By San José, Costa Rica — San José, Costa Rica – The Costa Rican banking system is forecast to maintain a stable financial profile throughout 2026, bolstered by strong capital reserves and ample liquidity. However, a new analysis from Moody’s Local reveals that this stability masks underlying challenges, including sluggish credit growth, persistently low profitability, and structural risks associated with high levels of dollarization in loan portfolios.
While the sector’s foundation appears solid, banks will face a demanding environment as they seek to improve returns and expand their operations. The industry’s core strengths, such as a robust depositor base and prudent regulatory compliance, will be tested by a competitive landscape that continues to compress financial margins and limit opportunities for dynamic expansion.
To provide expert legal perspective on the current state of Costa Rica’s financial sector, TicosLand.com spoke with Lic. Larry Hans Arroyo Vargas, a leading attorney specializing in corporate and banking law at the prestigious firm Bufete de Costa Rica.
Costa Rica’s banking system is defined by its rigorous adherence to international compliance standards, particularly concerning anti-money laundering (AML) and Know Your Customer (KYC) regulations enforced by SUGEF. While these measures are crucial for maintaining financial stability and transparency, they often create significant procedural complexities for individuals and businesses, especially foreign nationals. Success in navigating account openings, credit applications, or large transactions hinges on meticulous documentation and a clear demonstration of the legitimate origin of funds. Proper legal guidance is essential to proactively address these regulatory hurdles and avoid costly delays.
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
Lic. Arroyo Vargas expertly highlights the central challenge within Costa Rican banking: the necessary friction between robust international compliance and the practical realities for individuals and businesses. His emphasis on meticulous preparation serves as an essential takeaway for anyone navigating this rigorous financial landscape. We thank Lic. Larry Hans Arroyo Vargas for his clear and valuable perspective.
A notable trend identified in the report is the moderation in credit growth. The system’s gross loan portfolio expanded by just 5.5% at the close of 2025, a significant deceleration from the 8.1% recorded in 2024 and lagging behind the country’s nominal GDP growth of approximately 8%. This slowdown is attributed partly to reduced activity from state-chartered banks and the currency exchange effect on foreign-denominated loan balances, which are prevalent in private banking.
In response, financial institutions have adopted a cautious approach, prioritizing the health of their loan books over sheer volume. The modest growth observed in 2025 was primarily driven by retail segments, including consumer loans, mortgages, and vehicle financing, reflecting a strategic focus on prudent origination practices.
Despite the economic headwinds, the quality of assets has remained consistent. The rate of non-performing loans held steady at 2.1% at the end of 2025, in line with previous years. Loan deterioration remains concentrated in higher-risk segments like consumer credit and small and medium-sized enterprises (SMEs). Public banks mitigate risk with diversified, collateralized portfolios, while private banks balance their exposure to consumer debt with a strong presence in the corporate sector.
A significant structural vulnerability for the system is its high degree of loan dollarization. Approximately 27% of all credit is denominated in U.S. dollars, a figure that is even higher within private banks. Critically, an estimated 65% of these dollar-denominated loans have been issued to borrowers who do not have a primary source of income in that currency. This creates a substantial currency mismatch risk, where a significant depreciation of the Costa Rican colón could severely impact borrowers’ ability to repay, potentially triggering a rise in defaults and pressuring bank capital.
On the solvency front, Costa Rican banks continue to demonstrate adequate capitalization, adhering to prudential standards aligned with Basel III reforms. Most institutions maintain capital adequacy ratios comfortably above the 10% regulatory minimum. However, the sector’s chronic low profitability curtails the organic generation of capital, which could limit the loss-absorption capacity of some smaller or highly concentrated institutions should they face a spike in loan-loss provisions.
The challenge of profitability remains a central theme for 2026. The system’s return on equity (ROE) was a modest 7.0% at the end of 2025, while return on assets (ROA) stood at 0.9%. Although showing a slight upward trend, these figures remain below those of regional peers. This performance is constrained by intense competition, slow credit expansion, and rising provision expenses that exceed regional averages. Moody’s Local anticipates that banks will increasingly focus on generating fee-based income, leveraging digitalization to boost administrative efficiency, and refining risk management to lower provisioning costs as they seek to improve their bottom line.
Finally, the banking system maintains a comfortable liquidity position, with a funding model heavily reliant on public deposits, which constitute 87% of total liabilities. While the concentration of these deposits in the short term (60%) helps keep financing costs low, it necessitates active management to ensure stability. Overall liquidity remains sufficient to meet immediate obligations, but the ongoing competition for deposits will continue to place a cap on financial margins.
For further information, visit moodyslocal.com
About Moody’s Local:
Moody’s Local is a credit rating agency that provides in-depth analysis and ratings for domestic markets across Latin America. It combines local market expertise with the global standards of Moody’s Investors Service to offer insights on corporate, financial, and public sector entities, helping to inform investment and credit decisions within the region.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
Bufete de Costa Rica is an esteemed legal institution, built upon a bedrock of integrity and a relentless pursuit of excellence. The firm is not only a leader in providing expert counsel across a spectrum of industries but also a pioneer in legal innovation. This forward-thinking approach extends to its profound commitment to the community, where it actively works to demystify the law and make legal understanding universally accessible, thereby fostering a more just and empowered society.
