Guatemalan economist Nestor Quixtan discusses banking in Guatemala and how to secure a line of credit as a foreigner or Guatemalan living abroad.
Banks in Guatemala are conservative.
By conservative, I mean they typically shy away from the loose lending practices we’ve seen in other countries. That means any potential loan applicant must go through the wringer before being approved for a line a credit.
Why is this? Well, to be blunt, they’ve been hurt before, and not just by the 2008 financial crisis.
Back in the early 2000s, the Guatemalan banking system was awash with cash. This was because of an unprecedented boom in remittances spurred by the economic expansion of the United States in the 90s.
The dot.com crash in 2000 did little to stop US greenbacks flowing into Guatemalan banks – and into Guatemalan households. So the banks lowered their standards somewhat, opened the vaults and out came auto loans, credit cards and mortgages. Several banks went belly up and thousands of customers defaulted.
Since then, things have tightened up. Now, the rule of thumb is “x3”. That means whatever you borrow, you need to multiply the monthly payment by three. That’s the minimum monthly income you need to prove to qualify for the loan. So if the monthly payment of a loan is $100, you would need to earn at least $300 a month to qualify for said loan.
Now, that’s just the beginning.
Depending on the credit you’re seeking, there’s a greater amount of risk attached to it.
So, the banks would deem mortgages as the safest (since they attach the property as collateral), then auto loans are next in line, followed by credit cards and consumer credit (the kind you take out to finance a vacation or a new TV). For all of this, the rule of thumb is “x3”.
After this, banks in Guatemala need extensive documentation. This for two reasons. First, they have strict risk assessment practices, and second, they are subject to tough anti-money laundering laws that come attached with harsh penalties. These penalties may come in the form of a fine imposed by the toothless bank supervision entity, or worse, correspondent banks may decide not to do business with Guatemalan banks. This might kick them out of SWIFT.
Regarding documentation, banks require ID, in the form of a DPI (either Guatemalan citizens or permanent residents), Guatemalan bank account statements, proof of employment, or business incorporation documents for business owners, tax statements, and NIT number (tax ID number).
This is where it gets tricky for a foreigner looking to secure financing from a Guatemalan bank.
The biggest obstacle is the ID. The main reason here is they see a foreigner as a huge risk as they could pack up and leave at any time. In addition, statements from foreign banks, or letters of employment from foreign companies not established in Guatemala are inadmissible since the bank has no way of proving they are legit. Foreigners also can‘t furnish Guatemalan tax statements or a NIT number.
So it’s nearly impossible for Guatemalan banks to lend a penny to anyone not legally domiciled in Guatemala.
But the good news is there are ways to get around this.
The first way is for those foreigners married to Guatemalan citizens. The deal here would be to apply for the loan in the Guatemalan spouse’s name and provide all documentation for the Guatemalan spouse. With a valid marriage certificate and permanent residency DPI, the foreign spouse can serve as a co-signer.
Or the Guatemalan spouse applies for the loan, another Guatemalan relative serves a co-signer, and the foreigner is the one who pays for the loan. But if anything goes wrong, it’s the Guatemalan who’s on the hook.
For investors who don’t want to marry a local, much less move to Guatemala for any significant amount of time, the work-around would be to hire a trusted law firm to oversee the loan application.
It’s a lengthy process which may not even be worth the hassle, but what the law firm would do is name a Guatemalan legal representative who would then be the one signing the documentation with the bank, on behalf of the foreign individual, or company, and then become liable for the amount loaned.
This is complex since anti-money laundering rules kick in and proof of funds need submitting, such as legalized incorporation documentation, foreign bank statements and any other documentation required by the banking supervision agency. They could shut it down if they believe there is any suspicion of illicit funds trying to wiggle their way into Guatemala.
For Guatemalans living abroad, a quick workaround would be to have a family member in Guatemala apply for the loan.
When they submit proof of funds, they can cite remittances from the family member abroad as proof of funds.
The individual living abroad would have to send certified copies of bank statements and proof of employment letters. The Guatemalan bank will relax somewhat if the applicant can furnish their own bank statements which reflect remittances being paid for at least the amount of the monthly payment on the loan, for a period of at least 3 months.
Ideally, a pattern of remittances paid for at least a year would convince credit analysts.
One other important consideration is the interest rate.
The official rates set by the Central Bank are meaningless as they are only “for reference” since there is nothing in the law that binds commercial banks from adhering to them. In fact, banks are free to charge whatever they want.
A typical unsecured mortgage – in Guatemalan quetzales – would draw a rate between 20-25% annually, while a secured FHA-approved loan would fall into the 9-12% range.
For auto loans and credit cards, rates spike to 30-40% a year, while consumer credit can easily top 50%, sometimes upwards of 80%.
There are no laws on the books regulating interest rates. The Guatemalan Constitution defines usury as a crime, but there is no definition of what it is. Politicians have shut down numerous attempts to regulate this in the National Congress over the years.
The only law on the books on this matter states that banks have a ceiling of 150% on the original debt (principal plus interest). Once the customer reaches this ceiling, the banks must cap the account and go straight into collections.
To sum up, for any foreigner looking to invest in Guatemala, the best way to go about it would be to find a trusted Guatemalan partner to apply on the individual’s behalf. This could be a lengthy process, but for the right property at the right price, it might be worth the hassle.
Nestor Quixtan is a Canadian/Guatemalan economist, linguist, and writer. He lives in Guatemala City.