PANAMA: An Introduction to Banking & Finance

Growth, Regulation, and a Digital Future 

Panama has a series of attributes that positively differentiates it from the rest of the region and makes it attractive, such as a fully institutionalised dollarisation, 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 USD142 billion in assets as of March 2023, which represents a 4.0% increase over the previous year. The Panamanian banking system is home to more than 61 domestic and international banks which boast 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 and a 10.8% GDP increase in 2022, which was particularly driven by copper mining, manufacturing, and commerce. The World Bank forecasts that the Panamanian economy will grow by 5.7% in 2023.

The extreme 2020 downturn provided challenges for local and international banks and their advisors, due to the mandated national quarantine. To provide relief to the Panamanian banking system, the National Assembly of Panama and the Superintendency of Banks of Panama issued a series of laws and regulations which provided temporary relief to borrowers and provided extraordinary and temporary measures regarding credit risk. These measures were positive for the banks and 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. While there is an increase in the loan delinquency rates compared to pre-pandemic levels, the rate remains low (approximately 2.5% for loans at 90+ days delinquent), and given that reserve coverage ratios were strengthened during the COVID-19 Pandemic, the Superintendency of Banks of Panama estimates that the quality of the Panamanian banking system’s assets will continue to be controlled, even if economic conditions are moderately weakened.

Moreover, at the end of the first half of 2023, the Superintendency of Banks of Panama reported that the country’s banks continued to show high liquidity and capital ratios. As of June 2023, the liquidity of Panama’s banks reached 57.6% partly based on an increase in deposits which gives banks a comfortable position to comply with regulatory requirements and puts them at an advantage to face market volatility. Furthermore, as of June 2023, the assets of the Panamanian banking system totalled USD142.94 billion, which represented an increase of USD5.64 billion in comparison to June 2022 (a 4.1% rise).

We would also note that in 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:

1. 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.
2. Law 52 of 2016, which requires all Panamanian companies (including offshore companies) to maintain accounting records.
3. Law 70 of 2019, which modifies the Panamanian Criminal Code to include “tax evasion” as a crime.
4. 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), 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.
5. Law 254 of 2021, which introduces amendments to the rules on:
   1. exchange of tax information;
   2. prevention of money laundering;
   3. accounting for legal entities; and
   4. registration of beneficial owners of legal entities.
6. The government of Panama has declared that being removed from “grey” or “black” lists is a priority. In June 2023, the Financial Action Task Force (FATF) made the initial determination that Panama has “substantially completed” its action plan and warrants an on-site assessment to verify the implementation of the various commitments. If achieved, this would result in alleviating pressure on local financial institutions from their correspondent banks.

Additionally, an often-discussed aspect of banking and finance is the development of fintech with the inclusion 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. Hence, it has not yet become law. The Project Law was vetoed partly 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, crypto, 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.