US-Cuba Ties and Financial Institutions

Epsos.De / CC BY 2.0

Q: U.S. President Barack Obama and Cuban President Raúl Castro on Dec. 17 announced a series of major bilateral policy changes. In addition to normalizing relations after a half century and opening new embassies in Washington and Havana, the countries have agreed to allow U.S. financial institutions to open accounts at Cuban financial institutions, permit the use of U.S. credit and debit cards in Cuba and increase the amount of remittances that can be sent to Cuba from the United States. How significant are the changes for banks and other financial services companies in the United States and elsewhere? How important of a market is Cuba for U.S. and other foreign financial institutions? How much will improved commercial ties between Cuba and the United States depend upon the U.S. Congress' support for changing existing laws that restrict business with Cuba?

A: Manuel Orozco, member of the Financial Services Advisor board and fellow at the Center for International Development at Harvard University: "Allowing U.S. financial institutions to enter the Cuban banking sector will have a major impact on the country's local economy. First, a larger number of businesses will be able to offer electronic transactions more easily and offer credit. The impact of a modernization of electronic payments in Cuba would be substantive because these transactions would increase liquidity and stocks to expand businesses. Second, there will be greater competition among financial service providers which in turn will accelerate the modernization of the Cuban retail financial sector. Third, it is important to add the fact that the policy changes will likely influence remittance behavior among senders and recipients. For example, an increase in the allowed amount of remittances will increase disposable income among recipients in Cuba by 15 percent and flows by at least 40 percent to nearly $2 billion. The effect of increases in disposable income will be greater purchasing power to buy foodstuffs and other goods, as well as to save and invest. Those who are able to save will increase their savings and will depend more on financial institutions to manage their funds and use savings accounts, credit cards and perhaps debit cards. The effect on productivity will be significant because the circulation of money in commerce will increase and so will the demand for more services and goods, which in turn will benefit the local economy. To this, the existing and new incentives to send money to promote entrepreneurship in Cuba will be a welcome opportunity. About one-third of Cuban remittance recipients would like to have their own business and more than half thinks that their relatives in the United States will help them establish a business. One-tenth of Cuban migrants financing local businesses of relatives in Cuba would amount to at least $250 million to microentrepreneurial activities. Cuban economists think that the services industry market is not saturated, and more investment is needed. Therefore the impact of these openings is substantive."

A: Jerry Haar, professor of management and international business at Florida International University: "There are presently around a dozen foreign banks operating in Cuba, one from Lebanon and the majority from Western Europe. How significant are the Obama administration's changes for banks and other financial services companies? The answer is: 'not very.' Except for financing exports of products and services not restricted by the U.S. embargo law and for money transfers, the market is limited for U.S. financial services institutions. Clearly, the use of debit and credit cards in Cuba and the increase in the amounts of remittances will be beneficial to U.S. firms operating in these areas; however, U.S. banks in particular will only reap significant benefits when Cuba allows them to offer a full range of services, including retail and commercial banking. That will be contingent upon a significant rise in wage levels, savings, and investment by Cubans and the emergence of a large and vibrant private sector. Additionally, without acceptable collateral, loan guarantees, transparent and enforceable banking and investment laws that protect individuals and firms (foreign and domestic), and a fair, just and transparent legal system, U.S. financial services firms will be reluctant to take advantage of doing business in Cuba."

A: Nicolás Mariscal, chairman of Grupo Marhnos in Mexico City: "The measures that Presidents Obama and Castro announced on Dec. 17 are a very significant change that will help to promote prosperity on the island. This is a first step that we hope will be accompanied by other public policies in Cuba to promote development and that will make viable the needed reactivation of Cuba's economy. Many of us hope for a new dawn for the Cuban people, and this is happening gradually—not just with the measures announced last week, but also with the surge of entrepreneurs and an emerging middle class which is exploring possibilities in the narrow range of allowed private work. A door is now opened, not a small step, for banks and diverse companies to offer financial services. These institutions can offer products and services tailored to the characteristics to the Cuban market, such as loans and microcredit. At the same time, the amount of money that Cubans in the United States can send back to the island is being quadrupled—from $500 to $2,000 quarterly, and credit and debit cards issued in the United States will be able to be used in Cuba. The results could be seen in the medium and long terms, but caution and patience will be required. Firm steps should continue to be taken toward a greater commercial opening, and the economic benefits will contribute to improving Cubans' quality of life."

A: Ray Walser, co-chair of the Western Hemisphere working group at the John Hay Initiative in Washington: "For bankers, businessmen and travelers, the watchword toward Cuba is 'curb your enthusiasm.' While President Obama has seized the headlines with his olive branch to the Castro regime, the tenuous relationship between Cuba and the United States is still marked by a lack of modern connectivity in mentalities and practices. The White House optimistically, and many say naively, believes its change in policy will unleash the creative powers of 11 million Cubans. Yet, collectivist Havana, with its Hawaii-sized economy, has more than 50 years of experience in keeping its citizens, particularly the independent-minded, on choker leashes. New flexibility by the U.S. government on licensed travel, remittances, modest imports ($100 worth of cigars), export of certain categories of items such as telecommunications equipment and building supplies will spark increased revenue flows to and from the island and provide a boost to Cuba's ailing economy. Nevertheless, Americans will have to navigate a complex maze of regulations and controls exerted by Cuba's bureaucratic-oriented state. As Raúl Castro made perfectly clear, the regime's objective is not a market economy or increasing individual freedoms, but rather grasping a lifeline to support 'sustainable socialism.' Big Brother in the form of the state sector will determine the business and investment climate for years to come. While U.S. companies and banks will ease the way for the use of credit and debit cards by travelers and others, modern private banking with interest-bearing accounts and investment portfolios appears to be a distant dream. Finally, with the Republicans in control of both houses of Congress for the next two years, implementing the promised changes in Washington will resemble downhill skiing in July."