“What had made us successful in the past was clearly not what was going to make us successful in the future.”
Peru was in a tough spot 20 years ago. A violent insurgency by leftist rebels was threatening to topple the government, while the economy was coming out of a long stretch of hyperinflation that had wiped out the savings of local residents.
Today, much has changed in the Andean country. It’s been one of Latin America’s fastest growing economies in recent years, helping millions of people escape poverty. Indeed, while many emerging-market economies are feeling the impact of a weak global economy, Peru continues to post robust growth as an expanding middle class fuels demand for new homes, cars, and other goods.
Walter Bayly, the CEO of Banco de Credito del Peru, the largest bank in the country, credits the return of political stability and government reforms in the 1990s for the turnaround. The reforms opened up Peru’s economy, he says, laying the foundation for increased private-sector investments, competition and international trade.
After living abroad for 13 years, Bayly returned to Peru in 1993, a year after the capture of Abimael Guzman, the leader of the Shining Path insurgency. “One of the key elements that triggered my decision to return was the fact that terrorism was starting to come under control,” Bayly says.
“It was a country after war. The country as a whole, I would say, had practically collapsed,” Bayly adds, remembering his first impressions of Peru after his return. “It was still a moment in time in which many of us Peruvians questioned whether Peru was viable.”
As Peru’s economy began to open up, the banking sector was transformed. State-run banks were privatized and foreign financial institutions set up shop. Competition heated up.
Banco de Credito’s first move was to bring in a new set of managers, many of whom had international banking experience. “We began transforming the bank to be more competitive,” said Bayly, one of the new managers at the time. “What had made us successful in the past was clearly not what was going to make us successful in the future.”
One of Bayly’s early positions at Banco de Credito was to run the bank’s offices outside of Lima, a challenging task in Peru, since communication between vastly diverse regions could be patchy. To stay on top of local developments, Bayly formed relationships with community leaders who provided on-the-ground insight. “I formed important relationships with maybe 20 or 30 important business men in their own cities or regions and that is something that has remained over many years,” he said.
After years of focusing on wholesale banking, Banco de Credito’s new managers refocused the firm’s activities on retail banking, betting that continued economic growth would increase demand for consumer credit.
That decision marked a major shift in Banco de Credito. In the early 1990s, about 10 percent to 20 percent of the bank’s business came from retail banking, while today it accounts for more than 50 percent.
Although the bank was initialed focused on high-end retail business, for the last several years Banco de Credito has worked to increase the number of clients from low-income areas that have traditionally lacked access to banking services. This is part of a broader effort in the sector over the last few years to increase banking participation in Peru, which has one of the lowest participation rates in Latin America.
Within this framework, one of Banco de Credito’s most important innovations during the past 20 years has been to introduce ‘agencies’ in Peru— stripped down banking stations at mom-and-pop shops, pharmacies and other small stores. The agencies offer fewer services than branches, but they are less expensive to operate.
“They are used extensively and it is a relatively inexpensive way to increase our coverage and to reach places where branches or even an ATM is not profitable,” Bayly says.
The growing participation in Peru’s banking sector isn’t expected to let off anytime soon. Indeed, when Bayly looks to the future of Peruvian banking, he often looks south to neighboring Chile, where participation in the banking sector is significantly higher.
Banking sector loans in Chile represented 74 percent of the country’s gross domestic product at the end of 2011, compared to just 26 percent for Peru, according to Peru’s private-sector banking association, or Asbanc, meaning there’s plenty of room to grow.
“Chile has been a model for us in many things. What we see happening (in Peru) is continued penetration of the financial system,” Bayly says.
Bayly says he also expects the sector to continue to expand its infrastructure as banks look to increase their presence in remote Andean towns and jungle communities. He says technology will play a key role in growing service in these isolated areas.
“We are extremely focused on how technology can help us widen our reach without dramatically increasing our costs,” Bayly says. For example, mobile banking is expected to take off in the next few years in Peru, where a large percentage of the population has a cell phone.
Competition is also expected to remain fierce as new banks enter the market looking to benefit from Peru’s robust growth. Bayly says, however, that most of the new competition will likely come from niche players, while the country’s four large universal banks are expected to hold on to their market share.
Banco de Credito wants to expand its regional presence too. The company has recently embarked on creating a regional investment bank with offices in Chile, Colombia and Peru. This move follows the creation of the Integrated Latin American Market, known as MILA, which combines the stock exchanges of the three South American countries.
“We think there is a trend of integrating ourselves with our neighbors and we see that very much impacting what our customers are doing,” Bayly said. “We should thus follow our customers.”
Ryan Dube reported from Lima
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