Fundamentals of financial management in non-banking institutions in Cuba

In the present work, a characterization of the Financial Institutions is made, with particular emphasis on Non-Bank Financial Institutions (IFNB). This must begin with the analysis of the bank or bank as the primary financial institution and preponderant of the financial sector for any economy or country. In addition, the main tools and indicators necessary to carry out a correct evaluation and analysis of these institutions are described.

1- GENERAL CHARACTERIZATION OF THE BANKING OPERATION

A bank is a financial intermediary that is responsible for raising resources in the form of deposits, and providing money, as well as the provision of financial services. Banking, or the banking system, is the set of entities or institutions that, within a given economy, provide the bank service. Internationalization and globalization promote the creation of a Universal Bank.

In short, the basic problem of a bank is to achieve maximum profitability, but at the same time ensuring sufficient liquidity and restricting risk to the maximum, ensuring its solvency. Solvency, in addition, must be ensured with its own resources (capital and reserves) sufficient to allow it to face possible risk situations derived from the insolvency of its debtors.

Intermediation margin

Knowing that banks pay an amount of money to the people or organizations that deposit their resources in the bank (deposit interest) and that they collect money to give loans to those who request them (placement interest), then it is worth asking, where do you get a bank your earnings? The answer is that placement interest rates, in most countries, are higher than deposit interest; so banks charge more to provide resources than they pay to raise them. The difference between the placement interest rate and the deposit interest rate is called the intermediation margin. Banks, therefore, make more profits the larger the net interest margin.

Placement interest rate - deposit interest rate = brokerage margin.

Banks act as intermediaries. His business is to trade money as if it were any other type of good or merchandise.

Banking operations are extremely wide and complex, boasting a very varied range of operations and possibilities both for raising funds or credits and for granting them. The study of typical banking operations will be summarized below according to their classification.

Passive operations are made up of those operations by which the bank captures, receives or collects money from individuals. The fundraising operations, called passive operations, are materialized through deposits. Bank deposits can be classified into three broad categories:

Checking accounts. Savings account or passbook. Fixed-term deposit.

The accounts are therefore totally liquid. The difference between the two is that current accounts can be mobilized by check and promissory note, while in demand deposits it is necessary to make the refund at the window or through electronic ATMs, but it is not possible to use checks or promissory notes.. Another difference is that in demand deposits, the bank can require advance notice.

Term deposits can be mobilized before the expiration of the term, in exchange for the payment of a commission, which can never exceed the amount of the accrued interest. These deposits, depending on the type of account, pay interest (deposit interest).

For the study of Active Operations, it must be taken into account that placement is the opposite of recruitment. The placement allows money to be put into circulation in the economy; that is to say, the banks generate new money from the money or the resources that they obtain through the raising and, with these, they grant credits to the people, companies or organizations that request them. For giving these loans, the bank charges, depending on the type of loan, amounts of money called interest (placement interest) and commissions.

On the other hand, the bank reserve requirement is only that part of the total funds raised that banks are obliged to keep in liquid form, as a reserve to face the possible demands for restitution of customers is called a bank reserve requirement. They have a sterile character, since they cannot be inverted.

The reserve requirement is a percentage of the total deposits received by financial institutions, which must be kept permanently, either in cash in their savings banks or in their accounts at the central bank. The reserve is intended to guarantee the return of money to savers or bank customers in the event that they request it or if liquidity problems arise for the financial institution. This reduces the risk of loss of money for savers.

Another part of the resources goes to profitable assets. Within these profitable assets, a first part is made up of profitable assets in:

Loans and Credits

Conceptually we can say that a loan (from a financial point of view) is the real contract by virtue of which a party (lender) delivers certain funds to another (borrower), so that after maturity, it is repaid as agreed. Multiple classifications can be developed about loans:

Due to the nature of the goods loaned: Money (in which we will focus on this topic), fungible movable items and loan of securities. By the currency object of the loan: In national or foreign currency. By the interest rate: At fixed and variable interest, prepayable or post-payable. By the amortization system, at the end of the loan, following a French, German, American system, etc. Due to the existence of guarantees of the fulfillment of the obligations, they can be real (garments, mortgages, deposits, etc.) or personal (guarantee). Syndicated loan in which the funds delivered to the borrower come from a plurality of lenders (union), although this plurality does not mean that there are several lenders, from the legal point of view It is a single contract. Participative loan in which the lender,Regardless of the interest pact, it agrees with the borrower the participation in the net profit that he obtains. Loan for spot trading operations, linked to a purchase or sale of securities.

Among the main types of loans or credit granted by banks we can cite the following modalities:

1. Credit Accounts

The credit accounts that are operations by which the Bank grants credit to the client (credited) for a certain term, (it can establish its automatic extension) and up to a certain amount that it makes available to the client. The client is obliged to satisfy the Bank with an opening commission, to reimburse the Bank the balance in his favor that the credit account throws at the time of the cancellation and liquidation of the same and to pay interest on the amounts drawn down, and another minor part for the amounts not disposed.

2. The discount of effects

The discount of effects as a way of financing companies and which consists of an operation by which a bank advances to a person the amount of a pecuniary credit that he has against a third party, with deduction of an interest or percentage and in exchange for the assignment of credit itself except for good purpose.

3. Portfolio of securities

The second part of the profitable assets is made up of the portfolio of securities where fixed income is distinguished on the one hand by both public and private and variable income on the other.

4. Temporary transfers of assets

A third type of operation carried out by the banks would be the temporary transfers of assets, they are a modality in which credit institutions transfer to a client a part of an asset (for example, a loan) that they own, which allows them recover a proportion of it from a third party in exchange for a return.

Currently, the change in the needs of companies, families and institutions has redirected banking activity, orienting it towards services, which become its main source of income due to the reduction in net interest income, a more pronounced reduction the more mature it is the financial system of a country and the lower the interest rates. The means of payment (cards, checks, transfers), guaranteeing the successful completion of international trade between the parties, ensuring solvency in import-export, intermediation in financial markets and operations with large companies and public institutions, mark the focus of banking as universal financial services companies. Separate mention deserves the important business participations of the big bank,Another great source of business and power for these institutions, coming to form powerful multinational groups with interests in the most diverse areas.

Depending on the laws of the countries, banks can perform additional functions to those mentioned above; for example trading stocks, government bonds, currencies of other countries, etc. When these activities are carried out by a single bank, it is called universal banking or multiple banking. Likewise, these activities can be carried out separately by banks specialized in one or more activities in particular. This is called specialized banking.

Bank typology

There are several criteria for grouping and classifying banks. In our study, we will follow two fundamental criteria for its grouping, taking into account the origin of capital and the type of operation in which it specializes.

Classification according to the origin of capital:

Public banks: Capital is contributed by the state. Private banks: Capital is contributed by private shareholders. Mixed banks: Their capital is made up of private and public contributions.

Classification according to the type of operation:

Current banks: They are the common wholesalers with which the general public operates. Its usual operations include account deposits, savings accounts, loans, collections, payments and collections for third-party accounts, custody of articles and securities, rentals of safes, financial, etc. Specialized banks: They have a specific credit purpose. Issuance banks: Currently preserved as official banks, these banks are the ones that issue money. Central Banks: These are the top-tier banking houses that authorize the operation of credit institutions, supervise and control them. Second-tier banks: those that channel financial resources to the market, through other financial institutions that act as intermediaries. They are mainly used to channel resources to productive sectors.

Regardless of the types of banks, they allow money to circulate in the economy, so that the money that some people or organizations have available can be passed on to others who do not have it and who request it. In this way it facilitates the activities of these people and organizations, and improves the performance of the economy in general. From the foregoing, the importance of banking in the economic history of mankind arises.

Financial institutions are defined as any legal entity whose corporate purpose is to carry out the activity of financial intermediation. The definition covers both banks and non-bank financial institutions. A financial intermediary is a company that acquires funds from a group of investors or savers and places them or makes them available to other deficit holders. In this process of channeling funds, the imbalances in volume, time, risk and information that exist between savers and customers are eliminated.

Currently, the study of Non-Bank Financial Institutions (IFNB) is of particular interest, which are nothing more than those institutions or companies created with the aim of providing financing to companies and legal businesses, and whose financing comes from financial institutions such such as banks or others, instead of private funds or deposits. They generally specialize in the development of short and medium-term activities, with a wide and fast operating range. It is vitally important to study the quality of its Portfolio and its Assets, which make up the fundamental performance rule; therefore, the main techniques and methods most used in its evaluation will be described below.

2- FINANCIAL EVALUATION OF THE FINANCIAL INSTITUTIONS

From 1961 to the 1980s, there was only one bank

in the Cuban economy: Banco Nacional de Cuba. This concentrated the functions of central, commercial, investment banking and was in charge of

international financial operations. In the 1990s, the

financial system underwent a drastic transformation.

A two-tier system emerged, headed by the Central Bank of Cuba, in charge of monetary policy, to ensure the operation of the payment system, and to supervise and control the 8 state commercial banks and the rest of national and foreign financial institutions.. The financial system modernized, developed new financial services, new forms of intermediation, and achieved greater integration into international markets.

In Annex 1 you can find the financial entities that make up the Cuban Financial Sector. It highlights the division that is made into 4 fundamental groups: Commercial Banks, Non-Bank Financial Institutions, Representative Offices of Foreign Banks, and Representative Offices of Non-Bank Financial Institutions.

With respect to the type of assets that mainly make up the Balance of these entities, the 3 fundamental study groups are presented below:

Productive generating assets: those that generate income related to the typical activity of the financial business, that is, the loan or credit portfolio. There are loans granted receivable, effect discount, factoring, leasing, etc. They constitute the investment of the financial company and involve a certain level of risk. They are those assets in charge of obtaining the necessary profitability to achieve the commercial and financial objectives of the company given an evaluated and acceptable risk of the company. Liquid assets: composed of cash on hand and bank, short-term financial investments. They have the function of immediately meeting their obligations, whether planned or not, tangible and intangible fixed assets and other assets.

Regarding the type of liabilities, we can argue that the banking business operates with a high level of financial leverage. The main sources of financing are: Customer deposits and funds received from other financial entities. It is necessary to separate those liabilities that generate interest costs from those that do not generate them, as described below:

Liabilities with cost: customer deposits, for bank financing purposes, a distinction must be made between demand deposits and fixed-term deposits.Demand deposit: they can be withdrawn by the client at any time, in times of crisis in the financial system The massive withdrawal of funds by clients can cause bankruptcies even to creditworthy entities. In normal times it is a fairly permanent source of financing, since the client usually maintains relatively stable minimum balances in the box to be able to face his daily payments. Financing received by other financial entities: there are two types of financing in this concept: 1) that are generated by correspondent banking relationships and 2) loans and lines of credit received from the interbank market,It is important to keep in mind that they may cease to be available to the company upon maturity. Free liabilities: Made up of those obligations for which no interest or other charges are paid, such as accounts payable. In the case of Cuba, sight deposits from the non-bank sector are also included.

Capital or equity in this banking sector is generally used to finance the company's fixed assets, as well as the permanent fund needs that may be demanded by its cycle of operations. It is generally divided into 2 parts: Basic Capital and Supplementary.

Basic Capital: formed by paid-in capital or state investment fund and patrimonial reserves. Supplementary Capital: made up of general reserves to cover losses on loans and subordinated debt for a fixed term in the case of Cuba with a minimum maturity from 5 years.

Much of its operations take place through off-balance sheet items, with contingent liabilities or obligations being important. An obligation is contingent when the financial company undertakes to make a certain disbursement on behalf of third parties under certain conditions: guarantees granted, letters of credit opened or confirmed in the case of banks, financing granted not yet used by clients, etc.

Procedures for the Analysis of the Financial Situation

In relation to the balance sheet of a financial company, the development and development of the following rubles must be observed:

The size or value of the assets, and in particular what is the volume of the loan Identify the type of business in which it is oriented, that is, if it focuses on financing commercial or short-term obligations, or if it is dedicated to financing investments in a longer term. It must be specified that it is the short, medium and long term. Productive assets must represent between 70 and 80% of the total assets of a financial business. Amounts higher than these could suggest in principle an over-placement of funds and a consequent tension in liquidity, which will have to be verified later. On the other hand, a much lower level could imply that the company has a rather conservative position, which should probably be reflected in lower profitability indicators.It is convenient to review the changes in the structure of the bank's or financial assets and liabilities by calculating the vertical indices, to know why these occur and the implications. The Quality of the loan portfolio is predetermined in the credit process, which is when it is evaluated and decided where to place the money and under what terms and conditions.

On the other hand, within the study of the Loan Portfolio, the behavior of the following aspects is of special attention and care:

Portfolio Growth: A first sign of potential deterioration may be very rapid growth, it could suggest: High-risk portfolio; high concentration in a few clients and operations; questionable decision-making process; the lack of a growth plan or strategy. Historical loan losses: it is a primary indicator of the historical quality of the portfolio given what the record for bad loans is. It does not say much about the present quality of the assets which should be measured through the reserve for doubtful collection credit. On the other hand, loan losses take years to define and record and generally appear in the notes of the accounts rather than in the financial statements. Provisions: must be created to represent a loss, whether known or estimated, of your portfolio,It is common for it to be regulated by central banks, but it always goes through the subjective assessment of the company's managers in relation to the state of each of the credit assets. Given that provisions have a direct effect on the company's profitability, managers are probably not interested in creating it at the required levels.

And to efficiently carry out said study, special emphasis is placed on the analysis based on financial indicators that reflect the health and efficiency of the Loan Portfolio. Among them, some of the indicators shown in Annex 2, described below, must be analyzed:

Portfolio Quality: Provisions / Loan Portfolio:

A growth in it indicates that it is recognized by the management of the deterioration in quality. In Latin American banks they have a value of 2 and 8%, for developed countries it is 1%.

Past Due Loan:

Past Due Loan / Total Loan Portfolio

Growth implies real deterioration in the health of the client's portfolio. A statistical series must be followed to analyze the quality of the portfolio, detect trends, deterioration or improvement.

It is relatively profitable to disguise the deterioration of the portfolio by renegotiating the loans, in this way the latter are incorporated back into the current portfolio and reduced from the reserves and past due loans item. The stability over time of relations with the company, the general knowledge of the financial situation of the sectors or companies that are its clients, as well as its policy regarding the renegotiation of past due loans helps us to perceive when it is possible to find this kind of practice.

Liquidity

The ability to meet your obligations over time, especially with loans received from the interbank market and customer deposits, is crucial to the reputation of any financial institution or bank and even to continue its existence. 2 approaches are proposed in this regard:

Continuous need for funding to finance new loans and cover the usual needs of clients to withdraw deposits. In countries where there is no development of financial markets, financial institutions must experience a slower pace of their placements in order to maintain an adequate level of liquid assets. Need for financing in the face of a sudden crisis, taking into account the massive withdrawal of funds in sight. Liquidity is considered the second cause of bankruptcy. The loss of confidence of a bank's depositors could bankrupt others who are perfectly solvent.

It is important to have a healthy portfolio that is salable and acceptable to other lenders in tight liquidity. One of the signs of lack of liquidity is the decrease in profitability, since when part of the portfolio is sold, a lower margin is obtained. Liquidity has a lot to do with the level of leverage, the greater the less coverage to raise new funds and the higher the price you will have to pay for them. Among the main causes of liquidity stress are:

High losses or deterioration in the portfolio. Inadequate financing structure, imbalances of serious maturities between assets and liabilities. General crisis of the financial system.

Banks manage liquidity risk using the following methods:

Maintaining a minimum level of liquid assets that can be converted into cash quickly in the face of unforeseen needs Precise control of maturities by age of assets and liabilities to set placement limits, imbalances, net currency positions Capturing funds from the financial market to supply temporary needs Performing simulations in which the financial and illiquidity situation of the company is considered in the worst case scenario

Among the ratios most used for liquidity analyzes, we can find:

· Liquid assets / total assets

The more liquid the asset, the less profit will be obtained from it, so a balance point must be found.

· Liquid assets / Deposits

Similar to the previous indicator or very similar to the acid test.

· Assets with maturity <30 days / Liabilities <30 days

It is a bank version of the current ratio, it measures immediate coverage. It is one of the most effective in measuring liquidity.

The BC Cuba regulates that it must not be less than 0.90. 100% of demand deposits are in liabilities with a maturity of less than 30 days, although in theory they can be withdrawn in their entirety by the client under normal conditions, they represent a permanent source of funds for the bank, since as a rule these they tend to keep minimum balances in mind.

For Cuba, the permanence is longer since a large part of the companies do not freely choose their bank but are directly assigned to it. So a coverage of 0.90 may be acceptable. For financial companies that do not have a customer account and that their main sources of financing are lines and credits that they receive from other institutions, an adequate result will depend on how healthy the portfolio is. Must exceed unit. A summary of the indicators used in this work can be found in Annex 2.

Financing and Capital Structure

Due to its characteristics, the banking business is the one that operates with the highest level of financial leverage, since its function is to raise funds from a group of savers and lend it to others that are in deficit.

In the analysis of liabilities, the following must be taken into account:

Level of concentration of financing sources mainly in relation to a number of bank accounts and clients. A high concentration will increase dependence and potential imbalance in the event that said source is no longer an option for the bank. Stability of financing sources Causes in changes in financing structure. If the changes have been directed to more or less cheap sources than previously. Time imbalances (time missmatching) is a common risk in financial institutions that arises when the origin and destination of the funds are different, and different maturity. In other words, you collect funds on demand and lend them over a 90-day period. There is a level from which the imbalance creates a serious risk when, for example, you are taking short-term funds and lending them over the long term.The greater the imbalance, the greater the risk of interest rates, for those companies whose lending and borrowing rates are expressed in variable terms. Currency imbalance, when operating in several currencies. When you have made a dollar loan using a source of funds in another currency, you are highly exposed to the risk of exchange rate movements. They must be hedged using financial derivatives

Capital: It is often the value that is seen before the rest of the indicators, but in itself it is not a performance indicator. However, the capital level is one of the most followed and regulated items in a financial institution, both by central banks and by international agreements such as that of Basel. Given the need to protect depositors and the impact that a crisis can have on the country's banking system. The first function of capital is to serve as a cushion to absorb possible losses, when the quality of assets deteriorates, the better capitalized banks or financial institutions will experience less loss in value since the bankruptcy risk is also lower in relation to others. highly leveraged. A good level of capital also indicates that shareholders believe in the business.

In Annex 2 we can find the most used ratios to measure the level of capitalization or leverage. They are also described in more detail below:

- Free capital / Productive and liquid assets

Free capital is: Equity less fixed, intangible assets and investments in subsidiary companies.

The part that is financing infrastructure and other non-bank funds is deducted from capital, the remaining part must represent a semi-liquid form to cover potential losses. It shows how far the portfolio can deteriorate before third party funds are compromised. It is equivalent to the working capital of the industrial business.

- Liabilities / Capital

It measures the level of leverage, in the sector an acceptable range can be between 8 and 14 times. In Latin America the average is 7 to 10 times. The central bank sets limits for banks of 20 and for the rest of non-bank financial institutions it is 7 times.

In calculating the ratio, it would be convenient to include contingent liabilities as part of the company's obligations. These are not real obligations until certain events occur, which may or may not happen. Example: a bank guarantee whereby the bank undertakes to irrevocably pay a third party upon maturity of an obligation as long as the direct debtor does not do so, in fact the bank is granting a credit to the customer, has contracted a non-real obligation But if you are contingent and you are running the risk of having to disburse at the end of the debt.

Financial Risk Analysis

Every financial institution is exposed to financial risks that involve being managed through an identification, measurement and monitoring process and are subject to certain limits and controls. The entity's objective in this regard is aimed at achieving an appropriate balance between risk and benefit and minimizing the potential adverse effects derived from its financial activity.

The main financial risks are: credit risk, liquidity risk, market risk and operational risk. In turn, market risk includes interest rate risk and exchange rate risk. The entity's management carefully reviews and agrees on the management policies for each of these risks, which are summarized below. These policies have remained unchanged throughout the year.

Credit risk

The risk that one party to the financial instrument may cause a financial loss to another party if they default on an obligation. Financial assets, which potentially subject the entity to concentrations of credit risk, mainly consist of discounted documents, factoring, financial leases, and loans and advances to customers and banks.

The entity has a credit unit that evaluates the credit risk before being presented to the Credit Committee. Credit policies are established to ensure that the concentration risk is avoided and that there is sufficient diversification of the loan portfolio in terms of resource allocation, economic sector and maturity profile. Credit reviews are carried out regularly and credit relationships are efficiently managed.

Liquidity risk

It is the risk that an entity will find it difficult to obtain the necessary funds to fulfill the commitments associated with its financial liabilities.

Market risk

The risk that the fair value or future cash flows of a financial instrument may fluctuate as a consequence of variations in market prices. Market risk comprises 3 types of risk: interest rate risk, exchange rate risk and operational risk.

Interest rate risk

The risk that the fair value or future cash flows of a financial instrument may fluctuate as a consequence of variations in market interest rates.

Exchange rate risk

The risk that the fair value or future cash flows of a financial instrument may fluctuate as a consequence of variations in the exchange rates of a foreign currency.

Operational risk

Operational risk is the risk of loss arising from system failure, human error, fraud, or external events. When controls fail, operational risk can lead to reputational damage, legal or regulatory implications, or loss.

Economic Analysis of Financial Entities

For the financial sector, the ability to generate income or obtain Net Interest Income stands out from the difference between the interest rates charged to clients and the one paid for raising funds. Also included are other sources of income such as: consulting services, and other income that is grouped under the heading commissions. The latter are highly desirable for their rapid generation, without the need for funding and not subject to interest rate or any other risk. Among the main reasons that can be detected as producing changes in the relationship of interest with respect to total assets we can find:

Greater or lesser proportion of generating or productive assets Movement of the loan portfolio towards more or less risky businesses Losses in the loan portfolio Fluctuations in both active and passive interest rates Changes in the product mix of the business portfolio Changes in the funding structure Increase or decrease from competition causing price changes Changes in accounting policy for revenue recognition

The main performance indicators that allow the performance of a financial institution to be measured are the following:

Interest received / Average productive assets

The result is the average interest rate that the company receives in its brokerage operations. It should reflect portfolio risk as riskier assets will require higher profitability levels.

Interest paid / liabilities with average cost

Accelerated growth may indicate liquidity and funding problems or increased use of more expensive sources.

The difference between both indicators is the company's financing margin or spread. In principle, the greater the better the result. In addition to the cost of funding, it is important to control general and administrative costs. An impaired portfolio carries an unanticipated growth in administrative costs, collection costs, corrective measures, legal processes, etc. All these performance indicators can be seen in Annex 2; In addition, they are explained below:

Return on assets: Earnings before tax / Average total assets

Average: 1%

Return on equity: Earnings before tax / average equity

Its result will be more or less adequate depending on the opportunity cost of capital in the market for businesses of similar risk.

Range: 20-25%

BCC regulates as acceptable values for:

Banks: 12-15%

Non-bank financials: 6-8%

It is likely that the BCC is considering regulating interest rates at low levels with the premise that financing should not significantly increase the production and trade of Cuban companies.

Analysis of the financial situation of the Cuban sectoral financial houses

Carrying out a general analysis of the country's financial houses, we can see that the first ones were a derivation of the treasuries of the different ministries, for the most efficient use of temporarily free funds, and had (among others) the following general characteristics:

His priority, with some exceptions, was to support and give financial support to the sector to which they belonged. Double subordination: methodologically to the BCC and administratively to their respective ministries. Legal limits on their activity that do not allow them to carry out letter of credit opening operations and funding with client deposits. They have no real competition, they have certain prerogatives in the administration of finances that are their clients.

The most important transformations are the gradual disaggregation of the accounts of the company in the sector. Henceforth, the trend is to become companies that fund only with their own capital and interbank market facilities, the most recent ones were born with this structure: Finagri and Alfisa.

It should lead to decision-making with a more commercial and autonomous approach less committed to the administrative objectives of the branch to which they belong. The main drawback lies in the loss of their main source of financing, which was the cheapest and most flexible, which will force them to change their cash management policies, interest rates, as well as increase their working capital.

3- GENERAL CHARACTERISTICS OF NON-BANKING FINANCIAL INSTITUTIONS IN CUBA

Cuban non-bank financial institutions are historically known as “financial houses”, as this is the initial name by which they were known, especially the first companies of this type that emerged in the country. A summary of those that are currently operating in the country can be found in Annex 1, highlighting that some are made up of mixed capital (domestic and foreign investment), and others are aimed at granting or controlling the financing that is granted in a determined sector. The main characteristics that identify this type of institutions are the following:

Loan Portfolio:

Fundamental short-term financing or working capital, given the immediate urgencies in the current account (with the exception of fintur). Sources of funds available to financial companies are short-term. Those that must be disposed of from client funds will have a contraction of your portfolio from the point of view of its volume in the immediate future.

Portfolio quality:

They depend on the evolution of the sector derived from the concentration it has in it. Those that assume a greater commitment of financial support have been the most sensitive to the evolution of the sector, those that are more commercial in nature have been able to maintain some stability. Provisions for loans of doubtful collection are not created to the provisions and regardless of the real impairment level of the portfolio and that this aspect is regulated by the BCC.

Financing structure:

They are currently financed with client funds. The tendency is to disaggregate the accounts to the national banking system. Instability of funding sources since their liabilities change in a very short period and they will have to look for new alternatives in the interbank market. Tendency to increase the cost of financing, since deposits They have zero cost Sources are short-term. The sources of financing are mostly national in origin, and it is quite difficult for a Cuban financial institution and, in particular, for a sector to obtain external funds, the country risk factor comes into play. Lines obtained from foreign banks are normally granted to Cuban banks and not to non-banking institutions.

4- Profitability

Within the Cuban Financial System, it can be seen that Financial Institutions have an average interest rate between 5 and 10% per year, being lower than those of the total market, which are 15-18% per year. The low funding and administration costs allow them to obtain profitability margins even above the international average, the ROA index is above 5% compared to 1% on average in foreign Financial Institutions.

The fact of funding with deposits should condition the main differences between the two types of company since the change modifies their original name, by becoming independent from the treasury management of their sector, they need to achieve more efficient management: more commercial interest rates to assume financing costs, to assume higher financial costs, a healthier portfolio, a more conservative liquidity policy, autonomy in credit decisions, a higher level of capitalization in order to increase its debt capacity and therefore its volume of operations.

There are also other very influential factors that make the difference with other entities in the country. They are:

Economic-Financial Situation of the country. Policies, Regulations and Regulatory Instructions by Government Institutions and / or Central Bank. Economic and financial evolution of the sector. Commercial character versus degree of commitment to support the sector. Management capacity of the entity that is It manifests in the establishment of more or less correct policies of liquidity, indebtedness, credit and interest rates.

ANNEX No.1 FINANCIAL INSTITUTIONS THAT OPERATE IN CUBA

Commercial banks

Non-Bank Financial Institutions

Representative Offices of Foreign Banks

Representative Offices of Non-Bank Financial Institutions

· National Bank of Cuba (BNC)

· Popular Savings Bank (BPA)

· Banco de Inversiones SA

· Banco Metropolitano SA

· Banco Internacional de Comercio SA

· Banco Financiero Internacional SA (BFI)

· Banco de Crédito y Comercio (BANDEC)