A recent study conducted by two Central Bank researchers indicates that the de-risking in the Caribbean has had a tangible impact on remittance flows and trade financing.
In their Central Bank working paper, Reshma Mahabir and Ashley Bobb articulated that in the Caribbean the increased global scrutiny of activities of financial firms resulted in correspondent banks withdrawing their services from several of the islands, increasing costs of conducting international transactions and the de-risking by domestic banks of segments where risks of money laundering were deemed to be high.
According to the Financial Action Task Force (FATF) de-risking is defined as “the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk in line with the FATF’s risk-based approach”.
Mahabir and Bobb noted that while the noise surrounding de-risking has diminished, in the last year its effects are still being felt. Simultaneously, the authors indicate, that new and unforeseen financial regulations by international bodies are being put forward and applied.
Mahabir and Bobb implied that those supervising the Caribbean financial sector constantly have to expedite or fast track their processes in order to catch up to or avoid or exit a “black” or “grey” list.
In the paper, the authors’ found an increase in the demand for Berne Union financing in the midst of de-risking. This means that foreign exporters were worried about receiving payments from their Caribbean partners, said Mahabir and Bobb.
Berne Union is an international insurance organization that provides parties with short-term export credits when they are concerned about being paid. According to the authors, trade financing facilitates international trade by providing a measure of security of payments between the importer and exporter.
For the Caribbean countries, Mahabir and Bobb indicated that this form of financing is very important, “as these economies have historically been described as highly open” and “are highly dependent on imported goods either for final consumption or as inputs into the production process.”
According to the authors, reduced availability of trade financing could mean that the ability of the Caricom countries to import goods would be restricted. They noted that policy-makers should ensure that domestic import/export institutions are meeting the needs of the local businesses.
Mahabir and Bobb revealed that for several of the Caribbean countries, remittances are a significant source of inflows of financing, which comes at a time where the World Bank indicates that COVID-19 has threatened remittances to Latin America and the Caribbean by 19.3 per cent.
Citing 2018, the authors showed that remittances as a percent of gross domestic product was over 33 per cent for Haiti, 15 per cent for Jamaica and 9 per cent for Dominica.
The research indicates that remittances both into and out of the Caribbean have continued to trend upwards over the last three decades. It added that Jamaica and Haiti receive over 80 per cent of the remittances to the Caribbean, as the countries possess the largest number of outward migrants - where both countries are estimated to have over 1 million of their citizens living in another country.
Mahabir and Bobb also foregrounded that Jamaica, Haiti, The Bahamas and Trinidad and Tobago account for most of the outward remittances. They remarked: “Trinidad and Tobago, Belize and The Bahamas appear to have the most foreign-born population, accounting for around 50 thousand persons each.”
The findings of the study highlighted that the relationship between de-risking and outward remittances was positive, where the authors suggested that persons took the opportunity to deposit funds in foreign financial institutions, via relatives abroad, to avoid the effects of de-risking.
The study reported: “Alternatively they could have sent increasing volumes of money to family abroad in anticipation of de-risking.” It continued: “It may be that persons in the Caribbean countries were much more aware of the developments in the financial space and thus took immediate measures to mitigate the effects.”
Mahabir and Bobb also posited the possibility of business segments, which were de-risked by commercial banks like casinos, were forced to find financial institutions in other countries that were willing to accept their funds and/or other means for relocating their funds internationally.
The author’s highlighted that global economic growth significantly improved the flow of remittances to the Caribbean countries, whereas, for outward remittances, domestic economic activity was a stronger factor.
For both remittances and trade financing, Mahabir and Bobb indicated that blockchain technology has the potential to help.
In the case of trade financing, the research highlighted the implementation of smart contracts, the reduced need for correspondent banks, real-time tracking of shipments and transparency of documents could lead to lower costs and more time-efficient services.
With regard to remittances, the author’s argue that blockchain technology offers a faster transmission time with lower costs. They indicated: “Internationally there has been experimentation with the use of this technology with remittances receiving the majority of attention.”
Mahabir and Bobb said that the Caribbean region is now seeking to understand the potential benefits of blockchain technology.