History of the Colombian financial system

RISE

In national and world economic history, commercial banking has been and is the basis of the financial system, on which a fundamental activity is developed for the operation and evolution of all productive and commercial sectors. Since the end of the 19th century, banking establishments have been main protagonists in national life, fulfilling an essential task for savings, investment and financing, in favor of the nation's personal, family, business and community growth. According to the stages and characteristics of the Colombian economy, banking has had different circumstances, but always in constant evolution, sometimes under the total administration of the state and, at other times, with a predominance of private national, international and mixed capital.The institutional financial system in the country was generally identified, until not many years ago with commercial banking, but with phenomena such as industrialization, then protectionist models and recently with the opening and internationalization, the deepening and diversification of the market was registered with the emergence and rapid development of other entities, but the bank maintained its leadership, although now with new strategies that go beyond traditional intermediation.but the bank maintained its leadership, although now with new strategies that go beyond the traditional intermediation.but the bank maintained its leadership, although now with new strategies that go beyond the traditional intermediation.

CENTRAL BANKING

It is serious for Colombia that a century after its independence it did not have an effective regulation in financial matters, which accustomed Colombians to monetary indiscipline and to allow economic indulgences. Prior to the creation of the current Banco de la República there were several and unsuccessful attempts to create an agency to act as Central Bank.

In 1847 the creation of the Banco de la Nueva Granada was proposed but such a project was never started due to the capital required for its creation, ten million reais. Later, in 1855, the “organic law of issue, discount and deposit banks” was issued, but there was no creation of any bank. Then in 1864 it was thought to give the right to issue banknotes to English citizens, so that they could create a national bank, but such citizens did not accept due to the clauses of the contract. In 1866The government was authorized to establish the Bank of the United States of Colombia, with the characteristics of an issuing bank and a state banker, but it was not carried out due to other problems faced by Colombians at the time. The most successful attempt was the creation of the National Bank. In 1880Rafael Nuñez promoted the creation of this bank, and whose banknotes should be accepted by all private banks, but the National Bank could refuse to receive banknotes issued by private banks if at any time its financial situation was compromised. As such, private banks refused to accept such conditions. With this refusal, the government decided to maintain the shared issue of money, indicating that both parties should accept the money issued by the other. Still, private banking declined. Faced with this other refusal, Rafael Nuñez stated that banks that did not admit the money issued by the National Bank should be liquidated. Despite such a move, the private sector was more resilient and using all its political weapons prevented law enforcement.Furthermore, during this process the country's political crisis worsened. In the end, disconceived by public opinion, the National Bank became part of the Ministry of the Treasury, in a section called the liquidating section. Rafael Nuñez, as president of the republic and with great financial vision, promised that during his presidency he would not issue more than $ 12,000,000 to the market. Nuñez made this calculation multiplying by three the public expenses. The system was optimal because after a period of movements in the industry and the market the money that had been issued would be valued. The problem arose after the death of Nuñez, since the issue reached ten billion pesos to finance the war, so the money quickly depreciated.This event is known as the dogma of the 12 million and has left its mark on the economic and financial history of Colombia. Another attempt to develop a central bank was the creation of the Central Bank of Colombia in1905. This would exist with the privilege of issuing money, being a state banker but at the same time acting as a commercial bank. This bank was developed by Reyes, but once his regime fell, everyone went against the decisions he had made and through the 8th law of 1909 the liquidation of the Central Bank of Colombia was decided.1

After a long period of financial management by the private sector, there is a need to create a central bank with enough power to enforce the rules of the game for private banks. This is how Banco de la República develops.

Bank of the Republic

The emergence of the Banco de la República occurred in 1923. It was organized by the so-called Kemmerer mission. Along with the creation of the Bank, the Banking Superintendency was developed as a surveillance entity.

The first world war brought serious economic and financial difficulties to Colombia that did not improve with the arrival of peace. At the time money was issued without control, each bank faced its liquidity needs due to the lack of a formal system of guarantees and government support. This disorder in financial matters unleashed in the crisis of 1922 that evidenced a shortage of circulating resources and the need to give stability to the currency and credit. Seeing the problem, Congress passed several laws and authorized the government to hire a mission of foreign experts to advise the country on the organization of the monetary and banking structure. In March 1923 a mission arrived, chaired by Edwin Kemmerer, which led to the ordering of the financial system by studying our economy.The result of this mission was the establishment of the Banco de la República based on thelaw 25 of 1923. two

The Banco de la República exercises central banking functions. It is organized as a legal person under public law, with administrative, patrimonial and technical autonomy, subject to its own legal regime. The basic functions of the Bank are those of regulating currency, international exchange and credit; issue legal currency; administer international reserves, be a lender of last resort and a banker for credit institutions; and serve as a fiscal agent for the government. All of them are exercised in coordination with the general economic policy. The board of directors of Banco de la República is the monetary, exchange and credit authority. (Verónica García “http: www.lafacu.com/apuntes/economia/sistema_financiera_colombia/default.htm”)

This entity was organized as a public limited company with an original capital of $ 10,000,000, 50% contributed by the government and the rest by commercial banks. This fact that private bankers had shares in the Bank was decisive because it gave them confidence in the Bank. The Bank's first board of directors was made up of 10 members, three from the government; four from national banks, two from foreign banks; and one by private shareholders. In this way, they wanted to give participation to all the economic sectors of the country. At first, the Bank was empowered to issue money for 20 years. The way the Bank issued was based on the gold reserves which supported the issue, thus the higher the gold the higher the issue and vice versa. But this system was removed.The Banco de la República has had various reforms, despite the fact that all of them are of great importance because they affect the country's economy, the most highly represented are the following.

1. The exchange of national currency to foreign is regulated. All payments abroad must be approved by the Bank, and it is empowered to design monetary, credit and exchange policies. Powers to regulate the currency and credit. Gained power to establish controls on imports and operations abroad. Creation of the monetary board. He came to have more power than the Bank's board of directors, intensifying control over exchange movements, and the state became owner of 99.9% of Banco de la República's shares. Granting an action to each financial entity. It was defined as an entity of economic public law, with a special administrative regime and independent assets. With which he is exonerated from following the regime of decentralized entities.The figure of the monetary board was eliminated, and the Bank's management passed into the hands of the Banco de la República's board of directors, ending the dual role, policy formulation (monetary board), and their application (board directive). The meeting is constituted by the Minister of Finance, who chairs it; Bank general manager; and seven members appointed by the president. It is agreed that the primary function of the Bank will be to guarantee the stability of the currency. (Banco de la República "Introduction to economic analysis, the Colombian case" Banco de la República. Bogotá)The meeting is constituted by the Minister of Finance, who chairs it; Bank general manager; and seven members appointed by the president. It is agreed that the primary function of the Bank will be to guarantee the stability of the currency. (Banco de la República "Introduction to economic analysis, the Colombian case" Banco de la República. Bogotá)The meeting is constituted by the Minister of Finance, who chairs it; Bank general manager; and seven members appointed by the president. It is agreed that the primary function of the Bank will be to guarantee the stability of the currency. (Banco de la República "Introduction to economic analysis, the Colombian case" Banco de la República. Bogotá)

COMMERCIAL BANK

The evolutionary process of exchange houses thus led to the formation of commercial banks, as entities with the basic function of lending the resources they receive in custody, managing official money instead of gold in these operations. Thus, from deposits in metals, it was transferred to deposits in official money, which today is transferable by means of checks. The check is a payment order, representative of a debt that the bank has with the owner of the deposit. (Banco de la República "Introduction to economic analysis, the Colombian case" Banco de la República. Bogotá Pag.113.Cursive of the book)

Private

Initially, the capital required by Law 45 of 1923 for the constitution of a private bank was $ 300,000, which today amounts to $ 8,000,000,000 adjustable annually with the Consumer Price Index IPC.

It was established that banks could only acquire obligations to the public for up to an amount equivalent to 10 times their paid-in capital and their legal reserve, thus protecting the public by preventing banks from growing excessively based on deposits that later, except for reserve requirements, are placed in credits. (Gilberto Arango Londoño "Colombian economic structure" page 335) This means that banks can accept deposits from their clients only until in total they reach 10 times their paid-in capital and legal reserve, thus trying to stop the growth of These are based on money that is not fixed and can begin to flow at any time.The government is also trying to ensure that banks have enough capital with which to respond when a certain financial panic is generated and their massive withdrawals are generated. For this reason, banks must periodically increase their own capital in order to continue attracting customers. This capital increase is achieved by issuing shares.

Initially, the commercial banks as a whole were shareholders and owners of 15% of the Banco de la República, this because in the beginning it had to have some capital to achieve its capitalization. But in the financial reform, which was carried out mainly in the Banco de la República in 1973, the government acquired the bulk of the shares that were in the hands of the commercial banking system, leaving each bank with a share of the central bank, and the government with the rest, which is equivalent to 99.9%.

In the 1970s, in 1972 the CAV Savings and Housing Corporations were created, today called Mortgage Banks, which expanded the participation of the private sector in the financial market. These corporations were created to support massive construction projects.

With the appearance of the CAVs, the UPAC (Unit of Constant Purchasing Power) arises, whose initial objective was to promote the savings of Colombians, capturing large resources that were transferred to the construction sector. In this way, it sought to protect families and to protect those people who, due to their condition, were at a disadvantage vis-à-vis others, but this was not fulfilled since the main concern of the state was the protection of the interests of the CAV's. UPAC was tied to inflation, but was then tied to DTF. In September 1999, due to a ruling by the Constitutional Court, the government was obliged to tie the UPAC back to inflation, thus giving rise to the UVR (Unit of Real Value) to replace UPAC.Today the only entities with power to manage resources at UVR are the Mortgage Banks. UVR is measured according to the IPC (Consumer Price Index) 3. The first private banks were managed by the upper class and leader of Bogota society. There were Banco de Bogotá and Banco Colombia, which were national, created in1875, and developed at the initiative of Salvador Camacho Roldán. In addition banks in the federal states existed. Almost all banks had the power to issue banknotes.

Semiofficial

These institutions are called promotion institutions since they promote the development of the different productive areas of the country, but this does not mean they stop competing with private banks. These institutions are the Banco Ganadero, Banco Cafetero (Bancafé), Banco Popular and the Caja de Crédito Agrario, Industrial y Minero, called Caja Agraria (Banco Agrario).

Caja Agraria: Created in 1931. For a time it had the largest Colombian bank portfolio because it had a presence in much of the national territory, but little by little it has been losing ground. Its capital belongs to the Government, the Banco de la República, the National Federation of Coffee Growers, and its board is chaired by the Minister of Agriculture. The Fund has, in addition to the financial services it provides, a network of warehouses for the sale of fertilizers, seeds, tools and agricultural elements in general, at prices that sometimes generate losses because it must maintain the benefit services to the sector.

Banco Popular: Created in 1950. It is of mixed economy, linked to the Ministry of Finance. Not for profit. He was founder and owner of the Popular Finance Corporation. In the fall of General Rojas Pinilla, he faced a great crisis, from which he came forward because the government decided to reduce the national budget by 10% to recapitalize the institution. A substantial part of the official deposits are managed by this bank, which has allowed its portfolio to increase, and has attracted a greater number of clients.

Banco Ganadero: Created in 1956, it constitutes the fundamental point of support for the development of livestock. Most of the cattle ranchers in the country were his partners due to an agreement as a substitute for the respective taxes. Currently its shareholding control is held by the Spanish bank Bilbao Vizcaya. By legal provision, a significant percentage of its portfolio must be dedicated to loans for livestock development. It has received loans from international financial institutions in large volumes with terms that allow the execution of programs for the preparation of livestock land, its improvement, the breeding and raising of livestock.

Bancafé: Created in 1953 to serve especially coffee growers, who had been experiencing a boom in their economies. It is linked to the Ministry of Agriculture, and belongs to the National Coffee Fund. He is the natural banker of the National Federation of Coffee Growers, which by his means irrigates funds for the purchase of crops. In the coffee areas, it makes loans for the conservation and improvement of coffee plantations, as well as for the harvesting and diversification of crops in favorable areas. He is a shareholder in financial corporations such as Valle, Caldas and Nacional. It has subsidiaries in New York and Panama.

(Gilberto Arango Londoño "Colombian economic structure" pp. 335-337)

ENTITIES THAT MAKE UP THE COLOMBIAN FINANCIAL SYSTEM4

FINANCIAL CORPORATIONS

Financial corporations appeared for the first time in Colombia in 1957 as a result of a combined effort between the ANDI (National Association of Industrialists) and the Banking Association, to achieve the establishment of credit institutions that could channel internal and external resources towards financing the sector. industrial, with long-term operations and also used to promote, create, transform and organize companies.

Decree 336 of 1957 authorized the creation of companies called financial corporations and defined their corporate purpose. Decree 605 of 1958 regulated its operation and set a series of limitations for the granting of credit. Later Decree-Law 2369 of 1960 restructured its scope and more

in accordance with its corporate purpose. In 1980, Decrees 2461 and 3277 were issued, which redefined their objective and accommodated financial corporations as true investment banks. Decree 2041 was issued in 1987, which considerably expanded the capacity to carry out operations.

Again in 1993 with Decree 663, the current Organic Statute of the financial system, its scope is expanded and corporations are defined as credit establishments whose fundamental objective is the mobilization of resources and the allocation of capital to promote the creation, reorganization, merger, transformation and expansion of any type of companies, as well as participating in their capital and promoting the participation of third parties, granting them financing and offering them specialized financial services that contribute to their development.

BANKS

Institution that performs financial intermediation tasks, receiving money from some economic agents (deposits), to lend it to other economic agents (credits). The law defines the operations that a bank can carry out and prohibits the use of this name to other institutions. or companies.

COMMERCIAL FINANCING COMPANIES

The appearance of commercial finance companies in our environment was the result of the series of regulations that appeared in the 1970s to stop the proliferation of the extrabank market; Then this type of financial intermediary arose whose main function is to capture term savings and dedicate it to short and medium-term financing to facilitate the commercialization of goods and services, and to carry out financial leasing or leasing operations. They must be constituted as public limited companies and are subject to the control and supervision of the Banking Superintendency.

INSURANCE COMPANIES

These entities are financial institutions specialized in assuming third-party risks by issuing insurance policies. They are entities subject to the control and surveillance of the Banking Superintendency and must be constituted as public limited companies.

In Colombia there are two types of insurance companies: general and life. Life insurance companies specialize in covering, by issuing policies, the risks of death, individually or collectively, personal accidents, hospitalization and surgery, etc. General insurance companies, for their part, seek through the issuance of policies to cover the risks of theft, theft, damage, transport of goods, protection against fires, earthquakes, profit-loss, handling and compliance and all those activities for which they have been authorized to issue policies.

COMMERCIAL FINANCING COMPANIES SPECIALIZING IN LEASING

Leasing or financial leasing, is an activity known for many years in Colombia and in several countries of the world. Through this financial product, the different economic sectors were able to advance modernization processes, with the incorporation of fundamental technologies and machinery to raise productivity rates that will guarantee the greater competitiveness brought about by the liberation of the markets. According to current provisions, a financial leasing operation is understood to be the delivery by way of lease of goods acquired for this purpose, financing their use and enjoyment in exchange for the payment of royalties that will be received during a period of time.

determined, agreeing for the lessee the power to exercise a purchase option at the end of the period. Consequently, the property must be owned by the leasing company, a right of ownership that will remain until the lessee exercises the purchase option.

TRUSTEES

Trust companies are financial services companies, incorporated as corporations, subject to permanent inspection and supervision by the Banking Superintendency. They receive trust mandates, which they develop in order to fulfill a specific purpose, being, at the same time, advisers to their clients.

PENSION AND PENSION FUNDS ADMINISTRATING COMPANIES

As one of the most far-reaching economic policy decisions of the second half of the 20th century in Colombia, the labor and social security reform considered by Law 100 of 1993 and its subsequent amendments are considered by experts. With Law 100 of 1993, the pension system with which it had been working was liberalized, giving participation to the private sector and therefore, dismantling the monopoly that until then had in this field the Institute of Social Insurance (ISS). In this way, the general pension system was adopted, made up of two clearly differentiated regimes in terms of administration, financial foundations and amount of benefits, among many other aspects. Through Resolution 275 of 2001, modified by Resolutions 598 and 625 of 2001,It was established that the resources of the pension funds can only be used to acquire securities issued by legal entities that have adopted a code of good governance and have adapted their statutes to the aforementioned Resolutions. The Nation was exempted from this obligation.

STOCK EXCHANGE

They are the classic capital intermediaries, since their basic objective is to put offerors and claimants of representative securities in contact, through the intervention of persons authorized to do so, who act as representatives of the offerors and plaintiffs (Stockbrokers) and public meetings (wheels) agree to the price of the securities, object of the transaction.

SYSTEM REFORMS AND CRISIS

CRISIS5

The Colombian financial system has not been exempt from crisis, on the contrary, it has been involved in several, of which it has come forward due to the reforms that have been applied to it.

1887. The crisis that occurred after the death of Rafael Nuñez. He promised not to issue more than twelve million pesos, but his successors issued up to ten billion pesos to finance the constant wars the country was experiencing.

1. The crisis of the Central Bank of Colombia, which is liquidated because its main promoter was General Reyes.

1922. It was the crisis that occurred after World War I. At this time, there was a shortage of circulating media and the need to give solidity to the currency and credit.

1. Presented as a result of the great recession in the United States of America, which affected much of the world. The banks presented an acute liquidity crisis, external credit for banks stopped, the past due portfolio increased, the value of assets decreased.After the boom in the economy due to the large resources that came in for coffee, a stagnation in 1982. Various financial entities entered into processes of frank illiquidity. The peso was devalued by more than 50%, and when there were large amounts of credits in dollars, their owners went bankrupt. The Banking Superintendency took possession of several entities. Later, in 1985 the Fogafin (Financial Institutions Guarantees Fund) was created and it acquired all the shares of the intervened entities for a symbolic value.The cause of the crisis was the rise in real interest rates relative to inflation. They tried to keep everything within the exchange rate giving liquidity and raising the interest rates that were had.

REFORMS6

Apart from the reforms that the Banco de la República has undergone, which have been key to the development of the national economy, reforms have been presented to the financial system. The most representative are.

1. A specialized banking system was adopted, where three types of entities stood out, commercial banking; agricultural and industrial banking; and mortgage banking. The CAVs are developed to favor credit for massive construction projects. In turn, it begins with the UPAC program, so that the money of savers and credits remain constant. This year the commercial financing companies are created.

1990-1993. Law 45 of 90, Law 35 of 93. Financial reforms are generated to guarantee the stability of the sector. This due to the uncertainties experienced in the 80's.

1. Law 510 of 1999, through which the organic statute of the financial sector is modified. The government intends to guarantee the stability and normal functioning of the system as a whole.

Colombia belongs to the group of poor countries, as reflected in its economy in general, but in various aspects in financial matters it reflects the characteristics of the very poor countries.7

RICH	Poor	COLOMBIA	TYPE OF FEATURE
80%	32%	22%	Commercial bank assets relative to GDP
70%	25%	19%	Bank credit to the private sector with respect to GDP
63%	81%	44%	Capital concentration of the three largest banks in relation to the total capital of banks
81%	36%	24%	Liquid assets of the inhabitants in the financial system relative to GDP

CONCLUSIONS

The creation of a central bank in Colombia was delayed due to the pressures exerted by some of the most powerful bankers of a century ago, and at that time the country demanded immediate action in other fields because we were going through times of civil war. The consequence of the late appearance of the central bank led to various crises, to the issuance of currency by the private sector over a long period, and total disorganization in monetary and economic matters. Private commercial banking had great power in the 19th century, so much so that it was able to challenge government decisions and assert its position.

After the appearance of the Banco de la República in 1923, the national monetary organization began and financial institutions began to specialize. One of the bank's problems has been that when trying to keep the currency stable, it has chosen to raise interest rates, which generates general economic recessions.

The Colombian financial system has been linked and always will be linked to the country's economy. It will be a true reflection of the country's economic situation.

BIBLIOGRAPHY

• http: www.corfinsura.com/español/formación/dl/invfcar-autoridades.pdf Anonymous author: http: www.gestiopolis.com/canales/finanzas/articles/sistemafinancierocolombianoBanco de la República “Introduction to economic analysis, the Colombian case”. Bank of the Republic. Bogotá pp. 326-334. Banco de la República "The Colombian economy" Banco de la República. Bogotá p. 178 "Colombian Financial System" By: Verónica García.Gilberto Arango Londoño "Colombian economic structure" 8th Edition. Mc Graw Hill. Bogotá pp. 334-345 Marta Isabel Escobar, Marta Isabel Guañarita, Jaime Ramos, Gladys Valderrama "Financial Vocabulary" IX semester. USACA. 2001

ANNEXED

Terms used in the Colombian financial system

CDT: Certificate of Term Deposit. It consists of money that clients deposit in financial institutions at fixed terms, after which the bank makes a refund of the original amount plus the interest that has been applied to it. The longer the term of the deposit, the greater interest the client will receive. The reason for the interest the client receives is that this money has been circulated through the granting of credits, which have much higher interest rates than the client receives.

DTF: It is the average of the CDT interest. It is calculated weekly, but at the same time there are projections for 3, 6 and 12 months. Based on the DTF, a large number of the credits that the bank provides are granted.

Interest rate that is determined based on the CDT's weekly survey of deposits, is carried out by the banking superintendency, of all terms, of Banks, corporations, commercial finance companies. It corresponds to the week of application but not to the one in which the survey is carried out. (Marta Isabel Escobar, Marta Isabel Guañarita, Jaime Ramos, Gladys Valderrama “Financial vocabulary” IX semester. USACA. 2001)

CPI: Consumer Price Index. It is measured by DANE, it consists of the variation in the price of the Colombian family basket. It is calculated on a monthly basis, but those accumulated from the last twelve months or the previous year are also taken into account. The CPI is the main instrument for the quantification of inflation, since it measures the changes in prices of a representative set of goods and services consumed by the majority of the population.

UVR: Unit of Real Value. It is the unit of measurement that replaced the UPAC, although it maintains its philosophy, its calculation suffered some variations with respect to that of the UPAC. It is the unit in charge of keeping constant the deposits of savers, without them being affected by the effects of inflation, as well as the credit provided by financial institutions.

TCC: Average rate of CDT deposits only from Financial Corporations. (Marta Isabel Escobar, Marta Isabel Guañarita, Jaime Ramos, Gladys Valderrama "Financial Vocabulary" IX semester. USACA. 2001)

1 Gilberto Arango Londoño "Colombian Economic Structure" 8th edition Mc Graw Hill. Bogota

2 Banco de la República “Introduction to economic analysis, the Colombian case” Banco de la República. Bogota

3 Gilberto Arango Londoño "Colombian Economic Structure" 8th edition Mc Graw Hill. Bogota

4 South American Financial Corporation “http: www.corfinsura.com/español/formación/dl/invfcar-autoridades.pdf”

5 (Gilberto Arango Londoño "Colombian economic structure" pp. 339-340)

(Anonymous author.http: www.gestiopolis.com/canales/finanzas/articles/sistemafinancierocolombiano)

6 (http: www.gestiopolis.com/canales/finanzas/articles/sistemafinancierocolombiano)

("Verónica García" http: www.lafacu.com/apuntes/economia/sistema_financiera_colombia/default.htm)

7 (http: www.banrep.gov.co/economia/notasedi/dic-nota2000)

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