A complex web: Cuba’s financial system
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A complex web: Cuba’s financial system

Several key creditors have funded Cuba’s banking system and development in recent years. Cuba’s main source of credit is China. Chinese authorities have promised a $70 million loan for a ­telecommunications cable project. China is also understood to have provided a high proportion of the export finance that led to a record $1.8 billion-worth of Cuban exports in 2006, a figure that increased in 2007.

Cuba’s capitalist evolution

Other countries are offering substantial support. Iran, for example, is providing funds to the Cuban government and has extended a $900 million credit line for agricultural products. Brazil has extended a $1 billion food credit line and another $700 million for infrastructure projects. Russian credit enabled Cuba to buy several passenger aircraft in 2007.

In addition, private commercial banks, mainly from France, Spain and Canada, such as National Bank of Canada, BNP Paribas and Société Générale, offer credit to Cuban banks and corporates. The biggest recipients in the local banking sector are Banco International de Comercio (Bicsa) and Banco Exterior de Cuba (BEC), which, like all state-owned banks, have maintained a clean repayment record since 1993. "The banks are eager to get a good reputation – they wouldn’t default on a $10 million loan and risk losing this," says one businessman. One particular focus of the foreign banks is trade finance.

A route that foreign banks could use to get into the Cuban banking market is through a joint venture. The Spanish bank Caja Madrid has established a new company with a Cuban state bank. The new financial company, Corporación Financiera Habana, is 60% owned by Caja Madrid and 40% by Cuban state savings bank Banco Popular de Ahorra (BPA).

But while some banks are entering Cuba, others have been leaving. ING was in Cuba until it left the island in 2007 after the US government apparently pressured it to withdraw, according to Anaiza Rodriguez, investment director at Cuba’s foreign investment ministry.

Cuba’s relationship with the financial markets is limited but cordial. In 2006 and 2007, Cuba issued one-year euro-denominated bonds that were sold privately with a 9% coupon and listed in London. Both bonds were paid in full and on time. "The Cubans proved with these issues that they could raise money internationally, although whether these were proper commercial transactions is another matter," says Stuart Culverhouse, chief economist at Exotix. "At this stage, the best way to invest in Cuba is through the debt, both new performing paper and non-performing."

Locally, the authorities are trying to instil greater discipline into the financial system.

Perhaps the biggest barrier to the system’s development is the existence of a dual-currency system. The government wants to unite the currencies, but this will be a difficult and expensive process. Cuba has the Cuban peso (CUP), with which the subsidized domestic economy operates, and the convertible peso (CUC), which is used as the hard currency in retail outlets. But, as more Cubans get access to CUC – through tourism, restaurant sales and farm produce sales – huge discrepancies are appearing. Many Cubans make vast profits by selling goods at an inflated CUC price and then change this into CUP before using that currency to buy subsidized goods. This system is inefficient and expensive and prevents a proper price mechanism from operating.

In addition, foreign investors and banks are unable to access the internal, subsidized economy. This barrier to development is one reason why subsidized goods are potentially under the hammer, and a unified currency has risen up the agenda. But to achieve currency unification, Cuba’s central bank will need large reserves and a productive economy that can hold up the value of a new currency.

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