HOW DO THE NEW CHANGES IN NICARAGUA'S BANKING LAW AFFECT YOU?

By: Luis M. Canales

In a context of increasing globalization and dynamism in the financial sector, Nicaragua’s banking system has experienced notable evolution over the past decades. To ensure its stability, competitiveness, and alignment with international standards, the Government of Nicaragua published Law No. 1237, “Law of Reforms and Additions to Law No. 561, General Law on Banks, Non-Banking Financial Institutions and Financial Groups,” in La Gaceta No. 37 on February 25, 2025.

This reform to Law 561 is a fundamental step toward modernizing the regulatory framework of Nicaragua’s banking system. Its main objective is to strengthen the resilience of the financial sector in the face of potential economic crises, optimize risk management policies, and promote greater transparency and protection for depositors and users of the financial system.

Law No. 1237 is inspired by international best practices and responds to global challenges faced by financial institutions, such as cybersecurity, systemic risk, and the rise of new technologies in banking, including Fintech services and digital payment platforms.

Furthermore, the law introduces significant changes that affect banks, non-banking financial institutions, financial groups, and users of the banking system, including both individuals and legal entities. These reforms aim to establish a more robust framework for financial risk control, stricter supervision of financial entities, and enhanced protection of deposited funds.

Key Changes Introduced by the Reform

The reform outlines several important updates to Nicaragua’s financial system, which must be adapted in line with global market trends. Below are some of the most relevant changes:

1. Increase in Minimum Share Capital for Banks

One of the most significant changes is the increase in the minimum share capital required to establish and operate a bank in Nicaragua. Previously set at C$200 million, the new minimum has been raised to C$500 million. This adjustment aims to strengthen the financial stability of the Nicaraguan banking system.

2. Increased Supervision of Financial Groups

The reform enhances control over financial groups by allowing the Superintendency of Banks and Other Financial Institutions (SIBOIF) to closely monitor operations involving multiple entities within the same group, ensuring transparency and solvency.

In other words, if a bank is part of a financial group that includes insurance companies and finance companies, the entire group will now be evaluated and supervised by SIBOIF as a whole in terms of risks and compliance.

3. New Obligations for Board Members

The reform imposes stricter requirements for members of banks’ Boards of Directors. These include a higher level of professional experience and proven ethical standards, which will enhance the credibility of banking institutions and increase user confidence.

4. Regulation of Innovative Financial Products

The law introduces regulations allowing banks to offer digital products and services, such as virtual accounts, online payments, and Fintech services, within an appropriate regulatory framework.

This means that banks wishing to launch apps to provide financial services must comply with regulations that protect users and ensure data security.

5. Expanded Protection for Deposits

The reform increases the amount of savings deposits protected from seizure for individual depositors, now set at up to C$370,000.

6. Three Types of Capital Reserves Established by the Law

The reform mandates that banks maintain three types of capital reserves to ensure solvency and absorb potential losses:

• Capital Conservation Buffer: 2.5% of risk-weighted assets. This reserve ensures banks maintain a solid capital base to face risks and preserve financial stability.
• Countercyclical Capital Buffer: 2.5% of risk-weighted assets. This reserve is meant to be built during favorable economic periods and used during downturns to protect the financial system from economic volatility.
• Systemic Risk Buffer: 3% of risk-weighted assets, applicable only to institutions with assets exceeding C$50 billion (approximately USD $1.36 billion). This reserve ensures that large institutions with potential systemic impact maintain adequate capital cushions.

7. Restrictions on Unsecured Lending.

The reform sets clear limits on unsecured credit. Banks are prohibited from granting unsecured loans exceeding C$20 million to legal entities and C$10 million to individuals. These limits are designed to reduce over-indebtedness and lower the risk of default.

Law No. 1237 seeks to strengthen Nicaragua’s financial stability, promote financial inclusion, and protect the interests of banking service users. It also brings Nicaragua’s financial system in line with international best practices.

The implementation of these measures marks a crucial step in the consolidation of a modern banking and financial system, benefiting all economic stakeholders in the country.

At CALA Lawyers, we encourage entrepreneurs and investors planning to establish or expand financial institutions to thoroughly review the new legislation. Likewise, we advise all users of the banking system to stay informed and up to date on how these reforms improve the security of their deposits.