Venezuela has one of the strongest economies in Latin America. In terms of GDP, it ranks among the top 40 in the world. Venezuelan banks have been subject to intense regulation in arenas ranging from interest rate caps to mandatory minimum amounts for microfinance loans. The presence of few microfinance institutions and high market concentration results in weak competition. Additionally, microfinance must compete with heavily subsidized public programs, the latter of which can offer interest rates 6%-8% lower than private or not-for-profit programs. The growing trend towards regulation and nationalization means the presence of similar public programs will likely increase. Venezuelan law calls for strict regulation of financial institutions in the area of consumer protection. However, the extent of the regulation and government intervention, as well as the threat of nationalization, dissuades private sector players from providing services.
- Consumer protection law contains strict clauses regarding financial services in the areas of transparency, usury and false advertising.
- The Venezuelan Banking Association has a powerful ethics committee.
- New licenses for banks have been frozen and it does not seem likely that more will be granted in the future.
Venezuela has one of the strongest economies in Latin America. In terms of GDP, it ranks among the top 40 in the world. Venezuela is highly dependent on oil revenues, though less-prominent manufacturing and agriculture sectors also exist. In the mid-1990s, as international oil prices fell, Venezuelans witnessed the collapse of their banks, part of a larger economic recession. New regulations enacted in the aftermath of the mid-1990s crisis enabled the government to restrict bank activity. Venezuelan banks are subject to strict mandates in areas ranging from interest rate caps to mandatory minimum amounts for microfinance loans. Though private banks exist, the government runs the largest banks in Venezuela. Over the past several years, President Hugo Chavez has spoken of nationalizing the banking industry entirely. In the wake of the current global financial crisis he promised to buy failing banks.
In the Economist Intelligence Unit’s 2008 Microscope on Microfinance Business Environment in Latin America and the Caribbean, Venezuela ranked second-to-last, finishing just ahead of Jamaica. Though the Venezuelan banking industry as a whole is subject to strict regulation, the report found that the microfinance industry suffers from weak regulation and low institutional development. As the report explains, “few institutions and high-market concentration combine to produce a poor competitive environment” (Microscope on Microfinance, 2008, p. 52). The complete absence of both private and public credit bureaus further weakens the microfinance environment. The strong suit of microfinance in Venezuela, according to the report, is transparency. Regulated institutions receive annual external ratings and audits and must publish monthly financial statements in newspapers. The practice of advertising effective interest rates varies by institution, as it is not a legal obligation. National accounting standards, supplemented by International Accounting Standards, contribute to transparency in the financial sector of Venezuela. Since banks or bank affiliates execute the majority of microfinance activity in Venezuela, solid accounting standards are generally enforced in the microfinance sector.
The General Law on Banks and Other Financial Institutions of October 1993 and its November 2001 reform (Ley General de Bancos y Otras Instituciones Financieras) are the pieces of legislation guiding financial industry regulation in Venezuela. The reformed law enhanced the regulatory framework as it “defined the different types of financial institutions, modified the sanctions regime, and established regulations on trust funds” (Blevy, 2006, p. 14).
The law requires banks to offer loans to certain preferred industries—agribusiness, mortgage, microfinance, and tourism—at below-market rates. Commissions and fees are determined by the government. The most recent set of reforms to the Banking Law, announced in 2008, include provisions and penalties for non-compliance. For instance, the false advertising clause explicitly prohibits credit product advertising that misleads the consumer. Moreover, the transparency clauses mandate that institutions provide clients with a contract at least five days before disbursing a loan. As Venezuela works rapidly to enact strict legislation in the regulation of interest rates, fees, and commissions, the numerous recent changes to the regulatory and supervisory framework have created legal uncertainty.
The 2001 reform to the General Law on Banks and Other Financial Institutions also increased the authority of the Superintendency of Banks and Other Financial Institutions (known by its Spanish acronym SUDEBAN). SUDEBAN, the principle Venezuelan regulator of financial institutions, was created by the Banking Act in 1940 to inspect, supervise, and regulate banks operating in Venezuela. Attached to the Ministry of People’s Power for Economy and Finance, SUDEBAN enjoys functional autonomy. SUDEBAN monitors the agencies in charge of investment, mortgage, mutual capital properties change, bonded warehouses, representative offices of foreign banks, financial leasing, liquid assets fund, and savings and loans. It implements protective measures upon the detection of irregularities in the management of any bank. Following the financial crisis of 1994, SUDEBAN underwent reform in recognition of its failures to prevent the collapse. These reforms included increased regulations over bank mergers, transparency requirements, and external monitoring.
Banks are the primary regulated institutions involved in microcredit operations. However, the new leadership within SUDEBAN, which is less supportive of microfinance expansion in Venezuela, has severely jeopordized modest gains made in banks’ specialized microfinance potential. As the 2008 Microscope on the Microfinance Business Environment in Latin America and the Caribbean reports, licensing applications for the establishment of new microfinance institutions have been frozen. A general lack of support for private and NGO microfinance programs on the part of SUDEBAN makes it unlikely that it will grant more licenses for microfinance operations in the foreseeable future. Currently, government-subsidized public programs offer interest rates 6%-8% lower than private or not-for-profit microfinance programs. With increased trends towards regulation and nationalization in Venezuela, it is likely that similar public programs will increase, much to the detriment of non-subsidized programs.
The Law of the Central Bank of Venezuela established the National Central Bank of Venezuela and grants the central bank the authority to make and implement any policies within its scope of competency. Its fundamental objective is to achieve price stability and preserve the internal and external value of the currency in an effort to facilitate national economic development. As part of the economic and social development plans and policies of the state, the central bank formulates and implements monetary policy, designs and implements exchange rate policy, regulates currency, sets credit and interest rates, and administers international reserves. This law gives the president of Venezuela full control over the direction and administration of the central bank.
The first Venezuelan consumer-protection authority, the National Commission of Supply, was created in 1994. The commission’s role was to regulate and control transport, rents, and foreign trade.
In 1947, Venezuela created the Law Against Monopolies and Speculation, a legal instrument to punish abusive practices and treatments, and the illegal sale and transfer of merchandise with the intention of increasing prices, and conditional sales. A proposal for an antitrust law was introduced in the National Congress the same year.
In 1973, the first Consumer Protection Project of Law, “Anti-trust Project of Law and Protection of the Consumer”, was approved. This project created the Consumer Protection Supervisor, which is an authority assigned to the Ministry of Public Works and the Economy, later renamed the Ministry of Production and Trade.
A new Consumer Protection Law was adopted in 1992. The promulgation of this new legal instrument brought with it the creation of the Institution for the Defense and Education of the Consumer (IDEC). Its programmatic scope included consumer education, information, organization, direction, and protection of the consumers. A reform of this law was approved in 1995, including for the first time users of financial services in its scope. The reform also called for IDEC to be renamed. The institution is now known as the Institution for the Defense and Education of the Consumer and User (or by its Spanish acronym INDECU).
In 2004, the Consumer Protection Law underwent a second reform with the objective of adapting it to the requirements of the new Venezuelan Constitution. This process saw the amendment of more than 76 articles and the addition of twenty new articles, extending the prosecuting and supervisory capacity of INDECU. Other present innovations in the law provide penalty for crimes such as usury, payment in dollars for real estate transactions, an unjustified share of public services, and monopolistic and fraudulent alteration of prices. In addition, the reformed law imposes sanctions on those who receive surcharges from commission to pay with debit cards, credit cards, checks, or any other financial instrument.
In May 2008, President Hugo Chavez signed a decree in which all consumer protection laws and institutions were folded into one super ombudsman called the Institute for the Defense of People’s Access to Goods and Services (INDEPABIS for its Spanish acronym). The new law contains specific financial services clauses, which are very strict on transparency, usury and false advertising. It details penalties for noncompliance including sanctions and jail time.
Regarding transparency (Article 74), financial institutions must present to the client the following information:
- The full price of the good or service
- Interest rate and penalties for non-payment
- All fees, commissions, or charges including administration and transportation fees
- The total amount the client will pay for the good or service during the term of the contract
- The rights and obligations of clients and service providers
- A sample contract given to the client at least 5 days before the transaction takes place
The Association of Venezuelan Banks (known by its Spanish acronym ABV) is the national banking association. Founded in 1959, it works for the interests of the national banking community.
The main objectives of the ABV are:
- To contribute to the development of the Venezuelan banking system in order to provide the latest advances for the improvement of banking services to the clients of its 54 affiliates;
- To foster the development of the national economy by promoting private investment;
- To represent its partners before the international economic organization;
- To encourage the Venezuelan banking industry to strengthen relations with foreign counterparts; and
- To highlight the social function of the financial sector.
ABV has 25 permanent committees and some ad hoc focus committees that each specialize in a specific aspect of the financial sector. The focus committees research and submit their recommendations to the board of directors. The Ethics Committee, one of the most prominent of the permanent committees, is chaired by the president of the ABV along with six members of different institutions.
The Ethics Committee investigates “irregularities” that occur in any of the affiliated financial institutions. When the committee finds ethical violations in banking practices, the ABV requires that the institution take corrective measures. If the institution does not correct its fault, the ABV will first sanction the institution privately and then follow up with the institution thirty working days later. Though ethics is an important aspect of any consumer protection framework, the ABV never outlines what may constitute an “irregularity,” sets benchmarks for compliance, nor publicly denounces the offending institution.
The ABV also makes provisions for a Microfinance Committee, formed as a space for the exchange of best practices and experiences in national and international microfinance. The committee aspires to be a source of information sharing regarding legal compliance in the microenterprise sector.
The laws in Venezuela that directly relate to microfinance have changed several times in the past 10-15 years. Amidst the banking crisis the president has often called for the nationalization of all banks. Evidence indicates that such populist policies are likely to be publicly favored in the future as well. Uncertainty has prevailed in Venezuela during the Chavez presidency.
Chavez has tended to favor his own government-subsidized microfinance programs rather than to promote competition and create a sustainable microfinance industry. Notably, transparency is one of Venezuela’s regulatory strong points supporting client protection. Regulated institutions receive annual external ratings and audits and must publish monthly financial statements in newspapers.
Blevy, Rodolphe. (2006, September). Assessing Banking Sector Soundness in a Long-Term Frame work: The Case of Venezuela. IMF Working Paper, 14.
Economist Intelligence Unit. (2008, October). Venezuela. 2008 Microscope on Microfinance Business Environment in Latin America and the Caribbean, 52-53.
These profiles are not exhaustive and have not been reviewed by country experts. If you notice a gap or error in any of the profiles, we would very much appreciate your comments about how they can be improved. In this way we can work together to expand our understanding of the variety of client protection strategies and initiatives that are being pursued in different parts of the world.