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As with every segment of society, the major players in Barbados’ financial system were impacted by the COVID-19 pandemic. Despite the challenges it experienced, however, the financial sector remained stable. This is according to the 2020 Financial Stability Report, a joint publication by the Central Bank of Barbados and the Financial Services Commission.
So how was Barbados’ financial sector able to withstand the fallout from the pandemic?
First, it’s important to understand what the report means by stable. Carlon Walkes, Senior Economist at the Central Bank and head of its Financial Stability Unit explains:
“Stable means that it’s working well. The financial infrastructure is sound, such as the payments systems. Financial intermediation is running smoothly – that is, the flow of funds from savers to borrowers is working well.”
The major threat to financial institutions during COVID was what those in the sector call credit risk, or the possibility that borrowers would not be able to repay their loans. This was a concern because of the increase in unemployment caused by the pandemic. Indeed, the unemployment rate at the end of December 2020 was estimated to have risen to 13.6 percent from 8.9 percent the previous year.
A major increase in non-performing loans (NPLs), which are generally defined as loans that are more than 90 days in arrears, can impact not only a financial institution’s profitability, but also its stability.
During 2020, commercial banks, credit unions, and finance and trust companies all saw an increase in their NPL ratio, but the increase was not as significant as some may have expected because they were able to allow many of their clients to defer payment on loans through various moratoria programmes. Loans under moratoria were not considered to be NPLs.
That brings us back to the original question: how were local financial institutions able to weather the financial storm created by COVID?
Walkes offers an explanation:
“The first and most important factor that led to the system being able to sustain the shock of COVID-19 would be the liquidity in the system. It was well above the requirements. It was growing for commercial banks for quite some time. And as a result, institutions were able to finance the moratoria programmes as well as their day-to-day operations.”
By liquidity, Walkes means that financial institutions have “enough cash for depositors to access their deposits. There is enough cash [for financial institutions] to engage in investments if need be, and to sustain shocks such as COVID.” He revealed that liquidity has been high in the financial sector for many years, particularly at commercial banks. This is the result of a combination of an increase in deposits and a recent decline in loans being issued. “Barbadians have been saving and not borrowing as much.”
According to Walkes, another reason that the sector was able to remain stable was because of the quick transition to work-from-home arrangements. This allowed financial institutions to continue their operations almost seamlessly and in so doing reduced the disruption to the local financial system.
The news that Barbados’ financial sector, while challenged by COVID, remained stable in 2020, is reassuring. With the vast majority of Barbadians having savings or investments in local financial institutions – the Financial Stability Report reveals that the credit union movement alone has 222,000 members – we all want to know that, as Walkes said, we can continue to access our money should we need to.