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When I last addressed you in September 2018, Barbados was about to enter an adjustment programme with the International Monetary Fund. This approach had become necessary because the public finances had deteriorated, resulting in a burgeoning of public sector debt, the international reserves had fallen to less than half of the desired 12 weeks of import cover and investor confidence was waning. These developments were acting as a drag on economic activity.
During the 17 months that have elapsed, there has been a significant improvement in the macroeconomic outlook. The public finances are much stronger, as government has made substantial progress towards achieving its targeted primary balance equivalent to 6 percent of GDP for FY (fiscal year) 2019/20. Major reforms of existing taxes, the introduction of new tax measures, increased service charges for some public enterprises and general expenditure restraint have contributed to this performance. The restructuring of the domestic and external debt has reduced the stock of public sector debt. Lower debt servicing costs and access to external funding from the international funding agencies, principally the IDB (Inter-American Development Bank) and the CDB (Caribbean Development Bank), have substantially eased domestic financing pressures.
The international reserves have been restored to levels well in excess of the 12-week minimum considered acceptable for safeguarding the fixed exchange rate. The reduction in external debt service payments together with the catalytic role of the IMF in helping to unlock new external funding has been important in this regard. Equally crucial is that the stabilisation of exchange rate expectations has also helped to increase the availability of foreign exchange. These developments have all contributed to the recent upgrade in the sovereign credit rating.
These positive gains notwithstanding, challenges remain. Economic activity has remained subdued due to low levels of investment, caused in part by deficiencies in the doing business framework and the lack of fiscal space to accelerate public sector infrastructural development. Weak private consumption has affected the corporate sector, including small and medium size enterprises. Financial institutions, whose profitability has been impacted by increased provisions against bad debt in recent years and by the 2018 domestic debt restructuring, remain cautious and selective in their lending.
As we enter 2020, the prospects for a modest economic recovery are more favourable than in 2019. The Bank’s most recent forecast is for growth within the range of 1.25 percent to 1.75 percent, a more optimistic outlook than that of the international financial institutions which also envisage growth for the economy. External factors, principally related to the strength of the underlying demand for tourism services, the impact of ever-present global risk factors and the speed with which the myriad foreign-funded private sector investments in the pipeline start, will determine how strong the impetus for renewed growth in the current year will be.
Now that we have been able to stabilise the economy, the next challenge is not simply to achieve growth in 2020 but to sustain and accelerate that growth over the medium term. Herein lies a critical role for the financial sector, for as the economic recovery gathers momentum, we will be challenged to ensure that growth is both sustainable and inclusive, benefitting everyone.
It is my belief that the sector has the capacity to undertake this role. For example, despite the accounting losses resulting from the debt restructuring, the banking sector remains well capitalised and is awash with excess liquidity. This provides the opportunity for our banks to support emerging firms and industries which can help to diversify economic activity and aid in enhancing competitiveness of traditional sectors.
One such sector is that of renewable energy. Barbados has set for itself the ambitious target of eliminating the use of fossil fuels by 2030, an objective that is designed to protect the environment and reduce expenditure on fuel imports. Achieving this goal clearly requires a clear policy framework together with appropriate private sector engagement. The corporate sector will need capital to grow, expand, and innovate and, given the upfront investment costs, households will also need financing.
The financial sector also has the opportunity to help drive innovation and improved productivity and efficiency. The payments landscape is changing rapidly as more transactions are being done electronically. The Central Bank will in the coming months extend access to the credit unions to the ACH (Automated Clearing House) so that they can do direct debits more efficiently. The demand for mobile payments is increasing and new players want to enter the payments arena. While the Bank is working on the legislative framework to guide these developments, interoperability of systems will be necessary to maximise efficiency and encourage greater financial inclusion.
Financial inclusion, or access to financial services so that persons are able to save, to borrow, to invest, to obtain insurance etc. is a central tenet in several of the United Nation’s Sustainable Development Goals, including those related to poverty eradication, ending hunger, empowering females and reducing inequality. Globally, the concern about inadequate inclusion is reflected in the World Bank estimates at 2017 of 1.7 billion people worldwide being unbanked. That is more than 20 percent of the world’s population.
In Barbados, the picture has been much brighter. Access to banking services at commercial banks and credit unions are widespread, ATM services are within easy reach and the availability of alternative payments instruments is serving to diversify the payments landscape. A recent report by the IDB on financial inclusion in Barbados cites the 2016-2017 Barbados Survey of Living Conditions, which found that almost 100 percent of the people surveyed had either a savings or chequing account.
But we cannot afford to take it for granted. There are some very real risks to financial inclusion and I will touch on three of them this morning.
Inclusive growth requires that our SMEs (small and medium enterprises) are able to access the credit they need to grow. This has been a perennial complaint, often in part because of inadequate collateral and/or an inappropriate mix of debt and equity. And this despite the emergence of new channels such as peer to peer lending.
I am hopeful that the imminent passage of credit reporting legislation which will provide for the sharing of information about loan applicants’ credit history will allow financial institutions to more accurately assess the risk of lending and to set rates accordingly. This should mean that individuals and businesses with good track records will be able to obtain credit on more favourable terms. Applicants who might have been otherwise assumed to be high risk by lenders should now have a better chance of being approved.
Increased access to credit should help to support innovation which is needed to transform what and how we produce goods and services. Shifts in technology have become increasingly important across the globe and so we must create an environment where innovative ideas are allowed to thrive. I am reminded of the presentation last October by the Kenyan Central Bank Governor, Dr. Patrick Njoroge in which he, shared with us how Mpesa, a mobile money service, has massively increased financial inclusion in his country. He mentioned seeing members of the Masai tribe on the plains with both spear and smartphone in hand to illustrate how leveraging mobile technology can give people in remote areas access to financial services.
While the Barbadian situation is quite different from Kenya’s, his comments reinforce not only the need to integrate technology in the provision of financial services but demonstrate how embracing technology can help innovation. This underscores the role that access to finance can play in our development.
Financial inclusion relates not only to those seeking to borrow but also to those who want to open deposit accounts. We all know that local financial institutions must comply with the international Anti-Money-Laundering and Combatting the Financing of Terrorism (AML/CFT) Standards which require financial institutions to conduct due diligence on their current and potential customers. Over time, the requirements have become more stringent and the costs of non-compliance more severe. Some financial institutions, faced with the ever-present risk of loss of correspondent banking relationships, have chosen to de-risk some of their customers.
De-risking as a single incident would be troubling. At a systemic level, it could be dire not only for individuals but also for the economy.
For the self-employed like taxi drivers, hair braiders, and dressmakers, there is often no job letter.
Picture the recent school leaver who has just gotten his first job. He lives at home, so he has no bills in his name, he has never travelled and has no passport, and he has no driver’s licence.
Legitimate prospective customers must be able to access the financial system, and existing legitimate account holders must be able to continue to obtain the financing they will need to expand their businesses.
The irony of the situations cited is that maintaining many of these customers is not incompatible with the standards. The intent of AML/CFT regulations is to prevent bad actors from using the financial system to cleanse their ill-gotten gains. This does not mean that legitimate accounts should be closed where documentation to verify client identity may not be readily available. Indeed, the international standards allow for an approach to customer due diligence based on risk.
The AML/CFT standard setting body, the Financial Action Task Force (FATF) has itself committed to financial inclusion i.e. the application of measures that enable more individuals and businesses, especially low-income, unserved and underserved groups, to access and use regulated financial services. The FATF guidance on financial inclusion recognises that the unserved and underserved have to be financially active and that they may be forced to conduct their transactions through unregulated channels when they lack access to formal financial services.
Locally, our regulators, in keeping with the international standards, encourage entities to engage in a risk-based approach to AML/CFT and to have documented policies and procedures, which clearly articulate their AML/CFT frameworks. The AML/CFT Guideline does require financial institutions to Know Their Customers, but it also recognises that all customers do not present the same ML/FT (money-laundering/financing of terrorism) risk, and that all customers do not have access to some of the traditional KYC documentation. Financial institutions therefore have scope to determine what alternate identity documentation to accept and verification to employ. Financial institutions need therefore to establish a reasonable risk-based approach to on-boarding and maintaining customers, which includes dealing with exceptions, and to demonstrate to us, through proper documentation, how the international standards have been applied.
Compliance with AML/CFT guidelines must not mean that ordinary Barbadians should be deprived of the ability to open or retain a bank account.
Alternate identity may include:
A third concern for financial inclusion is the impact of rising bank fees on customer behaviour. Historically, banks generated most of their income from the differential between interest income and interest expenses. In recent years, this business model has shifted across the Caribbean and wider afield. Rationales often offered include the high regulatory cost of compliance and the need to recover costs associated with investment in technology. In addition, some charges are predicated on moving customers away from non-electronic modes of banking.
Barbadians have not traditionally been avid investors. Instead most persons opted to place their money in savings accounts and let it earn interest. Now accountholders are confronted with charges associated with maintaining an account: ATM fees, teller fees, minimum balance fees, paper statement fees, large value withdrawal fees, and monthly service charges, to name a few. These fees, in the current low interest rate environment create the risk that some persons may be charged more for maintaining an account than they are earning from it.
We could then be faced with a situation where persons withdraw from the financial system either because they literally cannot afford to have a bank account, or because they are not willing, as I have heard said, to “pay banks to keep their money.”
In 2008, the Bank issued guidance to the sector on certain charges in recognition that it is difficult to control all of the charges instituted by these institutions. The industry is largely compliant with these requirements but new charges have arisen, an inherent weakness in trying to maintain price controls. Mindful of the risks, we believe that we must, at a minimum, seek to safeguard the interests of small account holders and are looking at precedents set in other Commonwealth countries for addressing this precise problem. We expect to update our guidance to industry shortly. In addition, it is our intention to publish on our website key fees and charges of the respective institutions as is done in several of our regional counterparts as customers need to be aware of their options when conducting transactions.
We need to increase financial literacy as part of the thrust towards increased financial inclusion. Very often, we assume that everyone understands the basics of budgeting, saving, and investing, but this is not always the case. There are some, like the school leaver I alluded to earlier, who are frustrated by account opening requirements; or others dissatisfied with the low interest rates and high fees all of whom decide to return to the old days and keep their money in a tot. We need our citizens to understand why that is not a wise option. We need them to understand the benefits offered by financial inclusion.
The Bank is about to embark on a financial literacy campaign, in partnership with the Financial Services Commission and others, which will focus on doing just that. I invite you to also contribute to the effort. Use your position to educate the public about the importance of being connected to the financial system and ensure that reasonable measures are applied to entry requirements as well as ongoing due diligence.
Having a high level of financial inclusion is key to individual and national development. We can presently boast a level that is higher than the global average and we must preserve this accomplishment. Together, let us therefore act to ensure that no one is excluded from Barbados’ financial system.
I thank you.