Thriving Through Efficiency

Aug 1, 2003

Brazilian banks have performed remarkably well because of their competent management. But the credit market remains vastly undertapped because of the high cost of finance in Brazil.

The Brazilian banking sector has performed remarkably well in recent years. The question is whether this is due to efficiency or mere opportunism. Among the principal sectors of the Brazilian economy during 2002, only five posted returns on equity in excess of the 18% yield available on bank CDs. However, these generally low returns in the industrial sector of the economy probably are less a sympton of inefficiency and more a consequence of a market in which credit is scarce, costly and of very short maturity.

In fact, the operating profits of most Brazilian non-financial companies are in line with similar companies operating in other countries. However, the problem lies with the heavy financial costs that Brazilian companies must bear - costs that consume about one-third of companies' revenues. The economy cannot grow at a sustainable rate of 4% a year or more as long as companies must finance them-...

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