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Imagine a scenario without commercial banks and consider the impact on your ability to access loans, manage finances, and save money conveniently.
Commercial banks have a significant impact on the financial system and the economy by effectively distributing saved funds to borrowers.
They offer specific financial services that lower the expenses of obtaining information on savings and loan options, leading to a more efficient economy.
The Central Bank of Brazil, also known as BCB, BC, or Bacen, is responsible for supervising these banks to ensure an adequate monetary policy.
Read on to comprehend how this crucial financial system operates. Discover the ways Bacen can influence your daily life and the advancements they have introduced to the nation’s economic industry.
What is the Central Bank of Brazil (Bacen) and what role does it play?
Bacen, a federal agency under the Ministry of Finance, is a member of the National Financial System (SFN) with a focus on maintaining the value of the currency and promoting economic growth.
Bacen makes decisions that affect people’s finances, the economy, currency value, market stability, and inflation to keep the national currency strong.
The Central Bank, established in March 1965, plays a crucial role in facilitating the reallocation of economic resources within the government.
BACEN is an organization that consolidates and supervises all financial and currency transactions within the nation. Prior to its establishment under Law 4.595 of 1964, these responsibilities were carried out by SUMOC (Superintendence of the Coin and Credit), BB (Banco do Brasil), and the National Treasury.
Bacen’s main role in the financial market is supervision, with a mission to maintain currency stability and a strong financial system, as stated on Banco Central do Brasil’s official website.
The Central Bank plays a crucial role in balancing currency supply and demand to influence the price level, with a deficit hindering growth and surplus causing inflation.
Bacen plays essential roles in upholding the smooth operation of the Brazilian economy and securing economic stability.
The BC not only supervises banks and financial institutions but also functions as a “government bank,” carrying out essential operations to finance public expenditures and hold deposits for the National Treasury.
Bacen’s responsibilities guarantee the efficient operation of the SFN (National Financial System).
Its primary skills are:
- Control rising prices.
- Paper and paper-metallic emissions.
- Monitoring the credit industry.
- To oversee financial establishments and enforce the prescribed sanctions.
- Avoid financial intermediaries’ fraud and speculation.
- Safeguard well-liked deposits.
- Prevent the formation of monopolies.
Bacen also needs to maintain equilibrium in the national and global markets and uphold the connection between the Brazilian economy and international financial institutions. Additionally, the decisions made by the BC should align with the requirements of other central banks worldwide.
Banking dominance in Brazil
The Brazilian banking sector is recognized for its high level of bureaucracy globally, with the top five banks being Itaú Unibanco, Banco Santander, Banco Bradesco, Banco do Brasil, and Caixa Econômica Federal, collectively holding 80% of the market.
83.7% of loans were issued by the top five banks, as per the June 2020 Banking Economic Report from the Central Bank.
Brazil, despite being one of the top ten global economies, faces consumers with extremely poor user experiences, featuring high annual interest rates of up to 450%. This places the country among the world’s highest cost countries, trailing only Malawi and Madagascar, as per a report by Goldman Sachs.
Small and mid-sized businesses
The Monetary Policy Committee (COPoM) recently decreased the Selic rate from 4.25% to 2.75% annually, yet certain types of loans became pricier in specific banks.
The lack of credit has been a longstanding issue for entrepreneurs, as they have faced restricted access to funds and high interest rates even before the Covid-19 pandemic.
Only 59% of companies have access to bank loans, which is significantly lower than the 95% average in developed countries, as reported by the Applied Economic Research Institute (IPEA).
84% of small businesses lack access to funding options, as reported by Sebrae, a Brazilian organization supporting micro and small businesses.
Due to the domination of banking and resulting market control by a few players, Fintech companies in Brazil have thrived by capitalizing on the weaknesses overlooked by established market leaders, making them one of the most prominent categories of startups in the country.
What is Fintech and how have these new companies influenced the financial industry?
The fintech industry, also referred to as financial technology, includes areas like electronic payments, data analytics, investing, and non-traditional funding. In recent times, there has been a surge in the establishment of fintech startups in Latin America, particularly in Brazil, Mexico, and Colombia.
Brazil has once again become the leading Fintech ecosystem in Latin America, with 377 fintech startups, according to a study conducted by Fintech Radar Brazil.
The convergence of financial services and technology is quickly transforming the insurance and investment industries and is expected to revolutionize our approach to financial management.
Financial startups are defined by certain attributes.
- Innovation.
- Offer reduced or zero interest rates to clients.
- Processes have reduced bureaucracy.
- Heavy reliance on technology.
Fintech companies are introducing new ideas to the market by providing credit to small businesses with reduced red tape compared to conventional banks.
Statista (2020) reported a significant rise in the adoption of new financial services in Brazil, with over two-thirds of Brazilians utilizing fintech services, showing a 60% increase in adoption rate from 2017 to 2019.
Fintech Radar Brazil identifies the six primary sectors of Fintechs in the country.
- Covering a quarter of the total are payments and remittances, with 96 startups involved.
- Business Finance Management accounts for 17% of the total with 63 startups.
- Loans account for 15% of the total, involving 56 startups.
- Personal finance management, which accounts for 8% of the total, includes 30 startups.
- Crowdfunding and Wealth Management make up 7% of the total, each having 25 startups.
Financial startups have recently received support from BC for project development, including the LIFT initiative.
Laboratory for Financial and Technological Innovations: LIFT
Established in 2018 in collaboration with the Central Bank of Brazil and Fenasbac, LIFT is a program with the goal of fostering technological innovation in finance to lower credit costs, enhance the efficiency of the National Financial System (SFN), and encourage financial literacy.
LIFT will serve as a facilitator for fintechs in support of the BC+ Agenda, as stated on the BCB website.
LIFT has enabled us to assess how financial regulations affect innovation and identify the challenges to implementing technological innovation within Brazil’s current regulatory system.
BCB can pinpoint opportunities for enhancing financial regulation and assess how new technologies can enhance SFN capabilities during the project.
INCO was approved as one of Lift’s participating startups in 2020, focusing on reducing banking spread in the real estate market through an efficient credit analysis process similar to what is used to assess projects on their platform.
Follow INCO on social media platforms to monitor our involvement and progress in the program.
The Central Bank of Brazil plays a crucial role in determining the country’s monetary policy, acting as the driving force of the economy. Any issues with the bank could lead to risks and disruptions in the system.
The Central Bank manages monetary policy and sets interest rates to promote economic growth and manage inflation, which is the main challenge it faces amid increasing globalization and diverse investor demands.
The Central Bank of Brazil’s main responsibility is to create a structure for making monetary policy choices to ensure that inflation expectations are more secure.
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