The Bahamas: A Financial System Case Study

I decided I would post this case study that I put together as my final paper for Professor Ilene Grabel’s Finance and Development class. We were given the chance to choose a country of our choice to assess, and of course, I chose The Bahamas. One of the nice things about many of my classes has been the opportunity to tailor my papers around my specific interests and that’s what I’ve done here. I haven’t included the bibliography since it’s enormously long, but if anyone is interested in the sources of this information, feel free to contact me. I figured that since I had taken the time to compile all of this data on The Bahamas (people don’t often take time to compile much data on The Bahamas…) I may as well share it for those who could benefit from it. For those of you with no interest in finance or development, who don’t know how you ended up here and have a fear of percentages…run away now!

I’m warning you in advance, this aint no romance novel. It’s pretty dry and straightforward, but for those of you who are thinking about coming to Korbel to study the GFTEI program it will give you a good idea of the kind of work you might do, and for those of you who may be interested in the Bahamian financial system, well here’s an overview for you. Any feedback welcomed. Please don’t reproduce this without my permission…thanks!

The Bahamas: A Financial System Case Study

The Bahamas is a developing country of 355,000 people with a GDP per capita of $22,431.[1] It forms a part of the Caribbean Community and its economy depends revolves primarily around two sectors: tourism and financial services. This case study will begin to assess the Bahamian financial system, according to its institutional characteristics, depth, access, efficiency, stability, opportunities and challenges.

Bank-based system

The Bahamian financial system consists of banks (private banks, and trust services), non-bank financial intermediaries (insurance companies), financial and corporate service providers and “other financial services”, including investment fund administration and investment advisory services. It is a primarily bank-based system, but with a significant degree of involvement by the government in both directing and allocating credit. There is also a stock market, established 12 years ago. Within this financial sector, commercial banks are the primary financial intermediaries. In 2008, 271 banks and trust companies were licensed to operate in The Bahamas, of which 20 institutions provided services to the domestic sector, including 8 commercial banks (Central Bank of The Bahamas, 2009). Of the eight different commercial banks, the three largest are Canadian (Beckett, 2011).

One may get a sense of the development of the financial sector when considering the overall significance of the financial services industry to the economy. The sector is estimated to contribute around 27% of GDP and represent around 22,000 jobs, or 13% of total employment, according to a 2007 report (Britton, Sacks,  2007). These alone generate around 15% of GDP and between 5 and 10% of total employment. The system is quite concentrated, with 89% of all financial assets owned by the top 5 banks in 2010, according to the Global Financial Development Index. This has been steadily increasing, from 63% in 1998.

In the years immediately prior to the financial crisis of 2008, and even during the first year of the crisis in the US, commercial banks in the Bahamas have benefitted from significant operational efficiency, seen in their high levels of profitability. Between 1995 and 2005 net interest margins average 1.09%, ranging from a low of 0.02% in 1995 to a high of 1.79% in 2000. Between 2006 and 2009, net interest margins averaged 3.11%, before falling to 1.06% in 2010. This coincided with an increase in loan loss provisions related to a growing segment of non-performing loans. By comparison, net interest margins in the US averaged 2.47% between 1995 and 2010, while in the Latin America and Caribbean region as a whole they averaged 3.76% during this time (GFDR, 2012).

The government has not appeared to take an active role in how banks operate – that is, there has been little evidence of “voice” in the bank/state relations. That was the case until the most recent crisis when the government stepped in to ask banks to work with mortgagees who had found themselves unable to make their loan repayments due to reduced income as a result of the economic recession that occurred following the financial crisis. The government offered to contribute by assisting with the payment of some part of the overdue amount. This program was not large, however, and the government came under some criticism from international credit rating agencies who viewed it as a “credit negative” proposal (McKenzie, September 2012). It has also been stated that 86% of all delinquent mortgagees have remained in their homes rather than being foreclosed on, and although this might be related to the fact that banks perceive it as counterproductive to foreclose in a down real estate market, this also suggests an element of “voice” in the system, as mortgagees are being given the opportunity to work out refinancing plans or to sell their homes rather than be foreclosed on (Todd, 2013).

The sector and those it serves have benefitted over the last decade from the implementation of a Payment System Modernisation Initiative (PSMI) coordinated by the Central Bank of the Bahamas in conjunction with the clearing banks. This resulted in payments being settled on a basis which conforms more closely to international best practices. The Central Bank, in conjunction with the clearing banks and the private sector, is said to be responding to customer demand by implementing further modernisations in 2013, suggesting some “voice” in the system.[2] These modernisations include implementing systems which would allow Bahamians to use their debit cards at any Automatic Teller Machine (ATM), rather than just those belonging to their particular bank, and enable users to go online and make payments to any account, at any bank (Hartnell, December 18, 2012).

The Stock Market

The Bahamas International Securities Exchange (BISX) was established in 2000 and is regulated by the Securities Commission of The Bahamas, a statutory regulatory agency. The Bahamas International Securities Exchange (BISX) currently has 27 company listings, with a total market capitalization of $2.78bn. Given the Bahamas’ 2011 GDP of (US)$7.78bn this provides a stock market capitalization to GDP ratio of 35.8%.[3]  The stock turnover ratio, however, for the 9 month period ending September 30, 2012, is a low 5.4%, indicating significant illiquidity.

In the most recent information available, the BISX was reported to have just 46 shareholders (Securities and Exchange Commission, 2011). These include individuals, retail institutions, banks, insurance companies, financial services providers, two of the Exchange’s Broker-Dealer Members and the Government of The Bahamas. As of 2011, the single largest shareholder is the Government of The Bahamas, which bought a 43% stake in the Exchange in 2006. This small shareholder base suggests the BISX is not significantly increasing savings options for the average Bahamian.

The majority of the institutions listed on the exchange are part-foreign-owned banks or industrial sector companies (Bahamas International Securities Exchange, 2012). It would appear those listed are among those who would also have the best chances of raising capital from within the bank-based system, suggesting that its contribution to diversifying and widening credit provision may be limited. In addition there were 19 mutual funds listed on the Exchange, with approximately US$300 million under management (Securities and Exchange Commission, 2011). The majority of the listings are equity issuances, while there are also 4 tranches of debt issued by a bank, Fidelity Bahamas.

The characteristics of the stock exchange have been evolving. Between 2007 and 2010 the market capitalization of the BISX decreased from a high of $3.98bn to $2.91 bn, although the number of listings increased from 19 to 23 (21%). Trading value and volume also increased significantly, from $28,255,458 in 2007 to $110,226,124 in 2010, an increase of 290%.  The listing requirements for equity are that the listing must be no less than $1million Bahamas dollars. For debt, a listing of a minimum value of $400,000 is required. Accounts must be prepared in accordance with International Financial Reporting Standards. Participants must publish and file unqualified audited annual financial statements annually (Securities and Exchange Commission, 2011).

BISX is now moving to take further steps to enhance confidence in the exchange. These efforts include moving to implement a Takeover Code that would ensure a certain level of protection for minority shareholders in the instance of an effort to engage in acquisitions or mergers of companies (Hartnell, 2012). Mergers and acquisitions of public companies have taken place fairly frequently in The Bahamas and this had led to a situation where minority shareholders had been “clearly abused.” In June 2012, the World Bank gave the Bahamas a 4.7 out of 10 for investor protection in its Doing Business report (Doing Business, 2012). BISX has also expressed interest recently in developing a “small market facility” (presumably for smaller firms) and a commercial paper market, suggesting it is hoping to expand BISX’s ability to assist with allocational efficiency (Adderley, 2013). BISX has sought and received recognition from the US Securities Exchange Commission as a Designated Offshore Securities Market and is now seeking such recognition from Brazil.

BISX Chief Executive Officer, Keith Davies, suggested this came about because BISX “made possible by the initiatives undertaken by BISX in the form of investments in our trading technology, as well as our investments in maintaining a regulatory regime that meets international standards.” Mr Davies noted however that BISX “still (has) much more work to do to take full advantage of the access and benefits this affords us to investors from the larger United States market.”

The role of development finance Institutions

While The Bahamas Development Bank was established in 1978 with a particular mandate to assist in this area, it has been acknowledged to have had little success. The BDB has a delinquency ratio of over 50% on its roughly $50 million loan portfolio. Recent news articles suggest the Government intends to wind-up the BDB, rolling its functions and that of the Bahamas Venture Capital Fund into a new Small and Medium Sized Enterprise Development Agency (SMEDA). This is in part due to a recognition that to date the failure to promote economic development through the BDB has been in large part due to a lack of overall business development support. As a successor to the BDB, the SMEDA is now being envisioned as a “one stop shop” in this regard (Hartnell, 2013).

There is also a government-run housing finance corporation, an agricultural and industrial finance corporation, and several other small funds designed to direct credit to particular ends. The Bahamas Mortgage Corporation is suffering from a non-performing loan ratio of 36%. Figures such as this and the BDB’s default rate make these institutions’ contributions to any form of financial efficiency questionable (McKenzie, 2012).

Currency regime   

The Bahamas operates a “soft” or “conventional pegged” exchange rate regime, along with a total of 22.6 per cent of all IMF members, as of 2012 (IMF Exchange Rate Report, 2012). This system, which anchors the Bahamian dollar to the US dollar on a one to one basis, has been in place for decades. Capital controls on the domestic sector are necessary to protect this fixed-exchange rate regime between the Bahamian dollar and the US dollar and the balance of payments.

This fixed regime, in conjunction with an informal dollarization of the economy, is logical when one considers The Bahamas’ proximity to the US and dependence on the spending of primarily US tourists and investors, as well as the small size of the economy which would leave it particularly vulnerable to speculation.[4] Capital controls require that all investments by non-Bahamians in the domestic economy be approved, and the resultant currency flows recorded. There are no restrictions on current account transactions (Central Bank of The Bahamas) and with regard to the capital account, there are not restrictions on liquidation of direct investment (IMF Exchange Rate Report, 2012: 71). This latter openness suggests the government’s willingness to concede this control to encourage the inward investment which successive governments have made such a focus of economic development efforts.

It is worth noting that the extent to which the domestic sector is not as subject to “exit” based financial flows due to exchange controls is said to have been reflected in the relative stability of the Bahamian banking system during the most recent financial crisis.[5] Despite having a large amount of liquidity, Bahamian commercial banks have not been able to simply invest those funds abroad and therefore their exposure to international toxic assets has been limited.[6] Similarly, individual Bahamians would have had limited international investments to be threatened during the crisis. A perceived downside is the inhibition of access to foreign capital by local entrepreneurs (McKenzie, 2009).

On the opposite side of the coin, there have been some arguments put forward that exchange controls have contributed to the level of non-performing loans and unofficial indebtedness in the economy by incentivizing sub-prime lending. In a recent news article it was claimed that “privately, several Bahamian commercial bankers have admitted….that so-called ‘sub-prime’ lending is ‘alive and well’ in this nation, with numerous individuals receiving credit who should not do so. A contributory factor to this is exchange controls, which restrict Bahamas-based lenders to this nation when it comes to seeking returns on their excess liquidity.” (Hartnell, February 18, 2013).

International Integration

Despite these controls, The Bahamas is relatively internationally-integrated. As the recipient of $840 million (US), the third largest quantity of FDI by GDP in the Latin American and Caribbean region in 2011 (ECLAC, 2012), it has no shortage of investment for large-scale foreign-owned ventures. Foreign direct investment (FDI), is attracted and directed to a significant degree thanks to governmental incentives (Demeritte, 1998: 1).

With regard to participation in the Bahamas International Securities Exchange (BISX), participation is restricted. Due to exchange control requirements, foreign entities seeking to hold Bahamian Dollar denominated securities on the BISX are required to receive approval from the Exchange Control Department of the Central Bank of The Bahamas. This restricts ownership of BISX to those persons who are approved by the Exchange Control Department of the Central Bank of The Bahamas as well as by the Securities Commission of The Bahamas (Securities and Exchange Commission, 2011).

While primarily dependent on domestic credit, the Bahamian government has accessed an increasing amount of capital abroad, suggesting an increasing degree of international integration in the area of public financing. International debt issues to GDP doubled from 7.6% in 2007 to 16% of GDP in 2010, this followed a low of just 2.76% of debt comprising of international issues in 2000. [7] According to the Central Bank, disaggregated by creditor profile, the largest holders of foreign currency debt were private capital markets (36.7%), followed by other “miscellaneous” institutions (27.2%), commercial banks (20.9%), multilateral institutions (12.8%) and bilateral companies (2.5%). The average maturity of the outstanding debt was 15.7 years, with a dominant 97.2% in US Dollars, while Chinese Yuan and Euros accounted for the remaining 2.5% and 0.3%, respectively.” (Central Bank of the Bahamas, September 2012)

Remittance outflows averaged $108 million annually between 2000 and 2011, recovering to $125 million in 2011 or 1.6% of GDP (World Bank Migration and Remittances Database). This is higher than the worldwide average of 1.3% of GDP among the 149 countries for whom data is available. No data is available on remittance inflows.

As a middle-income developing country, The Bahamas receives minimal foreign aid except the occasional hurricane-related grant from the Inter-American Development Bank (IADB) with whom it also has a borrowing relationship focused on the provision of loans for systems modernization and large-scale public infrastructure projects.[8] With respect to domestic banks, significant foreign presence in the banking system has led it to be designated the most significantly exposed country outside of Europe in terms of “upstream exposure” to possible crisis in a creditor banking system, in this case – Canada’s (Cerutti, 2013 :15).

Of note is the fact that the Bahamian financial system could be considered a “dualised” system, as it is home to a fully internationally-integrated international financial sector. In 2008, as resources flowed out of US credit markets, assets of international banks and trust companies advanced by 24% to an estimated $503bn, dwarfing the country’s annual GDP of just under $8bn (Central Bank of the Bahamas, 2009: 34). This dualism of the economy also reflects some of the extent to which the financial system is both “exit” and “voice” based. In this internationally-integrated sector, banks are deemed “non-resident” and are differentiated from the domestic sector by not being subject to exchange controls that apply to the rest of the “resident” or domestic financial sector. They can operate freely in foreign currencies and as such are subject to the vicissitudes of international financial flows.[9] They also contribute little to the economy in comparison to their size and profitability and would appear to have no impact on domestic financial access or efficiency (Sacks, Britton, 2007).

Efficiency

With regard to allocational/operational/functional/informational and/or social efficiency, the Bahamas financial system has a mixed/unclear performance. As noted, based on the capitalization and constitution of the BISX, some large and often co-foreign owned firms have been able to obtain capital in this way. Historically large foreign direct investment inflows suggest foreign investors have not had an issue accessing credit abroad for investments in the Bahamas, which have been incentivized by government action. The existence of a public pension fund with assets totaling 21.6% of GDP (2008) which is mandated to invest only in domestic assets (primarily government registered stock) provides a vehicle for savings mobilization and domestic credit access. An unregulated private pension sector valued at 15.9% of GDP is estimated to invest primarily in domestic securities, while also making some portfolio investments (Deveaux, 2008:5, 7).

A significant question is to what extent the relative “depth” of the financial system corresponds to broad-based access across social-strata and industries. As a small economy it suffers from some data deficiencies which complicate this analytic effort. The Bahamas does not appear in the Global Findex (Financial Inclusion Database) and the World Bank’s most recent Global Financial Development Report Index also lacks data in critical areas, such as basic figures such as the percentage of adults borrowing from a financial institutions in the past year to total adults, or the percentage of adults saving at a financial institution to total adults.

Private credit to GDP overall stands at 82.2%[10] and there is significant credit being funneled into personal loans, which make up 72.5% of total loans outstanding to commercial banks in 2012. However, it is not clear who is accessing this personal credit.[11] What can be seen is that personal loans greatly outweigh any of the other categories, with the next largest recipient of credit being the construction sector, which represents just 5% of outstanding private sector credit.[12]

Of note is that the Inter-American Development Bank (IADB) recently approved a grant under the heading of “Providing microfinancial services through technology” to a Bahamas-based company, Transfer Solutions Providers Ltd (TSP), which aims to provide banking services to the low-income segment of the population.[13] The grant will fund research into how to rate the risk of the low-income segment of the Bahamas population. TSP aims to provide an “electronic wallet, accessible by a card, SMS and the internet”. In an interview conducted for the purposes of this report with the President of this company, Johnathan Rodgers, he said that studies undertaken by the company suggest that 60 to 65 per cent of people in The Bahamas are unbanked, while a further 10 to 15 per cent are underbanked. While this figure may seem surprisingly large, it is partly likely to be contributed to by the effect of illegal migration. Illegal migration to The Bahamas from Haiti is significant, and it is estimated that of the 355,000 total population of The Bahamas there may be as many as 50,000 to 70,000 undocumented Haitian migrants. Without formal legal status and related documentation, these individuals do not have access to financial services. Furthermore, their children, once they reach the age where they might want to open an account, also will not get access to financial services since they can only apply for citizenship at the age of 18 and this is not a definite path to citizenship. This high “unbanked” figure would also seem to be validated by the extent of inequality (the Gini coefficient) and unemployment for The Bahamas (noted elsewhere in this report).

The continued popularity of revolving credit associations (ROSCAs) in The Bahamas may be perceived as both a cultural feature in a country where 85% of the population is of African heritage, which contributes to “resilience, pride” and identity (Stoffle, 2009: 72). However, it may also be viewed as a potential signal of the proportion of this unbanked or underbanked population. To what extent people are relying on credit in light of a lack of other alternatives is an issue to be further explored.

In the Quarterly Economic Review of the Central Bank of the Bahamas for September 2012, it notes that 82.9% of the value of all deposits in the banking system are held in just 3.2% of accounts. “The largest number of deposits were held within the under $10,000 category (89.4%); however, these balances comprised the smallest proportion of the total value, at 6.2%. Accounts with deposits between $10,000 and 50,000 represented 7.0% of the number and 10.9% of the value, while those in excess of $50,000 were the least in number (3.6%) but held the highest value (82.9%),” it is stated.

In terms of the cost of capital – an indicator of access – there is a discrepancy which cannot be fully explained.  According to the GFDR, the Bahamas lending spread in 2011 was 1.8%, the lowest of all developing countries in the GFDR. The central bank, however, notes a weighted average lending rate of 11.18% coupled with a weighted average deposit rate of 1.93%, which would suggest a much higher lending spread of 9.25% (Central Bank of the Bahamas, September 2012). A higher rate would suggest lesser access for those on the lower-income end of the spectrum. It seems intuitive to imagine that a wider lending spread is likely in a situation where no credit bureau exists.

There is also a well-documented issue in terms of constraints to SME financing (Turnquest, 2012). However, again, there is a lack of solid empirical data in this area (the GFDR does not include data for the percentage of small firms with access to a line of credit for The Bahamas). The IADB’s choice of SME development as a focus area in its country strategy for 2010-2014 for the Bahamas and Government statements suggests this is recognized as a trouble spot in terms of financial provision. This may suggest some concerns in terms of the allocational efficiency of the financial system, since there is a significant demand for such credit and yet obstacles remain to it flowing to these areas.

Functional Efficiency

SME financing also relates to the functional efficiency of the financial system. There is certainly a case to be made that while capital is quite abundant for the development of large-scale real estate projects (primarily aimed at the foreign second home market) and for resort construction, it is capital in the area of Bahamian-owned SME financing which has the greatest potential to contribute to reducing the unemployment level in the long term and contributing to sustainable development. Furthermore, there are two issues that arguably affect the functional efficiency of FDI for large scale resort and real estate projects. For one, in order to attract this FDI the government has typically granted very generous concessions on taxation and in other areas, which may minimize their impact on economic development as a whole (Demeritte, 1998). There is a question whether this “loss in revenue is adequately compensated for by the employment and tourism gains” (Demeritte, 1998: 21). Second, these types of foreign-financed and owned projects typically see a large amount of leakage in terms of subsequent profits which leave the country, and do not create significant benefits within the economy except in terms of creating a large number of fairly low-skilled service-sector jobs.

While there are backward and forward linkages to suppliers from resort projects and real estate construction, this is typically concentrated within a relatively small segment of well-established firms. The ability for more firms to benefit is arguably held back by the lack of SME financing to create businesses that could harness some of the demand created by these projects for local benefit.

It is also worth recognizing that a significant portion of financing for loan term projects has come of late from institutions such as the Inter-American Development Bank.[14] For example, loans for a very large country-wide road network upgrade project. Other funding for road projects and the biggest resort project underway in The Bahamas at present, Baha Mar, has come from China at concessionary rates.

Informational Efficiency

In terms of informational efficiency, The Bahamas accounting profession complies with accounting standards, but generally uses cash-based accounting rather than accrual accounting. Since cash-based accounting is generally considered to be less reliable as a means of predicting future company performance and therefore as a basis upon which to make an investment decision in a company. It has been suggested by the Bahamas Institute of Chartered Accountants and outside bodies that the country needs to move to internationally recognized International Financial Reporting Standards (IFRS) and begin accounting using the accrual method if it is to be able to compete more successfully internationally (Adderley, 2012). However, it is to be noted that companies listing on the BISX are required to provide financial statements annually that are prepared in accordance with IFRS.

As far as lending to individuals is concerned, there is a major deficiency in terms of informational efficiency in this area as there is no credit bureau in the Bahamas, although there is an intention to set one up. The absence of such a bureau would exaggerate informational asymmetries in the financial system (Global Financial Development Report, 2013: chapter 5), possibly biasing lenders in their risk aversion to the exclusion of many potential borrowers with lower incomes and employment that is deemed less secure than those of government or large hotel employees. It would also reduce competition in the banking sector to the detriment of borrowers as there would be an incentive to seek credit from banks with whom you have an established relationship (GFDR, 2013). The lack of a credit bureau also factors into the stability of the system, and when combined with the level of financial depth seen, would seem to have an undeniable role to play in the high level of non-performing loans (NPLs) in both the mortgage and consumer loan segment at present.[15]

Rising NPLs have severely diminished bank’s operational efficiency[16] and led to tightened credit conditions. The International Monetary Fund has identified these above-regional-average NPLs as a “source of concern” in the system, despite high overall capital adequacy ratios (IMF, 2011). The IMF has warned the Bahamas to “strengthen its monitoring of credit risk” (Hartnell, February 13, 2013) and it seems that with the intention of establishing a credit bureau the country is headed in this direction.

With regard to lending to the government, significant information is available regarding public finances, based on reports provided by the Central Bank, and The Bahamas is also rated by several international credit ratings agencies. The public, the government and investors may also pay attention to the results of stress tests on local banks which the Central Bank has undertaken in recent years as an indicator of overall financial sector stability and a signal of which banks may be a better option when one is seeking to determine where to make deposits and so forth. The IMF has used the results of these tests to make statements about the overall soundness of the Bahamian financial sector of late, finding it to be quite stable despite a large number of non-performing loans. However, it is of relevance in this regard that credit unions are yet to be brought under the regulatory supervision of the Central Bank of the Bahamas, a point which has been noted by the IMF in its assessment of the stability of the Bahamas financial sector (Hartnell, 2013).

Social efficiency:

One of the only comprehensive surveys of poverty and inequality in the Bahamas, the Bahamas Living Conditions Survey of 2001, estimated a Gini coefficient of 0.57 for the Bahamas – as high as Brazil. However, it also noted that the Brazilian GINI is based on income distribution, which tends to be more unequal because of savings and seasonality, whilst the Bahamian figure is based on expenditures. This implies that true inequality is likely to be significantly higher in The Bahamas and thus probably the highest in the Caribbean (Handa, 2004: 14). This fact may be taken to signify a failing on the part of the financial sector to fulfill social objectives.

Factoring into this is the issue of land title and the possibility that a lack land reform is impeding access to collateral and hence, financial services. There is an antiquated system of land registration, which, along with a significant proportion of generational land of uncertain title, combines to limit people’s access to the land title that might provide them with the form of collateral needed to access credit (Hartnell, 2012). The process of “quieting” land title can be costly and time consuming, leading to the likelihood that only those with greater resources to begin with may benefit from the process, therefore increasing inequality.

There is also a recognized problem with structural unemployment. Between 1995 and 2008, unemployment averaged 9%, reaching as high as 11.5% in 1996 and as low as 6.9% in 2001 (Bahamas Department of Statistics). While the causes of this structural unemployment are myriad – with investment in education a key factor – it is possible that an analysis could be drawn that it may also indicate that the financial sector is not providing credit to the sectors which could create significant employment. This relates to the SME credit crunch which has certainly been identified as a problem within the economy. However, ironically, the financial sector provides some of the best paid jobs in the country – between 75% and 100% higher than the national average of B$24,000.

Challenges

Public finances as a whole remain a looming challenge (Hartnell, February 13, 2013).  Prior to the crisis, The Bahamas had established significant headroom, in the form of foreign reserves, upon which it has been able to draw down during the crisis (in lieu of undertaking the kind of active monetary policy that might otherwise take place if the fixed exchange rate regime was not in place). It now needs to rebuild these “macroeconomic buffers” (Hartnell, February 13, 2013). After years as one of the countries with the lowest debt to GDP ratios in the Caribbean The Bahamas is now joining the ranks of some of the more indebted countries, with public debt to GDP projected to increase from 44 per cent in 2008/2009 to 69 per cent by the end of 2015/2016 (IMF, 2011: 4). Of additional concern is that, between 2007 and 2012 the government increased its short term debt borrowings by just under 80 per cent, to $674m.[17] The most recent government has since announced plans to increase the government’s short term debt limit threefold from 20% of ordinary revenues to 60% (Hartnell, October 24, 2012).

Addressing this, according to the IMF, requires some medium-term growth strategies which are currently lacking. The Bahamas credit rating has been downgraded three times in as many years, and now standards at BAA1, with a “negative economic outlook”, according to ratings agency, Moodys (Hartnell, January 24, 2013). It is noteworthy, however, that The Bahamas is still accessing credit at reasonable interest rates and long-term maturities.[18]

While at present, with reduced demand for credit in the economy, there should not be too much concern about government financing requirements crowding out the private sector, as the economy recovers this may be a related issue. This aspect of the government seeking more credit domestically than abroad, as it has traditionally done, may be viewed as a double-edged sword.  As the Central Bank states in its Quarterly Economic Review for September 2012, “Government’s financing requirements…dominate commercial bank lending,” (Central Bank, 2012: 5).

While overall stability has been assessed by the IMF as satisfactory during a 2012 Financial Sector Stability Assessment (Hartnell, 2013), non-performing loans and the conditions which created them are a challenge. The creation of a credit bureau, which is forthcoming, should limit this problem in the future, and further contribute to the stability of the sector.

Functional Efficiency appears to be an area worthy of concern in the financial sector. Structural unemployment has remained high throughout the 1990s and 2000s, and inequality has also been identified as an issue, which suggests that investments are not necessarily being made in the sectors that contribute most to sustainable economic growth and development. This relates to the SME financing crunch, which is also in the process of being addressed via the revamping of the Bahamas Development Bank and creation of legislation specifically to benefit this sector.

Another potential challenge is the extent to which such financing for long term investment will continue to be available to The Bahamas in the future. The Bahamas relationship with China, from whom it has increased its borrowings in recent years, is a strong but politically-contingent one, and one which depends on uncertain Chinese foreign policy considerations. There is also discussion of pressure on the IADB to “graduate” countries including The Bahamas, Barbados and Trinidad and Tobago away from IADB concessionary loan eligibility (Best, 2012). This would diminish The Bahamas’ access to the type of loans it has typically used for long term productive investments at a time when the government is increasingly challenged by rising debt levels, worsening credit ratings and therefore increased cost of capital elsewhere. The Bahamas has argued before the UN that Washington-based international financial institutions have “rushed to graduate” many Caricom countries on the basis of per capita income, while “ignor(ing) the fact that many middle‐income countries have not yet fully developed the capacity and capabilities to independently resolve the challenges they face” as “small, open, vulnerable and highly indebted economies” (Bethel, 2012).

There are major challenges to the offshore sector in the form of demands for ever-increasing transparency and information sharing. As the Director of the Cariforum grouping, Ivan Lora, has argued, Caribbean countries, including The Bahamas “have essentially moved land and water to try and comply with the new rules and when they do so, the rules then change again and the costs are extremely burdensome. The cost for the Caribbean financial centres complying with international rules is ten times as the per cent of GDP as the cost of the larger rich countries complying with the rules they have set” (Richards, 2012). This has been seen most recently with the scramble to respond to the Foreign Account Tax Compliance Act (FATCA). This Act requires Bahamas-based financial institutions to enter into “contractual agreements with the US Treasury Department to identify and report all US persons, and their assets, otherwise a 30 per cent withholding tax will be imposed on all US-sourced income post-December 31, 2013” (Hartnell, October 5, 2012). This is just the latest in the string of regulatory demands being made from abroad on Bahamas-based offshore financial services providers, in particular since the financial crisis of 2008 when government revenues fell precipitously and governments looked for new sources of tax. However, such demands ultimately have little impact on the functional efficiency and access to credit within the Bahamas economy, given the somewhat segregated nature of this portion of the sector which primarily exists to serve foreigners. The primary concern would be in terms of the overall competitiveness of the economy and resources devoted to this response.

A related challenge for the sector is continued upgrading of regulation in response to the Basel III standards. In some respects, The Bahamas already exceeds these standards. As it has been noted, commercial banks are “well-capitalised with quality capital”, beyond Basel requirements. However, there are other areas where adjustments will need to be made and enhanced supervision will be required (Central Bank of the Bahamas, quarterly letter, 2012). The financial sector itself has noted a challenge in responding to the continually evolving demands of the international regulatory community (Bahamas Investor, 2012).

Clearly data availability is an issue which could be addressed to the benefit of the country. The fact that data on access to lines of credit by firms, accounts by individuals, and such other fundamental statistics are not filtering through to major entities such as the World Bank and its Global Financial Development Report Index suggests a need for improvement in this area if The Bahamas is going to be capable of benchmarking itself against other countries and identifying areas of weakness in its system. If one was thinking conspiratorially, the question arises whether there may be political motivations for why this basic data is not being made available to the general public when it is clearly easily accessible.


[1] 2011, Current US$. World Development Indicators database.

[2] Although one could argue that the fact these modernisations are only taking place now despite such high levels of bank profitability in prior years suggests a lack of voice in the system, and a possible negative impact of high bank concentration.

[3] This compares to 20.3% in Latin America and the Caribbean on the whole.

[4] Around 70% of tourists come from the US.

[5] The Bahamas banking sector has a stability Z-score 23.6%.

[6] The extent to which the US financial crisis and the subsequent downturn in The Bahamas has exposed other potential causes of instability/fragility in the system via an elevated non-performing loan rate, however, is an open question

[7] Global Financial Development Report database.

[8] See the IADB’s Country Strategy for the Bahamas, 2010-2014 for further details: http://www.iadb.org/en/countries/bahamas/country-strategy,1071.html

[9] As an Article VIII member of the International Monetary Fund, The Bahamas does not restrict current account transactions.

[10] Ibid.

[11] There is a known preference for government employees and employees of major hotels in lending.

[12] Given that the vast majority of consumer durables are imported, the predominance of this type of credit to overall economic development is highly debatable.

[14] The Bahamas has been “graduated” out of eligibility for concessionary loans from the World Bank due to its “middle income status”.

[15] Loans which are over 90 days overdue increased to 13.4% of all loans in 2012.

[16] The Central Bank of the Bahamas Quarterly Economic Review in September 2012 noted “sharp contractions in bank’s profitability” for this reason.

[18] See Bahamas Government Registered Stock, Central Bank of the Bahamas: http://www.centralbankbahamas.com/market_bgrs.php

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Posted on March 27, 2013, in Global Finance Trade and Economic Integration, International Finance, Josef Korbel School of International Studies, Masters and tagged , , , , , , , , . Bookmark the permalink. Leave a comment.

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