PANAMA: An Introduction to Banking & Finance

Chambers Overview  

Authors: Arturo Gerbaud, Patricia Cordero and Rita de la Guardia

Banking and Finance 

Panama has a series of aspects that positively differentiates it from the rest of the region, such as a fully institutionalized dollarization, no exchange controls, or restrictions on the movement of capital, readily accessible credit with sophisticated lenders who are well known both locally and internationally, and an active and modern capital market. Further, Panama has an international banking system with over USD137 billion in assets as of June 2022, which represented a 6.5% increase over the previous year. The Panamanian banking system is home to more than 56 domestic and international banks. Panama’s financial sector boasts solid balance sheets, with little to no exposure to complex financial instruments originated abroad.

Prior to the COVID-19 outbreak, Panama had mostly avoided the recent economic down-cycles in Latin America and beyond. From 2001 through 2013, Panama's economy grew at an average of 7.2% per year. However, this dropped to 4.9% in 2016, rising to 5.5% in 2017 and 2018, dropping to 3% in 2019, and then an alarming COVID-19 downturn of -17.8% in 2020, but followed by a 15.3% GDP growth rate in 2021, particularly driven by copper mining, construction, manufacturing, and commerce.

The extreme 2020 downturn provided challenges for local and international banks and their advisors, given that a mandated national quarantine resulted in closures which left borrowers in a difficult position with respect to the repayment of their loans. Law 156 of 2020 provided a moratorium, whereby bank customers had the opportunity to renegotiate or restructure their bank debts if their income or business had been negatively affected by the COVID-19 pandemic. Article 2 of Law 156 stipulated that the moratorium covered loans granted by banks, cooperatives, and finance companies, particularly, residential mortgage loans, personal loans, auto loans, credit cards, small and medium enterprise loans, commercial loans, transportation sector loans, agricultural sector loans and consumer loans. Furthermore, the Superintendency of Bank of Panama (SBP) also issued Agreement No. 2-2020, which provided for extraordinary and temporary measures regarding credit risk, thereby creating a special regulatory classification for modified loans, which allowed banks to adjust loans due to COVID, without such adjustments being considered as a restructuring of credits according to the provisions of Agreement No. 4-2013, which in turn affects the provisions to be held by each bank. This new classification was positive for the banks since they did not need to include these credits in their delinquent portfolios. Given the termination of the moratorium and the reactivation of economic activity, some foreclosures have resumed on loans that were in default prior to the pandemic, i.e., loans that were clearly not in default because of the pandemic. Starting in 2021, with the end of the mandated national quarantine, commercial activity picked up in Panama and the banking sector has steadily consolidated its position. As a result, at the end of the first half of 2022 the SBP reported that Panama’s banks continued to show high liquidity and capital ratios. As of June 2022, the liquidity of Panama’s banking system reached 57.9%, which exceeds the regulatory minimum and its assets totalled USD137.30 billion, an USD8.33 billion rise versus June 2021.

The aforementioned economic recovery has driven an improvement in Panama’s banking assets, in part due to an elevated level of collateral protecting banks’ portfolios. The SBP reported that as of June 2022, nonperforming loans were at levels similar to pre-pandemic levels, which is consistent with borrowers’ strong payment culture which allows for the banking system’s historic low levels of nonperforming assets and losses. As of June 2022, the national banking system recorded a delinquency ratio of 4.4%, of which 1.7% represents loans with arrears of 30+ days and 2.7% for loans with arrears of over 90+ days.

Nevertheless, while the Superintendency of Banks of Panama is of the opinion that Panama’s banking system has continued to show resilience and an overall solid position, they believe that given current domestic and global macro financial circumstances, such as increasing inflationary pressures and geopolitical tension, as well as the termination of certain government backed financial relief measures, there may be a downturn in credit quality which could result in an increase of loan losses and nonperforming assets.

We would also note that beyond the specific provisions agreed to deal with the consequences of the COVID-19 pandemic, in the past years Panama has made significant efforts to improve its compliance with international norms and regulations, especially with respect to the exchange of information on tax matters, seeking to be excluded from “grey” or “black” lists. We would highlight the following laws and regulations:

- Law 23 of 2015, which establishes measures to prevent money laundering, financing of terrorism and financing of the proliferation of weapons of mass destruction, and identifies customer due diligence requirements and reporting obligations for all regulated (financial and non-financial) subjects. 

- Law 52 of 2016, which requires all Panamanian companies (including offshore companies) to maintain accounting records.

- Law 70 of 2019, which modifies the Panamanian Criminal Code to include “tax evasion” as a crime. 

- Law 129 of 2020, which creates the ultimate beneficial owner registry. In essence, this will be a registry managed and operated by the Government in which all ultimate beneficial owners of Panamanian corporate vehicles will have to be identified and recorded. The registry will be under the administration of the Superintendence of Non-Financial Subjects (SSNF), in order to guarantee the timely access of the competent authorities to the information of the ultimate beneficial owner, while guaranteeing the confidentiality and security of said information. 

- Law 254 of 2021, which introduces amendments to the rules on (a) exchange of tax information, (b) prevention of money laundering, (c) accounting for legal entities, and (d) registration of beneficial owners of legal entities.

The government of Panama has designated being removed from “grey” or “black” lists as a priority. If achieved, this would result in alleviating pressure to local financial institutions from its correspondent banks.

Additionally, an often-discussed aspect of banking and finance is the development of fintech and the incursion of blockchain technologies and cryptocurrencies. The National Assembly of Panama approved Project Law No. 697, which, paraphrasing its proponents, seeks to make Panama compatible with the digital economy, blockchain, crypto assets and the internet. Project Law No. 697 was partially vetoed by President Laurentino Cortizo and sent back to the National Assembly for debate, as such it has not become law. The project law was vetoed partially due to perceived incompatibilities between the Law and recommendations received by GAFI, as well as certain structural changes that would need to be made to regulatory entities.

To date, there is no specific regulation on fintech or blockchain technology in Panama. The lack of regulation provides uncertainty to investors making it difficult for new players to enter the market. Given the development of fintech, open banking and blockchain technology-based models, we expect to see more discussion with respect to the regulatory framework in Panama in the future.