Effects of de-risking limit Caribbean’s access to finance

Effects of de-risking limit Caribbean’s access to finance

  • Caribbean financial systems have experienced more damage to correspondent banking relationships (CBRs) than has been the case in other regions, owing to the fallout from the international fight against financial crime.
  • About 40% of correspondent banks have withdrawn from the Caribbean over the past 15 years, which has reduced the region’s access to international finance and credit, and has restricted cross‑border payments including remittances.
  • Unregulated, less transparent financial channels have taken the place of the correspondent banks, undermining the aims of tighter regulations.
  • Without reforms, businesses and individuals will continue to face higher transaction costs and burdensome requirements to participate in the formal financial system, weighing on the business environment.

CBRs facilitate financial transactions including international wire transfers, cheque clearing, trade finance, foreign investment and remittances. In the past 15 years many correspondent banks, which are located in advanced economies, have withdrawn their services from the Caribbean, owing to concerns about the financial and reputational costs that arise from doing business in countries that international bodies, such as the Financial Action Task Force (an anti-money laundering and financial terrorism watchdog), deem high risk. Profitability considerations have also played a role in these withdrawals.

Worst-affected region

According to the World Bank, the Caribbean is the region that has been worst affected by de-risking globally. Based on data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the Atlantic Council (a US think-tank) found that Belize, St. Vincent and the Grenadines, Dominica, the Bahamas and Jamaica had each lost more than 40% of their CBRs in 2011-20. Belize was among the hardest hit, with the Caribbean Association of Banks reporting that the loss during that period affected more than half of the local banking system’s total assets.

Lower global competitiveness

As small, open economies, Caribbean nations are heavily dependent on foreign investment, export earnings and remittances, and are therefore highly reliant on CBRs to move these funds. Given that the gaps left by CBRs have not been closed, businesses now face longer transaction times to complete cross‑border business. The costs of transactions are also higher, partly because banks have passed higher compliance costs on to their customers. More broadly, Caribbean governments have argued that this has made the region less competitive in attracting foreign investment.

Effects of de-risking limit Caribbean’s access to financeEffects of de-risking limit Caribbean’s access to finance

Financial exclusion

Regional leaders view correspondent banking as a public good—affecting businesses, individuals and the overall economy. Arguably, the loss of CBRs has contributed to low levels of financial inclusion, which is estimated at about 60% in the region. This is because banks in some Caribbean countries, like Barbados, have gone even further than global watchdogs in imposing stringent standards for customers to open and maintain bank accounts. This overcompliance—in a bid to prevent further loss of international banking relationships—has placed more individuals at risk of financial exclusion.

Technology to the rescue?

Innovative uses of technology to reduce cost, increase speed and enhance transparency of cross‑border transactions are among potential solutions. In this vein, blockchain has been considered as an alternative channel for banks to address de-risking concerns. Although still unexplored, blockchain could improve the surveillance of transactions, which would enable better detection of illicit financial transactions and thereby decrease risk and compliance costs. Nonetheless, technological solutions come with additional considerations, given that some countries in the region, such as Trinidad and Tobago, have been the target of cyber-attacks, pointing to the need for more robust cyber-defence frameworks and systems to facilitate technological solutions for the problem of de‑risking.

More of the same

Overall, EIU is sceptical that there will be substantial technological progress in the short term to reverse the effects of de-risking. Consequently, banking customers will continue to face longer transaction times and higher costs for conducting cross‑border business.

The analysis and forecasts featured in this video can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.