Castries, Saint Lucia Wednesday, September 30th 2020: As part of its series of activities in promotion of financial literacy and financial inclusion, the Caribbean Association of Banks (CAB) Inc. sat with economist Jeremy Stephen to discuss how banks have been affected by the COVID-19 pandemic, how institutions across the region have responded, and what sort of changes the current crisis will eventuate.

Q. Generally speaking, how has the pandemic impacted banks within the region?

It has really placed all the banks in the region in a very terrible position, in my view. They’ve managed the fallout from the pandemic quite admirably. But when you think about what banks are heavily dependent on, they would tell you right away that anyone in their position would be very concerned if they were met with the financial conditions of governments not being able to pay off their debts, and that’s a major issue in the OECS, since there’s a little more active of a bond market.

You would have had major industries like tourism, which normally amount for, across the Caribbean, the majority of interest receipts that any bank would make. And tourism is a major casualty of the pandemic. And then, of course, issues pertaining to unemployment. On top of that, the banks offer a moratorium – a very good defensive strategy, one that keeps asset wealth at least, or at least the value of their assets consistent. But it does hamper the profitability of the bank for the period, because the bank still would have expenses to maintain. The banks would not have been taking a moratorium on paying people their own interest, but rather taking a moratorium on loans that they would have given out.

So pretty much the moratorium would just have conflated or worsened the situation that the banks found themselves in because of the pandemic and also because of the weakening financial system that we have in the Caribbean. And we’ve had at least the preceding 10 to 12 years of very flagging economic activity throughout the region, with the exception of Jamaica and, on the latter half, Guyana. So the pandemic has really placed these banks in a very precarious position. 

Q. We’ve seen reports out of the Bahamas that banks had written off an estimated $31.4 million in delinquent loans in the second quarter alone. Which, in and of itself, does not measure the true impact of the pandemic on the sector. But do you see loan portfolios across the Caribbean following a similar fate?

To be honest, I see it to be worse. You see, in the Bahamas, the situation is very much hinged on two factors. To my mind, heavily concentrated dependency on two industries, finance and tourism, and also being near field to the United States of America and heavily dependent on such for their survival. So on top of the fact that they themselves are going through a worse wave than most of the region, with the exception of Jamaica, perhaps, and Trinidad are experiencing.

Trinidad, on the other hand, is the financial capital of the Caribbean, number one. Number two, their issues are also worsened by the fact that they themselves are experiencing a second wave, but also that oil prices are low. So one would expect that the economy there should persist, despite its own series of problems.

The Bahamas pretty much may recover on the back of a stronger US economy. But then the smaller islands are a little more singular, they have what I would consider a little more mono-industrial dependence. So, for instance, the economic strategy and political strategy in Barbados is “revive tourism and everything else will follow,” as opposed to using it to restructure, as well as, of course, trying to score some quick wins.

So pretty much we depend on are hopeful that within the next 18 months that the pandemic is dealt with, and that should lead to some positive turnaround in tourism. Saint Lucia and Antigua are banking on that strategy, Grenada somewhat, although agriculture is a significant player for them. St. Kitts is hoping for a return to investment and travel that’s linked to their CBI program. So for us in the smaller, more mono-industrial countries, my view is that we need to wait till the world returns, while Trinidad needs to wait until when OPEC decides they’re going to raise oil prices if they choose to follow that road. And Bahamas has to wait to the US catching its wings, and that may very well happen within a year or two.

Jamaica, meanwhile, has gone through a very strong period of government reform, which has helped them to stabilise somewhat during this crisis. It’s helped the government in a way to provide even more support, a stimulus in areas such as agriculture. They’ve done some good work in terms of repurposing excess supply because of the lack of tourism. They have had trouble earning foreign exchange of late, but would have managed the economy and the central bank would have managed their own monetary policies in such a way that they could persist for a much longer period than, say, Barbados.

So undoubtedly a lot of countries in the region may very well see the issues pertaining to the Bahamas and raised much further down the road in terms of write offs. 

Q. Do you think that that enough has been done to mitigate the impact and effects of the pandemic?

That’s a tough question to answer, because the financial services industry itself was highly vulnerable – with the exception of Jamaica, because of the fiscal reforms that they’ve made there, and Trinidad, because they’re just a hotbed of capital. As I said, they are too heavily dependent on one industry and pretty much subsidizing the others that have taken over the region, such as manufacturing and whatnot.

You know, we’ve just had too many structural issues for far too long. And as a result, that has led to a situation where we in the Caribbean just don’t have enough fiscal space or the banks have not had enough of a risk appetite even to act in a way that some people in society would think a bank should act. Some people think a bank should support government debt, regardless of what government is doing, all in the name of national development, without recognizing typically the banks are number one, risk-averse. Typically banks have fiduciary responsibilities to make the best use of their creditors’ funds, that being savers. Savers in theory can’t absorb as much risk for those funds as say someone investing in stocks, so they would have to act in a much more cautious manner than what is presented there for other investment opportunities.

So in the way that banks have been acting. It is number one, yes, people would say it could be linked to profitability, but I think somewhat it goes hand in hand with executing that fiduciary responsibility to savers first and then probably lenders second. Now, if the question is whether the bank should extend moratoriums or not, it doesn’t necessarily benefit savers long term to have moratoriums extended for much longer than is feasible, much longer than your duration analysis, risk analysis would allow you to. But logically, one would think that the ability for the commercial banks across the region to persist, to do much more, to offer more extended moratoriums is heavily hinged on the performance of our economies.

The banks themselves have had to write off on a yearly basis an increasing amount of business across our jurisdictions. And that has pretty much impaired their ability right now, as far as I’m concerned, to continually offer moratoriums. Those situations present a limit on what banks can do according to their own charters and operational procedures and risk management functions. 

Q. So what do you think banks can do to help spur economic activity and really minimize the adverse impact of the pandemic?

Honestly, some persons are going to call for banks to support some more small businesses or to lend more to small businesses and yes, I support that call. But look at the other side of the coin. I also believe that that would lead to an increasingly risky environment. What I was saying is, is that the banks shouldn’t necessarily reduce their appetite for loans just yet, but obviously be a little more sensitive not to what has worked, but what will work in terms of the types of loans that they are going to pursue going forward. And again, the information must lead you to your assumptions, but for me, it will be more so probably looking at businesses that were resilient and able to make money during a pandemic, and as time goes on, you probably look at those.

I would say, however, that what the banks are doing right now, given how banks usually operate, I cannot reasonably expect more from them. What I think is important, is that other entities who should have different risk profiles, should take a more active role in resuscitating our economies as opposed to banks themselves. So the banks could also join that lobby by making it a little more instructive for other businesses, other types of investors to take more risk at this point or to fill a gap, or they can actually provide the means to which they can find some of these ventures or lend credibility or support. Another thing the banks could do outside of loan activity is fully recognizing that e-commerce and m-commerce pretty much sustained small businesses and different types of businesses, medium-sized businesses as well, during the pandemic.

And one of the greatest impairments, sorry to use this word again, not in its accounting sense, to general economic development in the region has always come down to how expensive and how difficult it is to do an e-commerce transaction. Banks would typically argue that there’s no economies of scale. Pretty much if you look at each island, you just got a few hundred thousand people, bar Jamaica and Trinidad. Everybody else, people are either too far spread, or have small populations that are fairly condensed, and that doesn’t necessarily present good economics of scale opportunities for banks. So that’s the argument that’s always been made against e-commerce.

As technology, however, becomes cheaper and one would expect banks would bring what would be considered outside of the region legacy technology to bear, I would say that one of the ways that banks could be helpful and might not necessarily impede their profitability long term, it might even help them to manage risks a lot better on the loans side, is pushing for more e-commerce linked solutions going forward. E-commerce linked solutions allow more businesses to transact a wider cadre of audiences, it allows better intra-regional trade, it may be well easier for someone in Saint Lucia to buy fruit in Dominica as opposed to what’s going on right now, where it might take days or you actually have to send a more expensive wire and the transaction takes a longer time and there is a lot more failures to be experienced along the way.

Let me also say therefore that by offering or supporting more e-commerce and m-commerce solutions, it makes it easier for banks to effectively track incomes of smaller businesses, which may very well help those same small businesses long term when they are applying for capital, because you’ve got a better track record and you as a bank can say, well, there’s a larger percentage, for instance, of transactions that go through the e-commerce portal. I can see cash flows a lot better, and see where your peak periods are. I don’t need just some financial statement or accounting records that you may have fabricated. I have a better idea of what you’re really doing. So therefore, there’s less of a gap between what I think I know about your business and what you’re presenting to me. So I honestly think that’s the biggest transformation right now that the banks could make according to their own mandates, to be honest. 

Q. How critical is government support for banks going forward? As you said very early in the conversation, extending moratoriums can pose a problem for banks. How critical will credit support facilities be for them?

Credit support facilities are merely another form of fiscal policy or monetary policy, according to which branch of government is supporting it. It takes some of the risk we are concerned about off the hands of the bank, but it still achieves a similar function to say government deciding, we’re not going to offer a credit guarantee, but we are going to co-finance or, through the banks, make financing much easier to attain. Some governments across the region are providing loan guarantees or loans to businesses in tourism, that achieves the same function. But we have to be careful to look at real function, and not just form.

In other words, if you have a credit guarantee scheme or if the government itself is offering a loan, the end result remains the same, because at each step, nobody is assessing risk as best as they could. For me, coming out of this pandemic, if you’re not assessing risk much better, you’re just looking at a situation where you return to the original form, which is where we were before the pandemic, where banks weren’t lending simply because they couldn’t assess or whatever biases they may have on top of it, but simply because they couldn’t assess risk appropriately. And governments also did a bad job at doing so. And if you come out of the pandemic without having improved those systems, regardless of which form you take, it doesn’t matter. If you’re not improving the risk assessment phase of risk management coming out of this, any initiative you take will present more issues because the Caribbean itself has a longer period to go through of reforms before it grows again. 

Q. How would you say the pandemic has shaped the future of the region? And what really is the role of banks in building post-pandemic resilience?

Banks now need to be, for their own sake, smaller, less likely to take up more branches, probably becoming more of an electronic service. For me, ideally, if a bank is going to survive in the region, it has to be more technology-dependent in its delivery of services, even when it comes to higher-value clients, and less so human capital intensive. That’s pretty much where banks are going globally.

Banks have to use technology to better assess risk. They have to be more willing to utilise e-commerce and m-commerce as part of their risk management tools and also as a way to drive general economic growth and what we call in economics velocity of money, get money circulating much more quickly through an economy and also probably a little more willing to support initiatives by, say, small business associations across the region, the same credit guarantees that we spoke about, a little more willing to support those, but also allow them to utilise the data that the bank is collecting themselves, have been invested in the technology to better assess risk and to allow for better circulation of money.

Additionally, banks themselves should be more willing to educate coming out of the pandemic, allowing people to know, all right, you save with us, that’s fine. And I’m not trying to say impair the profitability, but if banks are going to be more dependent on transactional services as opposed to lending alone, so e-commerce and m-commerce, then what I’m about to say makes more sense. And this may take a very long time to achieve, but banks should be encouraging people not to save as much as we do in the region, but rather take more risks. Because, obviously, if you’re providing the services that allow for transactions in an economy, it allows you to not take on as much risk as you did by having as much cash as you did before and nowhere to put it or to invest it, because simply you don’t want to lose money. So if you’re passing on that risk back to your client, I would think it’s your responsibility to educate savers as well. So a major mandate has to be that banks not only support investing in other ventures, and probably riskier ventures, but also take on the mandate for teaching more.