Challenges and opportunities in El Salvador's financial sector

The formal financial sector has expanded rapidly in postwar EI Salvador, encouraged by premature financial liberalization and a remittance windfall, exceeding commercial banks' capacities to lend prudently. The counterpart of this spurious financial deepening is a shallow financial market for smaller firms, which reflects both difficult real conditions for small urban and agricultural enterprises, and the unfortunate effects of the credit-channeling model characterizing development banks and most nongovernment organization projects. This model discourages the growth of small-scale institutions that can fund themselves from local resources, and limits the ability of small producers to accumulate financial savings.