With its skyscrapers glittering in the intensely bright sun, the center of modern Panama City resembles a miniature Manhattan. Panama has the most modern and successful international banking center in Latin America. The International Banking Center (IBC) offers investors over 67 Banks from more than 32 countries around the world, especially from Asia, Europe and the Americas. Some of these banks carry out their operations to and from Panama, as a consequence of the favorable banking environment.
Lured by the ease of doing business, international and regional players have established operations in the country. Today, Panama’s banks are the envy of many of its US and European peers as they are ranked among the safest and best-run financial institutions. The sector suffered no systemic shocks or banking failures. There is a clear divide between the local retail banks (44), and the more internationally-focused, specialized foreign banks (21) that have set up in Panama and which have almost no interaction with the domestic economy.
The country is also welcoming a new breed of financial institutions and is increasingly on the radar of non-banking finance companies in search of a regulatory framework suited to their needs.
At the end of December 2020, the performance of the Banking Center continues to show a system with stable financial fundamentals. The legal liquidity of the market was around 62.7% for the National Banking System after having marked around 56% in the first quarter of the year. This is because, since the declaration of the pandemic, banks have conservatively increased their liquidity positions.
We note that Panamanian banks have historically managed balanced funding structures, supported by relatively diversified and stable deposit bases. The Assets of the International Banking Center amount to USD 130,352 million, which represents an increase compared to a year-on-year increase of 4.3%. The behavior shown by the collection of deposits and the management of liquid assets is observed in a positive way. As of December, CBI deposits increased by 8.11% compared to December 2019. This variation responds to an increase in both internal and external deposits. Thus, the deposits captured in the market at the end of December 2020 registered a total of USD 95,196.0 million, an increase of USD 7,139.03 million compared to the same period of the previous year. When compared to the start of the pandemic, that is, March 2020, the growth was 9.3%.
The results has enabled banks to continue strengthening their solvency position, which allows them to meet regulatory requirements at levels that reach almost double the minimum requirements. These indicators also show the solid capacity of the financial intermediation entities to generate income, which allows them to expand, maintain a competitive position in the market, as well as replenish and increase their patrimonial funds.
Successful Legal Framework
Panama has performed several regulatory changes for the stability of their system, related to accounting, risk and prevention of money laundering, financing of terrorism and financing of the proliferation of weapons of mass destruction. These changes are part of a set of measures adopted by the Panama Banking Authority as part of an agenda to improve the quality of capital, the measurement of risks to which agents are exposed, and an update of International Standards. of Financial Information and to get the Republic of Panama out of discriminatory lists or from non-cooperative countries. Currently, the SBP has already approved market risk regulations, operational risk, short-term coverage ratio (LCR), derivative instruments, among others, some of which are already in the process of implementation according to the schedule developed by the SBP.
The International Monetary Fund (IMF) made a visit in regards the of review of Article IV from May 21 to June 1, 2018. The IMF noted that the International Banking Center of Panama remains solid, well capitalized and profitable. The agency also stated that local authorities continue to promote policies to improve banking regulation and supervision, including the implementation of measures 3 of Basel III, as well as providing important recommendations in view of the need to continue strengthening the financial system and tax transparency.
Strong financial sector oversight is a critical pillar in Panama’s success as a financial center and supports the robustness of its banking sector. Banking legislation is compliant with the Basel Core Principles. The presence of a single regulator, the Panama Banking Authority (PBA), which has built a reputation for being a meticulous, yet accessible, supervisory body, ensures that banks are closely monitored and fully compliant with regulations.
On the tax side, Panama tax laws establish different considerations depending if the source of the income is generated within or outside Panamanian territory. Income produced from any source within the territory of the Republic of Panama is subject to income tax. The income tax of Panama is levied only upon net income derived from operations within the territory of the Republic of Panama. Foreign source income, in other words income generated outside the Panamanian jurisdiction, is 100% exempted. Specifically, income derived from the following activities is not considered as produced within the territory of the Republic of Panama, and therefore is tax exempt:
In practical terms, an international bank with an office and employees based in Panama does not pay any income tax, if it only performs international operations from Panama.
In fact, the country’s constantly expanding international finance sector offers plenty of growth opportunities in areas such as ship finance, investment banking and custody services. Panama is also a land of opportunity for credit institutions looking compliant, yet flexible, domicile that provides access to the LatAm market. The emerging economies of the region have a high demand for infrastructure development, offering opportunities in the area of project finance. Panama’s professionals also believe that there is strong potential to attract more eCommerce payment business and payment factoring operations to the country and promote Panama as a location from where to service customers across the region.
Banking & More
Panamanian banking has remained resilient due to its strong capital base and bank liquidity. In the wealth management sector, foundations and trusts have become a popular instrument for many transaction planners, and the country has begun the process of updating its trust law in order to cater for the demands of modern investors. It is hoped that a more streamlined and simplified trust regime will attract foreign, as well as domestic, clients to utilize the 177 multinational companies already operating on the country. The country’s corporate framework, which includes a fully compliant regime, as well as a respected and well-regulated legal system, makes Panama particularly desirable company domicile. A Panama company is equally suited as a vehicle for international business, investment or financial services, and can be used as a holding or trading company.
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