Central America’s banking sector faces a critical choice: continue relying on the U.S. dollar, which leaves it vulnerable to global crises, or embrace digital integration to build resilience. This article explores how digital tools, regional coordination, and inclusive finance can address recurring challenges and prepare the region for future shocks.
For decades, Central America’s financial stability has relied heavily on the U.S. dollar and foreign correspondent banks. Crises like the 1980s debt debacle, the 2008 financial meltdown, and the COVID pandemic have exposed recurring vulnerabilities: banks face liquidity shortages, small businesses lose credit access, and remittance-dependent households endure uncertainty.
Yet, these challenges also present an opportunity. By shifting from reactive survival to proactive digital integration, Central America’s banking sector can transform fragility into resilience. The next decade will determine whether the region seizes this chance or repeats its history of externally triggered instability.
The Dollar Dilemma
The U.S. dollar is both an anchor and a constraint for Central America. It provides stability, credibility, and access to investment but imports U.S. monetary policy into economies lacking buffers to absorb it. When the Federal Reserve raises rates, liquidity tightens in San Salvador and Tegucigalpa. When U.S. banks “de-risk” correspondent relationships, small lenders in Belize or Honduras can lose access to global payments overnight.
This dependence amplifies shocks. In 2008, dollar scarcity halted trade finance. In 2020, remittance disruptions due to U.S. unemployment revealed the fragility of household incomes. With U.S. regulatory scrutiny intensifying under FATF and FATCA, Central American banks remain vulnerable to decisions made in New York or Washington.
Monetary sovereignty is not abstract—it’s the difference between managing a crisis and waiting for another country’s central bank to act.
The Digital Imperative
Digital transformation is critical for financial resilience, beyond just modern apps or user-friendly interfaces. Costa Rica’s SINPE Móvil system shows what’s possible with digital infrastructure and regulatory support. By enabling instant, low-cost transfers using only a mobile number, it has integrated millions into the formal financial system and provided stability during crises. In contrast, Nicaragua and Honduras, reliant on legacy IT systems and fragmented regulations, faced severe disruptions when COVID forced branches to close and services to move online.
Digital banking is the backbone of resilience. AI-driven risk management and mobile-first payment systems will determine which banks survive the next crisis.
Stablecoins and CBDCs: Risks and Rewards
The global debate over stablecoins and central bank digital currencies (CBDCs) is highly relevant for Central America. Stablecoins could reduce remittance costs, averaging 5-6%, almost overnight. In countries where remittances account for 20% or more of GDP, this would boost household welfare and banking liquidity. Unlike Bitcoin’s volatility, as seen in El Salvador, fiat-backed stablecoins offer predictability and efficiency.
CBDCs offer a long-term path to sovereignty. By issuing programmable digital currencies, central banks could regain monetary policy tools eroded by dollarization while modernizing payment systems. Costa Rica, with its advanced digital infrastructure, is well-positioned to pilot a regional CBDC. However, cybersecurity threats, regulatory arbitrage, and trust deficits pose risks. Without strong governance, digital currencies could increase instability.
Financial Inclusion: The Forgotten Frontline
Banking crises hit households and small businesses hardest, with deposit freezes, credit rationing, and high remittance costs. Digital tools—mobile wallets, agent networks, interoperable payment systems—can expand financial access, integrating informal savers into the formal economy. Kenya’s M-PESA shows how mobile phones can deliver savings, credit, and payment services, turning financial inclusion into economic reality.
Central America’s digital revolution must be inclusive to succeed. Otherwise, it risks creating a two-tiered system: high-tech services for urban elites and exclusion for rural and informal economies.
Governance and Trust: The Human Factor
Technology alone cannot save banks; trust is critical. If depositors trust their money is safe, panic is contained. If they doubt institutions, contagion spreads faster than liquidity can respond. Weak supervision, corruption, and inconsistent enforcement persist in parts of the region. Regional experts cite the lack of supranational supervision as a major vulnerability.
Trust requires credible regulators, transparent resolution frameworks, and consistent enforcement. Deposit insurance must be reliable, crisis simulations public, and regulators insulated from political interference.
Toward a Regional Payment Future
A regional cross-border payment system could reduce reliance on U.S. correspondent banks. The Caribbean’s similar initiative highlights the potential: lower remittance costs, expanded intraregional trade, and localized liquidity. Platforms like El Salvador’s Transfer365 and Costa Rica’s SINPE Móvil offer a starting point. A unified system, potentially led by the Central American Monetary Council, needs political will to succeed.
A Choice Between Resilience and Repetition
Central America banking stands at a crossroads. One path continues dollar dependency, fragmented regulation, and recurring crises. The other embraces digital integration, inclusive finance, and regional coordination.
The choice will shape how the region faces the next shock—geopolitical, technological, or climate-related. By prioritizing digital transformation and strong governance, Central America’s banks and policymakers can shift from reacting to crises to building resilience.
History shows crises are inevitable. The question is whether Central America meets them with fragility or foresight.
Luigi Wewege is the President of Caye International Bank, headquartered on the island of Ambergris Caye, Belize. He is also the published author of The Digital Banking Revolution, now in its third edition.
