Investigating the Performance of Caribbean Commercial Banks in Their Mobilization and Use of Savings

By Tennant, David | Ibero-americana, July 1, 2007 | Go to article overview

Investigating the Performance of Caribbean Commercial Banks in Their Mobilization and Use of Savings


Tennant, David, Ibero-americana


I. INTRODUCTION

With declining Foreign aid flows to the region, Caribbean countries now need to intensify their focus on national and regional means of financing development. The Monterrey Consensus (2002) notes that many developing countries increasingly depend on local funds to finance their development needs. Domestic financial institutions are important in this respect, as by intermediating between savers and borrowers, they can efficiently mobilize and use society's savings (Levine 1997).

When savings are mobilized by financial institutions, economic growth can be fostered by increases in both the quantity and quality of investments (Goldsmith 1969). The quantity of investment flows are increased by financial institutions which minimize intermediation costs and thus maintain cost efficiency in transferring the maximum amounts of funds to the real sectors of the economy (Valverde et al 2000). Financial sector prices are also important determinants of the quantity of investments, as large spreads between lending and deposit rates adversely affect both the supply of and demand for loanable funds'. Similarly, the quality of investments in a country is impacted by the domestic financial sector, because, as noted by Schumpeter, such institutions choose which firms get to use society's savings'2. Numerous studies have therefore shown that financial institutions' contribution to economic development stem from both an increased quantity of investments and from the increased efficiency in the allocation of investment.3

The acknowledgement of these roles of financial institutions by policymakers and multilateral lending agencies led to the implementation of financial sector reform programmes in many Caribbean countries in the 1980s. However, despite the resultant rapid financial sector development and sophistication across many countries in the region, commercial banks remain the dominant financial institutions with the largest market share and the largest volume of savings mobilized (Danns, 1996). Much of the responsibility for financing regional development therefore still lies with these institutions. This paper thus examines the mobilization and use of savings by commercial banks in five Caribbean countries - Barbados, Belize, Guyana, Jamaica and Trinidad and Tobago. Using data from each country's central bank, the performance of commercial banks is examined and compared across countries in the four basic tenets of financial intermediation. Through this comparison, the paper highlights areas in which commercial banks in some countries have exhibited higher standards of performance relative to the others, and suggests areas in which financial institution managers, policymakers and regulators from different countries within the region can investigate further so as to learn from each other and develop best practices in effective and efficient financial intermediation. The sources of heterogeneity across countries are also examined to provide possible explanations for the differences in Caribbean commercial bank performance.

The results show that two out of the five countries studied distinguished themselves by maintaining the highest standards of performance in all the basic tenets of intermediation. It was also shown that these countries were those which had relatively high levels of per capita income, low and stable rates of inflation, low Treasury bill rates, low and stable exchange rates and low debt burdens. They were also the countries with the smallest populations, and had the lowest incidence of social and political instability. Without making any conclusions as to causality, this paper highlights the intricate relationship that exists between the real and financial sectors of the economy, as the countries in which commercial banks were making the greatest contribution to the economy, were also the ones which had the strongest economic fundamentals.

These results are detailed in the four subsequent sections as follows: Section 2 outlines the data and methodology used; Section 3 provides the contextual analysis by comparing the countries being studied; Section 4 highlights the results and analysis of the data on commercial bank performance; and Section 5 presents the conclusions derived. …

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