Technical Note Financial Regulations for Financial Inclusion –Paraguay– Novem er cto er © 2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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Acronyms ACH Automated Clearing House AFD Agencia Financiera de Desarrollo AML Anti-Money Laundering AML/CFT Anti-money Laundering/Combating the Financing of Terrorism ATM Automated Teller Machine ATS Automated Transfer System BCP Banco Central del Paraguay (Central Bank of Paraguay) BNF Banco Nacional de Fomento CAH Crédito Agrícola de Habilitación CCT Conditional Cash Transfer CCTV Closed Circuit Television CDD Client Due-Diligence CGAP Consultative Group to Assist the Poor CNV Comisión Nacional de Valores (Securities Commission) CONACOM Comisión Nacional de la Competencia (National Commission for Competition) CONATEL Comisión Nacional de Telecomunicaciones (National Telecomunication Commission) CSD Central Securities Depository DGRV German Confederation of Cooperatives EEDES Empresas Emisoras de Dinero Electrónico (E-money companies) EMPES Entidades de medio de pago electrónico (Companies that provide electronic payments) FATF Financial Action Task Force FG Fondo Ganadero IADB Inter-American Development Bank IFC International Finance Corporation INCOOP Instituto Nacional de Cooperativismo (National Institute of Cooperativism) KYC Know Your Client LAC Latin America and the Caribbean MFI Microfinance Institution ML Money Laundering NGO Non-Governmental Organization NPL Non-Performing Loans OTA Over the Air PAR Portfolio at risk PIN Private Identification Number POS Point of Sale RTGS Real Time Gross Settlement System SEDECO Secretaria de Defensa del Consumidor y el Usuario (National Secretary for Consumer Protection) SEPRELAD Secretaría de Prevención de Lavado de Dinero o Bienes (Secretary for the Prevention of Money Laundering) SIB Superintendecia de Bancos (Superintendence of Banks) SIPAP Sistema Nacional de Pagos Electronicos del Paraguay (National Electronic Payment System of Paraguay) SIS Superintendencia de Seguros (Superintendence of Insurance) SMEs Small and Medium Enterprises SMS Short Message System TF Terrorism Financing VAT Value added tax WMD Weapons of Mass Destruction WOCCU World Council of Credit Unions Exchange rate: 1 US$ = Gs. 4,500, average exchange rate from January to April 2014, published by BCP. Monthly minimum wage: Gs. 1,824,055 = August 2014. Acknowledgements This technical note was prepared by Mariana Paredes under the supervision and edition of Jane Hwang. The team thanks Yoko Doi, Monzerrat Garcia, David Grace, Maria Cristina Heisecke Paredes, Celina Lee, and Doug Randall, for their substantive comments during various stages of this project. Emily Adeleke, Leyla Castillo, Jennifer Chien, Brett Coleman, Xavier Faz, and Korotoumou Ouattara also provided invaluable insights to this technical note. The team gratefully acknowledges the Paraguayan authorities, including the Banco Central, Ministerio de Hacienda, Instituto Nacional de Cooperativismo and Secretaría Técnica de Planificación del Desarrollo Económico y Social, for their cooperation and collaboration throughout the project. Finally, the team is particularly appreciative of the financial sector community in Paraguay who generously gave their time and views through extensive meetings and discussions to provide their information and perspective of the financial sector in Paraguay. Table of Contents Executive Summary ................................................................................... 1 Introduction ............................................................................................. 2 1. Overview of regulatory structure for financial service providers .......... 3 2. Regulated financial service providers in Paraguay ................................. 7 A. Banks and finance companies ............................................................ 7 B. Insurance ........................................................................................ 10 C. Cooperatives .................................................................................... 11 D. Pensions .......................................................................................... 17 E. Capital markets ................................................................................ 18 F. EMPEs: e- payment providers .......................................................... 18 G. Conclusion ...................................................................................... 21 3. Partially Regulated or Non-Regulated financial service providers in Paraguay ............................................................................................. 22 A. Pawn shops ..................................................................................... 22 B. Cajas Mutuales ............................................................................... 22 C. Non- regulated providers ................................................................ 22 D. Conclusion ..................................................................................... 24 4. Products for financial inclusion ........................................................... 26 A. Deposits .......................................................................................... 26 Basic savings accounts by banks and finance companies .................. 26 B. Payments ......................................................................................... 31 Payment system ................................................................................ 31 Payment products ............................................................................. 31 E-payments ...................................................................................... 32 C. Credit .............................................................................................. 33 Regulated credit ............................................................................... 34 Interest rates .................................................................................... 42 Paraguay: Financial Regulations for Financial Inclusion Public credit information ................................................................. 43 Non-regulated / non-supervised credit ............................................. 45 D. Leasing and factoring ..................................................................... 45 E. Insurance ....................................................................................... 46 F. Conclusion ...................................................................................... 48 5. Cross-cutting regulation ...................................................................... 50 A. AML regulation ............................................................................... 50 B. Delivery channels for banks, finance companies and Cooperatives ....................................................................................... 52 C. Operational risk requirements ........................................................ 54 D. Consumer protection, Information disclosure and transparency .... 54 E. Competition .................................................................................... 55 F. Conclusion ...................................................................................... 55 6. Summary of Legal and Regulatory Policy Recommendations ................ 57 References .............................................................................................. 59 Annex 1. Regulation Reviewed ................................................................. 60 Annex 2. List of Interviews ....................................................................... 62 Paraguay: Financial Regulations for Financial Inclusion Boxes Box 1. Savings accounts regulation in LAC ................................................ 29 Box 2. Microcredit best practices. ............................................................. 37 Box 3. Examples of microcredit definitions for credit risk purposes ......... 38 Box 4. Microinsurance definition in Peru .................................................. 48 Tables Table 1.Financial services providers in Paraguay ........................................ 5 Table 2.Legal basis of banks and finance companies ................................... 7 Table 3.Minimum capital requirements and capital adequacy