Small section of regional population benefits from Caribbean financial system-IMF Working Paper

WASHINGTON, Mar 14, CMC – The International Monetary Fund (IMF) says while many Caribbean financial systems are relatively well developed for their size, the benefits are concentrated in a small part of the population.

In a Working Paper entitled “Financial Development and Inclusion in the Caribbean,” the authors Chuan Li and Joyce Cheng Wong wrote that despite the development, financial inclusion could be improved. They said that some countries have deep markets as a result of government debt while others have developed offshore financial centers with some positive, but limited, spillovers to domestic markets and smaller clients.

International Monetary Fund“Financial development could be improved. The financial development levels of The Bahamas, Barbados,

Jamaica, and Trinidad and Tobago remain in the mid-range of Latin America and the Caribbean (LAC),” they said, using Jamaica as a case study for the paper that takes stock of the current state of financial development and inclusion in the Caribbean region and, based on a quantitative general equilibrium model.

It also examines the potential trade-offs between growth, inequality, and financial stability.

They argued that there is scope for further financial development, but care should be taken to safeguard financial stability.

“Policies that may be pertinent for these countries include strengthening institutional and legal frameworks related to property rights and collateral registries, as well as improving the credibility of financial systems and deposit insurance, enhancing capital and liquidity buffers, and addressing balance sheet mismatches.”

They said that policies to support small medium enterprises (SMEs) are warranted and that key supporting measures include understanding the determinants of banks’ fees and charges, examining the existence of and eliminating predatory practices, and reviewing the adequacy of banking sector competition, including the framework for entry.

“As financial inclusion improves and more users enter the market, measures to reduce information costs (strong credit bureaus), efforts to reduce operational costs (using mobile networks and correspondent banking), and measures to improve the efficiency of courts and collateral recovery systems are necessary.”

The authors said that there is no silver bullet solution to easing financial constraints. There are trade-offs between growth, inequality, and financial stability and that all should be considered when policies are designed.

“For example, even though policies aimed at lowering collateral requirements (such as strengthening the legal framework for managing and seizing collateral, reducing the size of collateral requirements, and creating modern collateral registries) are mostly beneficial for growth, they may also lead to higher inequality as marginal benefits accrue to the top of the distribution.

“In contrast, policies aimed at reducing participation costs (for example, lowering documentation requirements and reducing red tape and the need for informal guarantors to access finance) could help reduce inequality but may not yield comparable growth benefits.”

They urge synergies from a multipronged approach, noting the joint loosening of multiple constraints is likely to yield larger returns -higher growth and lower inequality- than the sum of loosening several constraints sequentially.

“However, the transition to that final state may also entail temporary increases in inequality. Hence, tailored policies require a clear understanding of country-specific constraints, priorities, and timelines,” the wrote, adding that “significant care should also be taken to ensure that a strong framework for financial regulation and consumer protection is in place to safeguard the benefits of expanded financial inclusion without jeopardizing financial stability”.

The paper acknowledges that significant data gaps hamper analysis for most countries in the region with the authors noting that good data are key to understanding the met and unmet needs of the users of financial services, their socioeconomic and demographic characteristics, and how financial constraints affect them.

“As an immediate first step, the Caribbean could focus on the collection of demand-side data to help diagnose problems, identify constraints, design targeted policies, and then monitor their impact,” they said.

CMC/pr/ir/2018

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WASHINGTON, Mar 14, CMC – The International Monetary Fund (IMF) says while many Caribbean financial systems are relatively well developed for their size, the benefits are concentrated in a small part of the population.

In a Working Paper entitled “Financial Development and Inclusion in the Caribbean,” the authors Chuan Li and Joyce Cheng Wong wrote that despite the development, financial inclusion could be improved. They said that some countries have deep markets as a result of government debt while others have developed offshore financial centers with some positive, but limited, spillovers to domestic markets and smaller clients.

International Monetary Fund“Financial development could be improved. The financial development levels of The Bahamas, Barbados,

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Jamaica, and Trinidad and Tobago remain in the mid-range of Latin America and the Caribbean (LAC),” they said, using Jamaica as a case study for the paper that takes stock of the current state of financial development and inclusion in the Caribbean region and, based on a quantitative general equilibrium model.

It also examines the potential trade-offs between growth, inequality, and financial stability.

They argued that there is scope for further financial development, but care should be taken to safeguard financial stability.

“Policies that may be pertinent for these countries include strengthening institutional and legal frameworks related to property rights and collateral registries, as well as improving the credibility of financial systems and deposit insurance, enhancing capital and liquidity buffers, and addressing balance sheet mismatches.”

They said that policies to support small medium enterprises (SMEs) are warranted and that key supporting measures include understanding the determinants of banks’ fees and charges, examining the existence of and eliminating predatory practices, and reviewing the adequacy of banking sector competition, including the framework for entry.

“As financial inclusion improves and more users enter the market, measures to reduce information costs (strong credit bureaus), efforts to reduce operational costs (using mobile networks and correspondent banking), and measures to improve the efficiency of courts and collateral recovery systems are necessary.”

The authors said that there is no silver bullet solution to easing financial constraints. There are trade-offs between growth, inequality, and financial stability and that all should be considered when policies are designed.

“For example, even though policies aimed at lowering collateral requirements (such as strengthening the legal framework for managing and seizing collateral, reducing the size of collateral requirements, and creating modern collateral registries) are mostly beneficial for growth, they may also lead to higher inequality as marginal benefits accrue to the top of the distribution.

“In contrast, policies aimed at reducing participation costs (for example, lowering documentation requirements and reducing red tape and the need for informal guarantors to access finance) could help reduce inequality but may not yield comparable growth benefits.”

They urge synergies from a multipronged approach, noting the joint loosening of multiple constraints is likely to yield larger returns -higher growth and lower inequality- than the sum of loosening several constraints sequentially.

“However, the transition to that final state may also entail temporary increases in inequality. Hence, tailored policies require a clear understanding of country-specific constraints, priorities, and timelines,” the wrote, adding that “significant care should also be taken to ensure that a strong framework for financial regulation and consumer protection is in place to safeguard the benefits of expanded financial inclusion without jeopardizing financial stability”.

The paper acknowledges that significant data gaps hamper analysis for most countries in the region with the authors noting that good data are key to understanding the met and unmet needs of the users of financial services, their socioeconomic and demographic characteristics, and how financial constraints affect them.

“As an immediate first step, the Caribbean could focus on the collection of demand-side data to help diagnose problems, identify constraints, design targeted policies, and then monitor their impact,” they said.

CMC/pr/ir/2018