly competitive business. Risk rating agencies consider that complex or high-risk innovative products are not offered in the Honduran banking market.
Currently, the Honduran banking market has four types of loans:
Over recent months, the largest banks in the country have focused on the commercial loans sector, which can recover faster than the consumer and mortgage loan segments. Risk assessment agencies continue to estimate credit growth but mainly in the corporate segment, while any growth in the consumer loan and mortgage segments will be very modest.
Other financing options in the Honduran financial system include the following.
Country overview and risk
S&P Global Ratings has given the Honduran banking sector a BB-/Stable/B risk rating and has classified it in group “8” (other countries within the continent in this group are Guatemala, Jamaica and Paraguay). The economic risk attributed to Honduras reflects its developing economy, with a very low GDP per capita that limits the debt capacity of the population, a narrow economic diversification and weak political institutions.
However, it is estimated that the GDP of Honduras will grow by around 3.6% in 2021, due to the recovery of agricultural and manufacturing activities and the high volume of remittances from the US, which are estimated to be constantly increasing. However, the National Electric Power Company (ENEE) represents the country's main fiscal weakness: the deterioration of ENEE's finances considerably affects public finances, generating annual losses of around 1% of GDP.
The current regulatory and policy environment in Honduras is not a solid foundation for the development of techno-financial services, and there is currently no special law applicable to the fintech industry. Combined with unfavourable market conditions, this environment has not fostered the growth of a techno-financial ecosystem in Honduras, either in the number of operating companies or in the variety and sophistication of technological solutions. There is also the issue that the adoption of digital products in Honduras is low compared to the rest of Latin America and other developing countries.
Some laws and authorisation regimes in force in the payments and transfers segment are a barrier to competition and innovation in the fintech sector. There are still gaps in key matters for the development of safe and reliable digital transactions, such as cybersecurity and data protection, while there is a lack of greater legal certainty around matters such as digital signatures and remote due diligence processes. Unfortunately, there are currently no open innovation banking initiatives in Honduras promoting banking-fintech collaboration and the development of techno-finance. With few exceptions, banks do not usually invest in fintech companies, nor do they individually or collectively have incubators, accelerators or hackathons, nor do they open innovation programmes or centres to identify new companies, solutions or business models and drive their growth.
The level of digital transformation of the Honduran financial system is low, even for subsidiaries of foreign banks that operate in the country, which makes the creation of innovative services and the level of adoption of enabling technologies such as blockchain, APIs or artificial intelligence very low.
The current fintech map of Honduras is made up of approximately 25 companies, which are developed in the following areas:
A large number of the existing fintech ventures in Honduras are in the prototype or even analysis stage. The approximate investment amount to date is + USD8.5 million, and the origin of the funds varies between own resources, loans from financial institutions, angel investors, government funds and incubators. However, it should be noted that said amount is highly influenced by the presence of one of the two companies that currently provide payment services through Electronic Money in Honduras. A notable feature of the fintech sector in Honduras is that payment and transfer services predominate, including mobile wallets.
Cryptocurrencies in Honduras
Currently, there are no laws enabling cryptocurrencies, and the creation or enacting of public policies with regards to allowing the circulation thereof in the country is not anticipated.
In January 2018, the Central Bank of Honduras reported that it is exempt from all responsibility for issues based on cryptocurrencies, since it neither regulates nor guarantees their use. This position was reaffirmed without modifications in January 2020, through a second statement where the Central Bank of Honduras reiterated that message.
The crowdfunding sector is still quite new in the country, so there are as yet no companies that provide debt or investment crowdfunding services. The only crowdfunding presence in the country is related to crowdfunding for rewards or donations.
Although there are currently no regulations on crowdfunding, such practice can be interpreted under the Honduran Securities Market Law as an “offering of securities”. In this sense, collective investment and debt financing involve the issuance of securities that can be interpreted as a “public offering of securities”, which under Article 4 of the Securities Market Law is defined as “any offer, express or implicit, which intends to issue, place, negotiate or trade securities and is transmitted by any public means or to specific groups.”
Under current law, any commercial operation, contract, financial instrument or any other right of economic or patrimonial content contained or not in a document must be authorised by the CNBS and registered in the corresponding Securities Registry in order to be the subject of a public offering. Obviously, this requirement does not allow crowdfunding operations executed through public offering, digitally or not, to flourish, since, in such a case, they would have to undergo the corresponding prior authorisation one by one, with the associated onerous costs in terms of time and money.
A modification of the current legislation for collective financing would make it possible to clarify that crowdfunding platforms do not violate the Financial System Law, while allowing the creation of a special regime of prior authorisation and subsequent evaluation of collective financing models, as well as supervision of the conditions of authorisation of operations and advertising of crowdfunding campaigns, which enables them to be executed digitally.
Government actions for the promotion of fintech
Despite its progress in recent years with a view to strengthening financial inclusion, the financial system in Honduras has progressed more slowly in its digital transformation process. According to the Human Development Report of the United Nations Development Programme (UNDP), the infrastructure for digital connectivity in the country barely reaches 36%. This negatively affects the ability of financial institutions to incorporate technologies that are commonly used in other parts of the world.
The Honduran authorities have denoted that the fintech phenomenon can be a catalyst for financial inclusion, whichis why Honduras has been trying to quickly catch up with the fintech trend over the past year.
In October 2020, the Table of Financial Innovation (Mesa de Innovación Financiera – MIF) was created, the members of which include representatives of regulators and investors (including all financial companies in Honduras). The MIF is a public-private collaboration initiative, promoted and managed by the Central Bank of Honduras (BCH) and the National Commission of Banks and Insurance (CNBS), which favours innovation and healthy competition in the provision of products and services using technology and digitisation, with the aim of contributing to financial inclusion through the adoption and use of financial technology.
The objectives of the MIF include the following:
Since the beginning of the formation activities, the MIF has had the support and co-operation of international organisations, especially the technical and financial contributions of the Inter-American Development Bank (IDB) and the Project Transforming Market Systems (TMS) funded by the United States Agency for International Development (USAID). Based on the high interest of the Honduran government in promoting this sector for the economic and social development of the country, there is some optimism surrounding the progress of the fintech sector and its legal framework.
Relevant Tax Matters
Honduran companies are taxed on territorial income, with the current rate being set at 25% of a company's net taxable income.
Non-resident companies are subject to Income Tax only on the income they receive from Honduran sources. Regarding dividend income paid to non-residents, a 10% withholding tax is applicable; however, it should be noted that any dividends or distributions of profits that were subject to the corresponding 10% dividend withholding tax will not be taxed again in the case of redistribution. Regarding interest income, Honduran bank interests are also subject to a 10% withholding tax at the moment the interest is given. Interests coming from abroad are also considered as other types of income.
For any Honduran company, interest expenses are deductible as long as they are incurred in order to generate income; however, interest paid to stockholders, owners or their spouses is not deductible. Payments to foreign affiliates are also deductible, as long as the services are effectively received.
It is also important to note that the Honduran government subscribed to an Intergovernmental Agreement with the government of the United States, regarding the US Foreign Account Tax Compliance Act (FATCA), in order to formalise the exchange of information on US and Honduran citizens and/or companies for tax purposes.