By Eduardo Amaral Gurgel Kiss1

The Brazilian economy has been performing reasonably well in recent years and international investors become interested in setting up financial institutions in Brazil. We present below the basic requirements for that purpose.

Before setting up a financial institution, the interested investor must obtain authorization from the Brazilian authorities.

The procedure to obtain the authorization comprises two phases.

The first phase is aimed to obtaining a decree by the Brazilian President. Such Decree is necessary whenever the investment will result in an increase of the foreign investment in the financial system.

The Brazilian Central Bank is the governmental agency that reviews the application and gives the initial approval. Subsequently the application is submitted to the National Monetary Council and, finally, it must be reviewed and approved by the President of Brazil for the issuance of the required Decree.

At the Central Bank In addition to various legal documents and data related to the interested investor, he/she/it must present a business plan which must cover at least the projection for the first 5 years of the company's activities. The following is a summary of the contents of a business plan, in accordance with the Central Bank requirements. The Central Bank expects a business plan to contain:

  1. an introduction or executive summary;
  2. macroeconomic premises;
  3. corporate governance standards;
  4. market plan;
  5. operating plan;
  6. human resources plan;
  7. risk management plan;
  8. economic-financial feasibility analysis (financial plan).

The following is a brief summary of the contents of the above items.

1. Executive Summary

This section should detail the line of business the company will be engaged in, with a brief history of the economic group applying for the authorization. Additionally, the summary should also point out the list of controllers, holders of qualified interest (individuals holding 5% or more of the prospective investor), and the managers of the applicant, as the case may be. The investor should indicate the countries in which he operates and the business conducted in those countries. The Central Bank can consult with the financial authorities of the country in which the investor has its head office with respect to the investor's status and his plans to set up a subsidiary in Brazil.

2. Macroeconomic premises

The main macroeconomic premises used in the projections utilized in the project must be explained to enable the understanding of market, financial, operating, human resources and risk management plans to be implemented by the investor. The investor should insert in the business plan considerations on how the institution will develop its operations within the local environment vis-à-vis the GDP evolution, the inflation rate (actual and forecast), interest rate (actual and forecast), exchange rate (actual and forecast) and any other economic rates deemed relevant.

3. Corporate Governance Standards

The corporate governance has been viewed within the Brazilian financial market as a key tool to support the company's management to carry out the daily operations within the most reliable and secure internal economic ambient.

The use of corporate governance standards help the Central Bank to assure the non-existence of the so-called "agency conflict" between the business ownership and business management. Hence, the Central Bank expects the investor to create and maintain efficient mechanisms to ensure that the executive officers' conduct is in line with the stockholders' interests. Those mechanisms are usually monitoring and incentive systems.

4. Market Plan

The project description must contemplate the market analysis as a whole, including the target public the finance company should work with, the products and services to be offered and the aspects related to publicity and advertising.

In processing the market analysis, the investor must describe the data, trends, market structure, as well as the analysis on competition and potential clients in the local market.

The competition analysis must mention the main competitors, and how the investor foresees the market dispute. Additionally, the analysis must take into account the intended market share, the investor's competitive positioning, the competitors' strategy, the strengths and shortcomings, and a description of the legal, operational and market issues for the intended institution.

As to clients, there must be a description of the target clients, along with a definition of the social-economic profile and segmentation criteria.

The pricing strategies must factor in the spread, the fees and the taxation on financial products and services, the estimated sales by product and services (quantity and average value) must also be detailed, further to the presentation of the main products and services offered.

The service network and its capacity must be described (call and service centers, internet brokerage) as well as their suitability to the offered products.

The market plan must finally encompass the publicity and advertising strategies, such as communications, promotions and the brand and institutional strategy.

5. Operating plan

The operating plan must describe and quantify the investor's operational activities, as well as mention:

  1. the future company's organizational chart, employees assigned to each department and distribution channel, as well as a definition of the duties attributed to the different layers of the institution;
  2. the aspects related to operational outsourcing, human resources, process technologies, products and controls, physical structure (physical facilities and equipment) and other investments;
  3. the description of the sales team, its size, support hardware, segmentation, professionals' profile, service procedures, collection processes and default credit policy.

6. Human resources plan

In this section the project description must introduce the management policies and the corporate culture. It must contemplate:

  1. the training policy,
  2. the performance evaluation methods,
  3. the compensation policy (salaries, fixed and variable amounts, average charges, among others),
  4. the hiring, training and termination expenses (when applicable), as well as
  5. how the finance company will address the main aspects of the labor and social security regulation.

7. Risk management plan

The risk management plan must contemplate the following items:

Control environment encompassing the risk control and management structure (areas, personnel and systems used), the formalization of the internal control procedures, and conformity of the risk profile to the institution's strategic goals.

Risk Identification and Measurement describing the tools and procedures to measure, control and minimize the risks intrinsic to the business (credit, market, liquidity, operational, and legal risks).

8. Economic-financial feasibility analysis (financial plan).

The financial plan is of paramount importance for the economic-financial evaluation of the project.

The analysis must include the forecast prepared in electronic spreadsheets, covering at least the projected first 5 years of the company's activities, the cash flow, accounting statements (balance sheet and income statement) and main operating limits used by the Central Bank, namely: minimum capital, reference net worth, risk diversification and lock-in rate.

The financial company's capital structure must mention the financing sources and the expected financial funding costs.

The cash flow, including forecast inflows, outflows, investments, taxes and shareholder's remuneration must be consistent with the premises and the aspects described in the market, operating and human resources plans.

The strategy evaluation must use the most suitable performance and profitability evaluation indexes depending on the proposed financial plan, such as: net present value (VPL), internal rate of return (TIR), return on equity (ROE), etc. Furthermore, it is necessary to present the analysis on the sensitivity to specific factors in diverse scenarios (realistic, conservative and optimistic). In other words, the Central Bank expects that the three scenarios be included in the financial projections.

There is no specific rigid project model under any strict standard for the drafting of documents concerning the constitution project, as outlined above. Therefore, it is left up to the investor to prepare the project description in a form deemed the most adequate, pursuant to the nature and size of the intended institution, provided that it encompasses all such required aspects.

In processing the analysis of the enterprise project, the Central Bank will verify whether the information submitted reflect sound principles and show a realistic risk evaluation pursuant to the economic and competitive conditions of the target market segment.

Finally, and equally important, the project must clearly indicate the national interest involved in the project investment, as this is key to obtain the Presidential Decree.

The initial measure, which must be taken at the time the project is ready to be submitted to the Central Bank, is for the investor to publish in Brazilian newspapers a certain communication informing its intent to set up or acquire a financial company in Brazil. The text of this communication must follow the Central Bank rules and the draft document must be previously approved by the Central Bank. Such publication will make the plan public.

The second phase initiates after the presidential authorization is granted and comprises the presentation of the document to incorporate the financial company and to elect its managers.


Eduardo Kiss is a partner at Demarest & Almeida's São Paulo office ( / phone: +55 11 3356.1631

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.