The Competitive Edge of Credit Unions in Costa Rica: From Financial Repression to the Risks of a New Financial Environment

Abstract

This article argues that financial repression played a key role in the emergence of credit unions (CUs) in Costa Rica, along with other institutional factors. Credit unions took advantage of the opportunity to serve borrowers whose requests had been refused by banks. Given the sweeping reforms of the Costa Rican financial system aimed at reducing the scope of financial repression, this article poses the question of how those reforms impacted the competitiveness of CUs. Previous literature suggests that financial reform may lead to concentration in the financial sector, and not to the promotion of a more competitive environment. This article presents data showing that CUs in Costa Rica exhibited an enhanced ability to gain market share and also provides an explanation for the observed trend.