BrianFrancisThere is a long, interesting and well-established debate in the financial economics literature that speaks to the important question of the nexus between financial development and economic growth.

The empirical evidence, even in the case of Caribbean countries, is mixed. In some countries, financial development leads to economic growth. In others, economic growth drives financial development. And still in many, there is a feedback mechanism such that financial development fosters economic growth and vice versa.

While the relationship between financial development and economic growth may be new to some readers, what should not be new is the continuous changes that have been taking place within the financial systems both at home and abroad – changes that can have profound implications for banking in the region. For example, those of you who have been following recent news may have heard about CARICOM’s recent meeting of Heads of Governments in Belize and the discussions surrounding “correspondent banking”.

Ordinary banks’ clients may not be familiar with the technical term which refers to a web of network of banks whereby local banks are able to transfer funds to and from other countries. Think of correspondent banking like the Western Union of banks. A company in the Caribbean needs to send a wire transfer to pay for goods or services procured, say, in the United States. It sends an instruction to the local bank to transfer USD 10,000 to the supplier in Miami. Since our local currency is different from the United States’, it means the bank has to have an account in the US at another bank in order to transfer USD funds. The intermediary bank is known as the correspondent bank. It holds our local bank’s monies and transfers funds in and out of the system in the US.

In recent months, the banks in the US have been revisiting their relationships with the local banks here in the Caribbean. Belize has been most impacted with nearly all its local banks losing their relationships in the US.

This trend is going to increase and eventually spill over to all Caribbean islands and the financial implication is going to be absolutely devastating. The inability of our local banks to get funds to and from the US directly means any business which has to pay for goods such as supermarkets, manufacturing plants, hotels and, practically every importer, will face difficulty getting payments to them.

Our economies are dependent on money transfers which account for a huge portion of our GDP. Travel agencies and hotels’ sales departments which are mostly based in the US need to be able to transfer funds into the local system. Simply put, every aspect of life in our free-markets depends on this correspondent banking to function.

The fact that the leaders of our region recognised the issue is encouraging. A committee led by Antigua is planning to write and lobby US officials to reverse this “de-risking” strategy by the banks. It is rather surprising that a country which is in the midst of an ongoing dispute with the US in the WTO and is still recovering from its shameful Ponzi scheme by Sir Alan Stanford would take the lead in such sensitive and critical negotiations!

Missing in the various news reporting and official releases was an indication on the timeframe for this action. If the leaders of our region think time is on their hand it isn’t.

Most disappointing is to watch again the clan of bankers who cannot even group together and devise a strategy to fight this challenge. Believe it, this can very well be their last fight!

Indeed, the title of this article may very well lead some sceptics to think that the importance placed on this critical issue is an exaggeration but trust me, this is far from one. If the leaders of the banking sector along with all our political leaders do not mobilise and quickly, we are going to see major turmoil in our small and already decidedly defenceless economies.

If the 2008/2009 global economic and financial crisis was bad for our economies, the 2016 Caribbean Banking Armageddon will be devastating given the relationship between financial development and economic growth!

(Dr. Brian Francis, a former Permanent Secretary in the local Ministry of Finance, is currently a Senior Lecturer in the Department of Economics at the Cave Hill Campus in Barbados of the University of the West Indies)

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