DeLisle Worrell: An overview of the financial landscape in Barbados
Speech by Dr DeLisle Worrell, Governor of the Central Bank of Barbados, at the Domestic
Financial Institutions Conference, Bridgetown, 11 November 2014.
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Barbados has a sound and sophisticated financial system which provides an adequate range
and variety of financial services for businesses and households, but there are a few gaps still
to be filled. The main impact of the global recession on our financial system has been to
reduce profitability among commercial banks, and to arrest the growth of insurance business.
The financial landscape is changing largely because of changes in the way that large
companies manage their regional and international finance and payments arrangements. My
remarks this morning will address these 3 issues.
The main financial providers in Barbados are the banks- by far the largest segment,
insurance companies, credit unions and finance companies. Between them, they provide
adequately for the needs of households. Banks provide mortgages, short term consumer
credit and payments services. Many people hold savings with commercial banks, even
though savings bonds and credit union shares are more remunerative alternatives. Banks
also provide for the working capital needs of established businesses, and contribute to the
funding of projects for larger firms. All banks operating in Barbados are part of international
banks headquartered in Canada and Trinidad. They therefore have strong backing. Banks'
profitability has declined, but loan write-offs are only a tiny percentage of their credit and
have not contributed much to the fall in profitability.
Credit unions are the banks' competition. Because of their mutual ownership, they are able to
offer lower interest spreads than the banks, between what members earn on their shares,
and the interest they pay on borrowings. Credit unions currently offer most of the services
banks offer, and there are no barriers in principle to prevent those credit unions which qualify
from providing the remaining services in which they have expressed an interest.
Insurance and pension funds cover the remainder of the financial services most businesses
and households need. The insurance industry contracted with the exit of Clico, and there has
been little recovery since then. Insurance and pension funds look for investment that will
yield a good return over the long run, and they are therefore a potential source of funding for
capital formation. The weakness of this segment is the limits on the supply of long term
finance. What makes matters worse is a preference for investment in marketable securities
rather than equity participation in projects. In Barbados there is a scarcity of marketable
corporate instruments available for purchase and sale on an ongoing basis.
All in all, our financial system provides a range of services that pretty much satisfies the
needs of Barbadian households and large and well established businesses. However,
venture capital is in short supply, and the fixed investment needs of small and medium sized
enterprise continue to be a challenge for us. Our session this afternoon will explore this
conundrum.
Impact of the crisis
The global recession which is dated from the September 15 2008 Lehman bankruptcy, had
little effect on the Barbadian financial system, with the one important exception of Clico. As
might have been expected, the weakness of the Barbadian economy resulted in late and
incomplete debt service by some firms and households, but in the typical case a workout
arrangement was put in place. On the other hand, Government maintained its perfect service
record, both for domestic and foreign debt.
Changes in business finance
The most noticeable changes in financial transactions in recent times have been on the
foreign exchange market. The interbank market is now inactive, in contrast to the situation up
to a decade ago, when daily interbank transactions of a modest size were the norm. Large
customers of the banks have corporate treasuries which manage their transactions and
exposures in several currencies, matching exposures by currency so as to minimise net
exposure in foreign exchange, and reduce the transactions costs of currency conversion. We
have looked into this phenomenon at this conference in years past, and when we meet with
banks we invariably discuss how the market is evolving. Some businesses appear to have
achieved a degree of independence of their bankers, with respect to foreign currency
receipts and payments. In so far as this facilitates payment of imports out of private firms'
foreign earnings, there is no problem with that arrangement.
Our programme today includes an update on the financial system, a presentation on cyber
security, investment options for insurance companies, the view from the credit union sector,
a new look at banking subsidiaries, and a panel on equity finance. It is a varied menu, and
one that is certain to be instructive. We expect to have a productive day.