Banking on sustainable growth
The island’s economic development is underpinned by the strength of its financial sector

Many of Puerto Rico’s world-class banks and other specialist financial institutions have already made a significant impact in America.

Puerto Rico’s recent economic development has been underpinned by a strong financial sector that boasts a number of world-class banks and other specialist institutions. Many of these organizations have made a big impact in America. Leading institutions such as W. Holding, Doral Financial and R&G Financial are now listed on the New York Stock Exchange.

According to the Office of the Commissioner of Financial Institutions, Puerto Rico’s regulatory authority, the banking sector is well placed to sustain its growth. The island’s leading banks continued to grow during 2002. Assets held by the 11 commercial banks that serve Puerto Rico grew from $55.7 billion in 2001 to $66.3 billion by June 30, 2002.

“The banking sector is very solid,” says Commissioner Alfredo Padilla. “The growth of the loan market is sustainable. The total growth of assets for this year will be approximately 10%.”

As well as a regulatory and supervisory role, the Commissioner of Financial Institutions takes an active stance in
educating private investors on the benefits and pitfalls of investment.

ALFREDO PADILLA Commissioner of Financial Institutions

Mr. Padilla believes that the banking community is able to withstand future changes to the economy, including further interest rate cuts. Despite the sluggish global economy, expectations for Puerto Rico and its financial sector remain high. “The economic conditions look good, especially taking into account the problems around the world, which have a direct impact on us. In terms of banking, the industry’s profitability will continue.”

There are a number of key challenges on the horizon, including the possibility of taxing the island’s International Banking Entities (IBEs). The IBEs on the island have combined assets of more than $52 billion. Citibank is the largest institution in the IBE sector, accounting for more than 40% of the assets. There are fears that new tax legislation could scare away some of these organizations which help drive domestic banking expansion, and create local jobs.

Passed in 1989, Puerto Rico’s International Banking Center Regulatory Act provides that income earned by an IBE from offshore activities is exempt from Puerto Rico income taxes, branch profit taxes, and municipal license taxes. Moreover, dividends, profit participation, or other distributions to shareholders, partners, or owners of an IBE are completely exempt from all withholding taxes.

Mr. Padilla says that while there is a lot to gain from the presence of the IBEs, the government also needs income. “A balance has to be found between the interests of the banking industry and the Treasury Department.”