The builders' guild in El Salvador is preparing a law proposal, which provides for the approval of preferential interest rates on loans for home purchases.
The proposal to be presented by the Salvadoran Chamber of Construction Industry (CASALCO) will be applicable for bank loans to low- and middle-income families who purchase their first home.
The Social Housing Fund wants to revive the housing market by reducing interest rates for the purchase of new or used homes by 5.5%.
In the case of loans to public institutions for the purchase of new houses, the rates will drop from 6.05% to 5.50%, while for private loans for new houses, the rate will be reduced from 8.5% to 8 % for amounts ranging between $31,000 and $125,000.
Up to June banks had only provided financing for housing projects worth $14.36 million, while in the same period last year it had already reached $32 million.
"The new housing projects can be counted on the fingers of one hand," said the executive director of the Salvadoran Chamber of Construction Industry (Casalco), Ismael Nolasco, adding that the drop is a reflection of an industry that is not investing in large housing projects because it has seen any demand.
Access to credit could get more expensive due to liquidity constraints and a higher country risk.
According to the Central Reserve Bank (BCR), last June returns on savings invested for 180 days was 3.44% while in the same period of 2012 the figure stood at 2.49%. In addition, interest rates on loans for over a year are 9.75% and in June 2012 they were 8.50%.
Authorities announced possible reforms to the rule that allows banks to freely determine interest rates, fees and surcharges.
In the context of recent research on the general rise in interest rates charged by banks, Antonio Echeverría, MP in the ruling Frente Farabundo Marti para la Liberacion Nacional (FMLN) party, said that "with new wording" of Article 64 of the Banking Act, interest rates could be lowered.
Banks in El Salvador, barred by law from charging management fees, offset their lower revenues by raising interest rates.
According to the president of the Salvadoran Banking Association (Abansa) Armando Arias, "commission (for administration) has been transferred to interest rates." "What they (the banks) have probably done is to take (for example) the $8 which was previously charged as commission and move it across to the nominal interest rate," said the head of Abansa.
The Superintendency of Competition has started an investigation into the recent increase in lending interest rates of some Salvadoran banks.
From a press release from the Superintendencia de Competencia (SC) of El Salvador:
The Superintendency of Competition is investigating whether the recent rise in interest rates for loans from certain banks could respond to an alleged agreement between competitors to "compensate" for the elimination of charging an administration fee. The Superintendent will be requesting information from affected consumers.
The Social Housing Fund (Fondo Social para la Vivienda) in El Salvador will keep the interest rate for social housing construction at 6%.
Francisco Guevara, president of the Social Housing Fund (FSV by its initials in Spanish), explained that this was because the housing supply was less than expected due to red tape delays.
"Some housing projects suffered from lack of technical documents which were in the process of being drawn up, or awaiting inscription in the National Registry. This halted three projects", said Guevara.
It would affect the banking sector in El Salvador, lowering the volume of transactions in the financial system, and increasing the price of money.
The Salvadoran Banking Association (Abansa) is studying a proposal by the Ministry of Finance to tax the issuance of checks and electronic transactions, but its representative Marcela de Jimenez has already indicated her criticism, noting that it has not been ruled out "that this tax will affect the banking system, ie, there will be a decrease in the level of resources that are traded through the financial system and therefore an increase in the price of money. "
The government reduced interest rates for the purchase of new homes and social interest housing.
For the informal sector, the annual interest rate for new home purchases of up to $ 20.000 went from 14.5% to 8%, and for homes over of $ 28,500 the rate dropped to 9%.
The chairman of the Social Housing Fund (FSV), Thomas Chévez told Elsalvador.com, "For the formal sector, the rate fell from 9.25% to 6% for new homes that cost $ 20.000, and 7% for the ones valued at $ 28.500."
Approved loans fell 6.5% in the past 12 months (August 08 - August 09); loans for the productive sector where the most affected.
Experts agree in blaming the global economic crisis for this reduction in credit.
The President of the Central Bank explained that "...banks just reflects 'the economic deceleration' ... It is a lack of confidence in an economic recovery capable of reactivating demand, and payment capacity", published local newspaper Elsalvador.com.
The Superintendent of Competition conducted a study on the credit and debit card market between April and August.
Journalist Daniel Choto wrote in Elsalvador.com: "The research will include an analysis of legislation, marketing strategies, management, costs, pricing policies and interests, as well as licenses to operate such services. What is sought, among other things, is whether there is a dominant position of one issuer."
Some banks already published the adjustment and others announce that the increase in the credit rates will occur shortly, although they did not say exactly when.
Scotiabank has raised the interest rates between 0.25 and 2 percent for loans. Scotiabank sales and services director, Jose Eduardo Angulo Milla, indicated that in order to not affect clients' budget, the amount for monthly loan payments has not been modified due to the interest rate adjustment, however he reported that the "non modification of the quota generates a portion of the capital that will be accumulated when the credit term expires.
Interest rates for loans and deposits rose again in September, according to the reference published by the Central Reserve Bank (BCR).
Regarding the active interest rate (loans) that is applied to loans with terms over a year, the increase was 0.21%, taking it up to 9.76%. This latest increase in interest rates for this type of credit is close to the highest percentage increase recorded in the last two years, which was 9.88% last March, according to records from the BCR.