After two punishing years in the financial wilderness, Colombian banking has staged a dramatic recovery in 2025, slashing accumulated losses and driving a stock market rally. While 33% of financial entities reported accumulated losses a year ago, that figure has dropped to 15% today, returning to historical averages. However, the sector’s comeback closes the year facing another wall, a central bank that refuses to lower interest rates and a fiscal outlook clouded by rising public debt.
The recovery, experts say, has been fueled by a rebound in credit following 25 months of contraction and a sharp improvement in payment discipline, which allowed banks to cut provision expenses by over 30%.
Consequently, accumulated profits have surged to 9.6 trillion pesos (approximately US$2.5 billion), sparking a frenzy on the Colombian stock exchange. Banking stocks, which make up nearly 60% of the Colcap index, have driven a market rally exceeding 50% in 2025. Major players such as Grupo Aval and Grupo Cibest (Bancolombia) have seen their valuations soar by more than 70% in the past 12 months. “You can already see the light at the end of the tunnel,” Cesar Pabon, executive director of economic research at Corficolombiana, told El Pais.
Despite Colombian banking’s growth, the cost of living remains above the 3% target
Yet, the light at the end of the tunnel remains dimmed by a rigid monetary policy. On Friday afternoon, in its final meeting before Christmas, the Board of Directors of Banco de la Republica voted to keep the intervention rate unchanged at 9.25%, where it has stood since April.
Despite pressure from the administration of President Gustavo Petro, who has blamed high rates for stalling the economy, the independent bank authority cited sticky inflation as the primary reason for the hold. According to the central bank’s projections, the cost of living increase (CPI) is expected to close 2025 near 5.2%, virtually unchanged from the end of 2024 and well above the 3% target.
“The deceleration process was unfortunately cut short,” central bank Manager Leonardo Villar said, noting that while growth expectations align with the government’s 2.9% target, inflation remains stubborn.
The decision highlights a rift between the technical board and the executive branch. Finance Minister German Avila, who sits on the board, revealed he pushed for a 50-basis-point cut to “boost growth and productive credit,” but was outvoted.
Colombian banks hold one-sixth of the country’s TES treasury bonds
The interplay between the recovering banks and the cash-strapped government has created a phenomenon known in financial circles as “crowding out.” With public debt reaching a historic high of 65% of GDP, the government has been absorbing vast resources from the financial system to fund its spending.
Colombian banks now hold nearly one-sixth of the country’s TES treasury bonds, attracted by double-digit interest rates that often offer better returns than mortgage lending. This dynamic leaves a “smaller box” for private sector credit, as Marc Hofstetter, director of the Center for Studies on Economic Development at the Universidad de los Andes, explained.
“The government ends up absorbing many resources from the financial sector to finance its spending; that pressures a finite bag,” Hofstetter told El Pais. The fiscal picture remains precarious. While the Autonomous Rule of Law Committee (CARF) projects a fiscal deficit of 6.2% of GDP, Corficolombiana estimates it could be as high as 7.6%. This fiscal fragility recently led Fitch Ratings to downgrade Colombia’s sovereign debt to “junk” status, a move that also impacted the ratings of the newly formed DAVIbank, the result of the integration between Scotiabank Colpatria and Davivienda.
Colombia faces stark social challenges in 2026
Looming over 2026 is the government’s controversial proposal to force pension funds to repatriate investments. The administration has requested the return of approximately 125 trillion pesos (US$33 billion) currently invested abroad. Experts warn this could trigger an asset bubble and distort the local capital market.
Adding to the complexity of the 2026 economic landscape in Colombia is the impending decision on the minimum wage, which President Gustavo Petro must decree by Dec. 30 after negotiations between unions and business leaders collapsed without a deal. According to reporting by local media, the chasm between the 16% hike demanded by labor unions and the 7.2% offer from employers proved unbridgeable, leaving the executive branch to set the figure unilaterally, a scenario that has played out in nearly three-quarters of wage negotiations since 1997.
This decision serves as a critical variable for the banking sector’s environment in 2026. The minimum wage acts as an anchor for more than 70 indexed prices across the economy, including rents and fines. A significant increase threatens to reignite the very inflationary pressures the Banco de la Republica is struggling to contain.
If the wage decree drives inflation expectations higher, the central bank’s maneuvering room shrinks further, potentially forcing the monetary authority to pause or even reverse rate cuts in January, keeping credit expensive and putting the banking recovery at risk.
Meanwhile, Colombian banking faces the need to combat informal lending, known as “gota a gota.” Gabriel Santos, president of Colombia Fintech, argues that the current usury rate cap of 25.02% excludes high-risk borrowers from the formal system, driving them into the hands of illegal lenders who charge extortionate rates of up to 669%.
As 2026 approaches, the banking sector finds itself balancing its newfound profitability against a backdrop of monetary stagnation. With Fitch Ratings predicting a potential rate hike next year rather than a cut, the “comeback” faces its toughest test yet.