The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian international banking sector is still contracting because the “retreat” of European assets is “outpacing” new growth from Latin America, the Central Bank’s governor has affirmed.

John Rolle, in written replies to Tribune Business questions, acknowledged that the financial services industry has yet to regain momentum following two decades of scrutiny and regulatory pressures imposed by major world powers and fora such as the Organisation for Economic Co-Operation and Development (OECD) that act on their behalf.

“In the international sector, there has been continued reduction in the size of the aggregate balance sheet for multiple reasons but, chiefly, the reduction in business from Europe,” he said. “This retreat is still outpacing new areas of business growth from Latin America.

“In responding to the industry’s needs, the Central Bank has worked with industry and government to help introduce new regulated products such as private trust companies (PTCs) [and] executive entities, which allow financial institutions to use additional regulated vehicles to serve their client needs. The use of these vehicles has increased over the last decade.

“The retreat of the European business summarises the sector’s response to heightened scrutiny that international financial centres like The Bahamas have faced over at least two straight decades around anti-money laundering and tax transparency standards,” Mr Rolle continued.

“In this regard, the Central Bank and other regulators continue to work to improve the jurisdiction’s anti-money laundering profile through national efforts to secure peer assessments that validate the effective and compliant standing of The Bahamas against the rest of the world. This aids banks and trust companies in maintaining solid correspondent banking relations, which are essential to the viability of their business models.

“We have also improved direct outreach to correspondent banks to ensure more accurate assessments of anti-money laundering risk management practices. Also, we have began a highly successful annual anti-money laundering research conference that is leading to more objective scrutiny of the effectiveness of the international approaches to anti-money laundering and financial crimes deterrence.”

Data unveiled by the Central Bank in a February 2023 industry briefing reveals that the total number of Bahamas-domiciled banks and trust companies fell by 18, or 8.1 percent, from 221 to 203 over the four-year period between 2019 and 2022. Banks, and banks and trust companies, both declined by three over that period, while trust providers fell by 12 - from 147 to 135. Private trust companies, meanwhile, expanded from 142 to 155.

Total bank and trust industry assets stood at $138.926bn at year-end 2022, with fiduciary assets (those belonging to clients) hitting $277.336bn. Collectively, total assets in the sector’s safekeeping stood at $416.262bn.

“There are 20 banks and trust companies that offer services in the domestic market,” Mr Rolle said. “In that total, ten have commercial banking licences and ten have bank and trust licences, which allow them to provide foreign currency trust and investment services to residents, but with a more substantial focus on international banking clients and with a majority of their trust clients being international.

“Another 55 public banks and trust companies have unrestricted licences to operate in the international sector, and the Central Bank licenses 127 restricted and non-active banks and trust companies, whose business activities are restricted to the areas specified within their licences, and which are for the most part managed by 55 public banks and trust companies mentioned earlier.

“Domestic banks and trust companies have total assets of $20bn - roughly $11.4bn onshore in The Bahamas, and the rest attributed to international business. For international banks and trust companies the size of the assets base was approximately $118bn at the end of 2022.”

Turning to the domestic market, Mr Rolle said the Central Bank is in the initial stages of developing a regulatory framework for so-called “agency banking” which would deepen financial inclusion by allowing licensed, regulated third parties to provide services on behalf of banks in far-flung Family Island communities.

“The Central Bank is currently in the early stages of developing a regulatory framework for agency banking as part of its financial inclusion strategies. Absent the overarching regulatory framework, some agency arrangements already exist in The Bahamas in very limited ways through outsourcing arrangements,” Mr Rolle explained.

“Currently, an agreement is in place between one of the money transmission service providers that provides cash handling servicing support to one of commercial banks on the Family Islands. The final evolved outcomes for The Bahamas, though, are expected to be more complex this.

“The introduction of agency banking would be a vital addition to the regulatory framework as it would allow for certain banking services to be offered more efficiently within communities that do not, or no longer, have traditional brick and mortar outlets. Agency models would be expected to eliminate many if not all of the reasons that individuals still have to travel to the capital to do banking (including deposits and withdrawals),” the Governor continued.

“As well, agents should make it easier for banks to take on new customers who live in the Family Islands. Currently, we have a model in the money services space where money transmission businesses can apply to money transmission agents throughout The Bahamas.

“Agents tend to be medium to micro-size businesses. A model for banking services has not been defined yet, but it is likely to draw on templates already in use in countries in the Caribbean and elsewhere. It could resemble the money transmission business framework depending on the amount of direct regulatory interaction that Central Bank is required to have with agents. In addition, we expect some agency models could leverage Fintech (financial technology) and be very digital in nature.”

Regulatory reforms are also planned for credit unions. “There will soon be extensive public consultation around the proposed reforms to the Credit Union Act,” Mr Rolle said. “These changes have a strong governance enhancing impact, particularly around the election of the Boards of credit unions.

“This process would be better aligned with the regulatory scrutiny that is applied for other Central Bank supervised entities. In addition, the Central Bank’s powers would be enhanced, similar to the case for other regulated entities, so that during times of severe stress there could be swifter and more effective intervention to stabilise such co-operatives.

The Governor added: “There is also a strong financial stability focus to improving the credit union framework, as they are members of the Deposit Insurance Corporation. In this regard, The Bahamian crisis management framework has to extend fully to the credit union sector, and the legal framework has to be consistent with this objective.

“Overall the reforms would help to strengthen outlook for the credit union sector, and provide greater transparency around their operations, enhance resourcing prospects for the Boards, and give added financial safety to the shareholders and depositors of the co-operatives.”