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Jorge Awad, presidente de la Asociación de Bancos e Instituciones Financieras(ABIF)

Chile’s banking system is at a crossroads. Banks have recovered from the financial crisis and strong economic growth is driving profits. At the same time, however, the government has accused them of abusive practices, including high interest rates on consumer loans, and has promised to create a new financial consumer watchdog. In this difficult scenario, the board of Chile’s banking association, the Asociación de Bancos e Instituciones Financieras (ABIF), has elected Jorge Awad, a businessman of Syrian descent, to take over from Hernán Somerville as president through 2013. Awad, who is also president of national airline LAN and has served on the boards of numerous companies including Banco de Chile, has experience navigating in situations that call for improved communication with stakeholders.

bUSiness CHILE spoke to Awad about the challenges facing the banking sector and the association’s plan to improve the way banks communicate with their customers.

What is the state of Chile’s banking sector two and a half years after the financial crisis?

The competitiveness, solvency and globalization of the Chilean banking system are attributes recognized by the international business community. Combined with Chile’s credit risk rating and the ratings of its banks, this has opened up access to global financial markets under optimal conditions. In fact, today the financial sector is the most important sector in Chile’s GDP and is in conditions to support growth levels of 6 percent annually. In other words, the banking sector is a key driver of the country’s growth through consumer loans, commercial loans and mortgages. Studies by different economists show that the main indicators in the Chilean banking sector are a good benchmark for efficiency in any bank.

Is the banking system strong enough to face a future global crisis?

I wouldn’t say that. But the banking system provides all the indicators necessary to act with enough anticipation in the face of any cyclical change to which any economy in the world is exposed. 

This is a highly regulated industry and there are few other industries that publish such a large quantity of information about their operations on a monthly basis. Using a medical analogy, the banking sector is an individual that submits to a biochemical check-up every month - you could call it a “bio-financial” exam. So anyone can see how the banks are being managed and this helps detect any potential problems.

The government is considering a reform to strengthen the financial system’s regulatory framework. Do the banks need better regulation?

The first thing is to look at the capacity of the banking sector to stimulate the chain of payments. The total loans held by banks, around US$200 billion, are equivalent to Chile’s total GDP. We have obviously reached a level where the financial regulatory system could be different, which is what is being discussed. But I can’t comment on that until we know what the new system will be. I can say that the banks are doing their job. The level of loans grew around 10 percent in April, which is a good indicator of the dynamism of the sector.

What about capital markets reform?

There is still work to do in implementing the Basel II Accord and preparing for Basel III. Basel II proposes capital requirements to limit market risks, credit risks and operating risks, in other words all the areas which are part of a bank’s normal business.

The new capital markets reform, known as MKB, is mainly aimed at designing products to make the financial sector more competitive and integrated in a globalized world. For example, there is a proposed bill to regulate derivatives, which is mainly a result of the development of the derivatives market internationally. And there is another bill that calls for auctions to insure mortgages.

Interest rates on consumer loans and mortgages are too high according to the government and consumers. What do the banks say?

The interest rates in Chile, as shown by many studies, are absolutely typical of the international banking system. There has been an incorrect representation [in the media] about the rates for consumer loans. The average nominal annual interest rate for consumer loans is around 17.7 percent, which is well within the normal range. If you consider operating costs and risk premiums, the margins are fairly standard.

What do you see as your greatest challenge as president of ABIF?

I’ve only been here a month, but my main aim is to better explain and help consumers understand the different products and services offered by banks. We want to make sure the consumer feels they are getting a better quality of service and that customer service is a part of the banking culture. Given that the majority of the population now has a savings account, this means increasing the level of financial education.

Why start educating clients now?

Because banking penetration has grown. Our banks have around 12 million clients, which is more than ever. All sectors of the economy are now incorporated into the banking system, not just the sectors with a high level of education. We need to improve education for people in segments of the population that are using financing products for the first time.

We need to explain, for example, what it means to take out a consumer loan in instalments or what it means to borrow on your credit card or what it means to take out an insurance policy. Electronic banking is also a new area and mobile banking is such a big change that people need to learn how to use it better.

How will you achieve this?

By using the communications potential offered by modern technology. For example, banks can use banners on their websites to provide information to clients. It is a mix between offering good customer service and, simultaneously, an on-going education about new products.

Of course, if there are things to improve then we should improve them. We are not starting from the position that this is a perfect system. That is why car companies have customer service departments. Everything can be improved.

How has your past experience prepared you for this role?

I have served on the boards of more than 40 companies and this has given me the ability to interpret the communicational challenges of the banking industry, given that the sector’s pillars are very solid.

You recently appointed a new general manager, Ricardo Matte, and have introduced other changes in the association. Why?

Different economic cycles require different people, which is why we are also looking for a new research manager. The previous cycle was mainly about recovery, but the current cycle is strictly about growth.