Costa Rican financial sector

Thanks in good part to A.I.D."s assistance, important progress has been made in modernizing Costa Rica"s financial markets. This progress can be seen in the strengthening of the private financial sector (banks, financieras, stock exchange), and a positive effect on state-owned banks, which were forced by the competition from private banks also to modernize. In addition, the Central Bank (BCCR) has decreased intervention and strengthened its supervisory role. Less progress has been made in regulating other state-owned institutions, such as the national insurance company, the social security system, and the state-owned pension funds, which are still tightly regulated and restricted in their investments. Recommendations are to: strengthen and professionalize the Superintendency of Banks, and include under its supervision other non-banking financial intermediaries, especially savings and loan cooperatives; further modernize state-owned banks; give the BCCR more independence; privatize the national insurance company; and develop a more active stock exchange. The following lessons were learned. (1) While A.I.D. played an important role in promoting reforms, policy dialogue would have been a better way than the conditionalities imposed by our ESF programs. (2) A.I.D."s direct assistance to specific financial institutions did not show the desired result; these institutions were no more successful than those which did not receive direct financial assistance. (3) ESF-produced local currency lines of credit strengthened private banks in general, but dependence on these lines of credit has led to relatively weak performance in the areas of deposit and resource mobilization. (The Mission notes that this statement is not supported by statistical evidence and does not take into account that, at least initially, the BCCR limited the number of certificates of deposits that each bank could issue.)