Tag Archives: short-term

A Word on Banking in Ecuador

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The benefit of Ecuador being a US dollar based economy is that, for the US investor, it eliminates the inherent risks associated with foreign currency exchange fluctuations and it allows us to take full advantage of significantly higher short-term interest rates.

I am still learning about the Ecuadorian banking system and I am not an investment professional; however, if you are considering a long-term stay in Ecuador, there are some clear advantages to short-term (1 year or less) investing there.  Just compare the interest rate on your current savings account or any CD’s you may own.  The rate is probably somewhere close to zero versus 6.0% (on average) for a one year CD in Ecuador.

I have a particular focus on CDs (certificates of deposit) because I like the fact that it is a relatively liquid asset and I know exactly when my money will be available to me, without any withdrawal penalties (however, early withdrawal penalties can be about 2%).  CDs are like temporary savings blocks.  You can invest for a minimum of 30 days to 1 year and you earn interest as a reward for locking up your money with the bank for that amount of time.   The reward, or interest rate, increases with the amount of time you are willing to let the bank(s) in essence “borrow” your funds.

With Ecuadorian bank investments, CDs are a great choice because you can stagger your investment across different periods of time and in varying amounts, based on your comfort level/risk tolerance.  In addition, the minimum investment is low, $1,000 or less.  This flexibility can be a safeguard so that you know, for example, your money will not be tied up at the end of 60 or 180 days.

To understand how to calculate the amount of interest you can earn in a given period, take the following steps:

  1. Determine how much your initial investment will be, for this example let’s say it is $5,000
  2. Determine how long you want the CD in place for, let’s say 30 days at a rate of 3.50% (Banco del Austro as of Jan. 2012).
  3. Multiply your investment amount by the interest and divide by the number of periods in 1 calendar year (30 days = 12, 60 days = 6, 180 days = 2, and 360 days = 1) So,  $5,000*3.50%/12 = $14.58
  4. This means your interest earned at the end of the 30 day period will be $14.58
  5. You can then decide if you want to do another CD or just take your money and do something else.

Two final thoughts

  • The difference between banks and cooperatives is similar to the difference between banks and credit unions in the US.  Both are financial institutions offering similar products, however cooperatives (like credit unions) are governed by a different set of laws and regulatory bodies.  As a result, cooperatives may be perceived as inherently more risky and they therefore offer the highest interest rates on CD investments.
  • The requirements to open a bank account will vary between institutions. Some require only a passport, others require an Ecuadorian resident card and a utility bill.  All require you to open the initial account in person, so get to know your bank and the investment professional you will be working with, because when you are away, they will typically be able to help via phone or email.

For a list of some of the banks and cooperatives available in Cuenca, Ecuador and their respective interest rates, click on the Ecuador Investments page.

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