Concentration Spiral

The concentration of banking power has transformed Colombia’s economy and society. With financial capital controlled by a small number of major banks, competition is heavily restricted, and small and medium-sized enterprises have limited access to credit. Although large banks claim to promote financial inclusion, in practice, their dominance in the sector contributes to rising inequality.

In 2024, Colombian President Gustavo Petro’s government proposed redirecting a portion of the savings deposited by citizens toward productive projects, such as the expansion of agricultural land, housing, and renewable energies, with the explicit object of financing decarbonization, among other developmental goals. Petro’s proposal would have obliged private banks to redirect investments toward sectors of national interest with a preferential rate. The proposal was unsurprisingly controversial, exposing the conflict between the banks’ interest in making savings profitable and the government’s intention to offer low-cost loans. The rift demonstrated the banks’ significant influence over policies at the national level. 

The disagreement over Petro’s proposal stemmed from opposing conceptions of the purpose of savings—should private savings be used for corporate or public interests? The largest banks won the dispute after significant lobbying to prevent the passage of the law.  This debate, however, must be understood within the context of the transformation of the banking system over the last two decades. From 2000 to 2022, thirteen conglomerates have risen to dominate the banking sector, shaping profitability, access to credit, and pricing. These conglomerates not only hold banks, but they also own the country’s largest pension funds and insurance companies. Colombia is unique among the region in this regard: given the entangled interests of the country’s largest private financial institutions, economic and political power is concentrated in the hands of a few major economic players. 

1990s reforms

The roots of banking concentration in Colombia can be found in the financial reforms of the 1990s. Prior to these reforms, the Colombian banking system was characterized by highly specialized lending entities, such as savings and housing corporations (CAVs), state-controlled interest rates, and credit rationing, with the Central Bank serving as the basic source of domestic resources.¹ Several factors drove banking liberalization. The economic crisis of the 1980s exposed the limitations of Colombia’s import substitution model. Then, following a wave of debt crises that affected many countries in the region, a consensus toward neoliberal policies was formed, motivating the need to attract foreign investment and guarantee the country’s integration into international markets. 

These reforms—supported by the IMF and the World Bank’s structural adjustment programs—included trade liberalization, financial market deregulation, and the privatization of state-owned companies. Economic liberalization was said to improve the stability of the banking system, aligning market incentives and the channeling of financial assets to productive investment.²

Previously specialized banking services consolidated into a new multi-bank scheme, reducing operating costs for the sector and allowing all commercial banks to carry out the same types of operations. The reforms also facilitated the entry of foreign banks, eliminated restrictions on international banking operations, deregulated interest rates, and reversed the state’s majority participation in the banking system.

Prior to these reforms, state participation in the banking sector in some Latin American countries reached more than 50 percent. Around the region, however, reforms in Bolivia, Costa Rica, Ecuador, Guatemala, and Honduras were not accompanied by regulatory changes. Countries that did not strengthen banking supervision suffered successive crises.³

In the Colombian case, during the 1990s, low interest rates set by savings and housing corporations (S&H) triggered a credit boom that facilitated massive mortgage lending without adequate creditworthiness checks. The subsequent drop in real estate prices and the sudden increase in interest rates increased portfolio risk, as many borrowers began to face difficulties in meeting their loan obligations. This situation, worsened by lax regulation and the external shock of the Asian international crisis, culminated in a financial crisis at the end of the decade. The collapse was compounded by structural problems of high public debt and political instability. The crisis caused a deep contraction in various sectors of the economy, with imports declining; real estate prices, credit, and construction falling; and unemployment and poverty indicators skyrocketing.⁴ Although the government implemented financial rescue measures and fiscal adjustments to try to stabilize the situation, the recovery was slow and painful.

In response to the crisis, the Constitutional Court required all CAVs to become commercial banks by 2002. Many banks also carried out mergers and acquisitions, as smaller banks suffered in the crisis, reducing the overall number of entities in the banking sector.⁵ Several banks and commercial finance companies intervened to liquidate these smaller companies. Banco Andino, Banco del Pacífico, and Banco Selfín all closed operations during this period, and the Compañía de Financiamiento Comercial FES was liquidated. Also noteworthy is the fact that other entities later to be privatized, such as Banco Interbanco and Compañía de Financiamiento Comercial Aliadas, were initially administered by the Financial Institutions Guarantee Fund (Fondo de Garantías de Instituciones Financieras, Fogafin). Cooperative banks were consolidated into a new bank, Megabanco, which was sold to Grupo Aval in 2006 in order to settle debts. 

Bank concentration

Thus, the twenty-first century began with a trend toward banking concentration in Colombia, contrary to the objectives of the liberalization reforms. The effects of this concentration can be seen in the collection of funds and the distribution of credit within savings’ deposits. As can be seen in Figures 1 and 2, of the twenty-nine registered banks, seven capture the deposits and manage the loans of 80 percent of the country’s funds.⁶

The high concentration of the credit business comes with a consequent concentration in profits, as measured by the main indicator of market concentration, the Herfindahl-Hirschman Index (HHI). The HHI reached 2,796 in 2022, a 55 percent increase from 2009, when it stood at 1,800.⁷ In 2022, the three largest banks took 75 percent of the sector’s profits, with the single largest bank—Bancocolombia—taking almost half of profits, as shown in Figure 3.⁸

The four largest financial conglomerates control between 75 and 80 percent of all assets, liabilities, and equity in the sector. Banking concentration, both in terms of loans and profits, has deepened. In the region, Colombia has a relatively high level of banking concentration—higher than that of countries such as Ecuador and Mexico, but lower than that of Peru.⁹ Figure 4 shows the market share of the three largest banks in various countries. The concentration in Colombia is particularly high, and within Latin America it is only surpassed by Nicaragua, Venezuela, and the Dominican Republic.¹⁰

Concentration of capital

The major beneficiaries of banking concentration are thirteen financial conglomerates representing the country’s strongest economic groups.¹¹ Each conglomerate is associated with a holding company—an investment vehicle that exercises the first level of control over the entities that make up the conglomerate. According to the Colombian Financial Superintendence, seven of Colombia’s thirteen conglomerates are linked to thirty-three financial entities.¹² However, in our research on these conglomerates’ partnerships, we found links to 226 companies in multiple countries. 

Financial conglomerates were established in Colombia after the enactment of Law 45 in 1990, which pursued economic liberalization measures, as well as the Laws 510 and 546 in 1999, which responded to the financial crisis. These laws encouraged mergers and acquisitions, with the objective of converting financial companies to banking companies. Through these measures, Colombia could maintain competitive financial institutions in the face of globalized markets.

As conglomerates have grown over time, their ownership networks have become more complex, with a presence in countries including Colombia, Chile, the Bahamas, Panama, and the Cayman Islands. These conglomerates also own companies in other sectors in Colombia. Grupo Sura, which owns Bancolombia—the largest bank in the country—is co-owner of the Pension Fund Administrator (AFP) Protección. The AVAL Group, which controls the Popular, Occidente, Bogotá, and AV Villas Banks, also owns AFP Porvenir.

Porvenir is the pension fund with the largest share in pension savings—46.3 percent—followed by Protección—with 35.2 percent. These two AFPs are among the top five pension administrators in Colombia. Together, they account for close to 90 percent of AFP affiliates in Colombia, giving them significant influence over the pension market.

Grupo Bolivar, owner of Banco Davivienda, the second largest bank in the country, also owns one of the most important insurance companies, Seguros Bolivar. The integration of financial and insurance institutions has a multifaceted impact on the real economy, as the decisions made by these entities can influence the flow of capital to different economic sectors. The interconnection between pension funds, insurance companies, and banks is amplified in the event of a crisis. A problem in one can quickly spread to the rest of the system. Conglomerates hold influence over financial regulation itself, as regulators rely heavily on information provided by them. Regulations are designed to favor their stability and thus profitability, limiting competition and hindering the entry of new players into the financial market.

Between 2000 and 2022, 87 percent of the assets managed by the top ten banks corresponded to obligations with external agents (liabilities), while banks only held 13 percent as equity. In other words, almost all of the banks’ profit generation resulted from the external holdings of third parties.  In contrast, shareholders’ contributions represented only 0.6 percent of assets on average, and its weight decreased over time: in 2000, shareholders’ contributions were equivalent to 2.5 percent of assets, while in 2022 it was only 0.3 percent. The return on their resources averaged 262 percent. Shareholders recovered all their invested capital and were able to obtain additional returns in just one year, a feat that companies in other sectors of the economy do not manage to achieve over several years.

The profits from the banking sector are enormous, especially in the Colombian context. One year of bank profits would be enough to cover the 2024 budget of the Ministry of Justice and comprises three times the budget of the Ministry of Environment. The three wealthiest Colombians come from the banking sector: David Vélez (owner of NuBank), Jaime Gilinski (owner of GNB Sudameris bank) and Luis Carlos Sarmiento Angulo (owner of the financial conglomerate Grupo Aval).¹³

Financial inclusion?

The dominance of these conglomerates in the financial market also has direct implications for competition and efficiency of banking services. The Colombian banking sector has very high intermediation margins—the difference between the interest banks receive on loans and the interest paid to savers. Figure 6 indicates that the largest banks have the lowest rates for remunerating savings while charging very high rates for loans.

Between 2000 and 2022, the ten largest banks earned interest-based income of $155 billion constant pesos, resulting in an average annual net margin of around $18 billion. Despite this high margin, the Superfinanciera imposes millions in fines on different banks for charging over the allowed rates. In 2024, Bancocolombia faced such fines, while Banco Itaú was sanctioned in 2023. The Superfinanciera similarly fined Banco Popular, part of Grupo Aval, for charging fees on failed transactions at electronic teller machines for almost a year.

Bank profits come not only from intermediation, but also by charging for financial services. Transaction fees in Colombia, from ATM withdrawals, transfers to other accounts, or the use of a plastic card, are historically among the highest in the region.¹⁴ Consider the following: a person who earns a minimum wage and wants to deposit it in a savings account each month will have to pay a handling fee for his debit card ($11,600 COP or $2.7 USD), a fee for  making withdrawals ($2,287 COP or $0.53 USD), a fee for transferring money to other accounts ($811 COP or $0.2 USD), and yet another fee for using services from his account ($864 COP or $0.2 USD), among others costs ($33,238 COP or $7.8 USD).¹⁵ In total, this person will spend 4 percent of his or her monthly income to pay financial costs. While the money is held in his savings account, the bank will earn an interest margin of 170 percent and pay for the savings at 0.5 percent.¹⁶

The high concentration of the sector gives banks the power to decide how much liquidity is offered and to whom. Despite making up 99.5 percent of businesses and generating 65 percent of employment, small and medium-sized enterprises in Colombia only manage to stay afloat for an average of two to three years. Of all the credit in the banking sector, only 7 percent is allocated to the smallest companies. Interest rates and costs associated with banking services are high, which can deter medium-sized companies and entrepreneurs from seeking formal financing. Finally, greater concentration erects barriers to entry for new competitors in the market, which in turn intensifies concentration. Banks have recently faced penalties amounting to $1.5 billion COP for violating protections on competition, but fines have still failed to deter such behavior.¹⁷

Concentration of power

The concentration of financial profits has political implications. For one, many traditional political parties in Colombia benefit from the financing provided by the conglomerates. One investigation showed that Luis Carlos Sarmiento Angulo, who until 2024 served as the head of Grupo Aval’s board of directors, contributed more than $11 billion COP to traditional political parties in 2022, almost doubling his contributions from 2018. While this financing is legal, it necessarily grants undue influence to the sector. Grupo Aval similarly financed more than 66 percent of President Iván Duque’s 2018 campaign. Duque’s presidency was marked by increased austerity, militarism, and deepening ties with the country’s economic elites.  

With banking and pension companies controlled by the same owner, there is also a risk that conglomerates can use savers’ earnings to finance projects with a political tilt. This occurred only recently, as AFP invested in road projects, such as Ruta del Sol (Odebrecht), promoted by politicians close to the former president, Juan Manuel Santos.¹⁸ Such influence even extends to clear cases of corruption. In 2012, Corficolombiana, the banking subsidiary of the Aval Group, bribed Colombian government officials to keep the extension of a 527-kilometer-road construction project for itself. The judicial process indicates that at least $28 million was paid with the knowledge and approval of the former president of the company. As a result, in 2023 the US Securities and Exchange Commission (SEC) sanctioned Grupo Aval and its banking subsidiary Corficolombiana.¹⁹

Pronounced banking concentration in Colombia has resulted in a severe concentration of capital that goes far beyond setting high interest rates: select economic groups end up determining the shape of the real economy by allocating credit support and administering insurance and pensions. The banks’ power reaches a systemic level in citizens’ savings. In this context, supervisory institutions, such as the Financial Superintendency, have been key in monitoring the technical indicators of banking entities and financial conglomerates. These institutions work to avoid systemic risks that could affect economic stability, directing their main efforts toward data disclosure and transparency. These efforts, while significant, are only the beginning of a broader and necessary process of rethinking how to reverse the hyper-concentration of the financial sector. 

The larger question remains: how can the state counteract existing liquidity and credit allocation models so that citizens’ savings are directed toward collective public interests rather than private profit? In August 2024, despite failing to pass a law that would force banks to offer cheaper financing for development projects, Petro reached an agreement with the major banks to secure $13.6 billion in lending for residential, industrial, manufacturing, agriculture, and tourism-related projects. While increased financing marks a small step forward, these loans will continue to be beset by high interest rates, and powerful financial conglomerates will remain at the helm of the Colombian economy.