How the Financial Sector Can Drive Economic Transformation in the Caribbean

For all its strengths and accomplishments, the Caribbean is largely made up of nations with narrow economic bases, with most economies dependent on tourism and a few others reliant on the export of commodities. This unfortunately makes the region vulnerable to external shocks, which depending on the nature, suppress tourism demand and/or international commodity prices. These shocks normally cause significant economic hardship and occur more frequently than the Caribbean economy can bear. Against this backdrop, many regional economies face interrupted and below potential growth and find themselves burdened by unsustainable fiscal accounts. Faced with these pressures, most regional States are seeking ways to transform their economies into attractive, investment friendly environments, driven by multiple industries, instead of an over-reliance on just one. This of course requires an appropriate policy framework that will facilitate the growth of smaller indigenous industries, the strengthening of key enabling institutions and the achievement widespread buy-in.

Unsurprisingly, there is a major role for the financial sector to play in the region’s economic transformation process. This role extends well beyond financial intermediation however, as the rapidly changing global environment requires financial institutions to increasingly act as agents of change, facilitators of training and guardians of the environment, just to name a few. This article recommends and briefly discusses a few areas on which the financial sector should focus, to help enhance the long-term financial viability of the Caribbean’s economy.

The first area of focus should of course be seeking to directly contribute to and facilitate economic diversification in the region. In terms of its direct contribution, it is important for the sector to develop substantially more depth than is currently the case. By international standards, the regional financial market has a very low level of sophistication, dominated by banks, insurance companies and to a lesser extent, credit unions. The limited options in the sector are inhibiting the diversification process, as SMEs are finding it difficult to access the level of financing they need. Against this backdrop, banks have been facing increasing calls to substantially improve the level of finance they direct to SMEs. This however, would likely require banks to assume risks that are best managed and suited to other types of financial institutions, such as venture capitalists. This isn’t to say that banks should avoid further exposure to the SME sector, but rather, they are advised to proceed carefully. Like the diversification of the wider economy, augmenting the depth of the financial sector will by no means be a simple task, since it would likely require legislative interventions, government incentives and substantial investment.

In any case, there are opportunities for the financial sector to support the growth of small firms in other ways. One of these relates to training and education. It is common for entrepreneurs to start businesses with only the technical knowledge related to the respective sector but with little business acumen. Such deficiencies make businesses unattractive to investors and lenders, and usually condemn them to short existences. Financial institutions can facilitate the delivery of financial management training and other business-related courses to build expertise within and among SMEs. This will increase their capacity to attract and manage capital and debt, enhancing their long-term viability in the process. The financial sector, particularly banks, can also use their expertise across industries and regions to provide guidance and opportunities for growth to SMEs. In addition to providing support through their advisory services and credit policy, banks can create opportunities for firms to expand and develop exports markets through initiatives such as conducting trade missions. It must be acknowledged though, that there are banks in the region already involved in these types of activities. For instance, Republic Bank Limited, in partnership with BPD Associates Ltd, has rolled out the Entrepreneurs Business Builder (EBB) programme which focuses on the development of women-led businesses and aims to assist established female entrepreneurs with creating profitable technology-based and future-proof businesses. This programme does not only seek to support the region’s economic diversification initiatives but is also aimed at empowering women and in so doing encourages inclusive growth.

Caribbean countries are among the most vulnerable to the manifestations of global warming, including, rising sea levels due to melting polar ice caps and the intensification of weather phenomena such as hurricanes and drought. This is extremely worrying, when we consider how dependent the region is on the natural environment for its survival. Regional States therefore have more than enough motivation to take meaningful action to cut greenhouse gas emissions, notwithstanding their relatively small contributions to global levels. Undoubtedly, it will take considerable resources and time to transition the Caribbean economy to net-zero emissions and for this reason, the process in the region is expected to significantly lag progress in developed countries. Such a grand initiative requires the commitment of all key stakeholders, including the financial sector. It is critical for the industry to embrace its role in promoting environmentally sustainable business practices among its staff, customers and other partners. One major component of that commitment will necessarily have to be the adoption of appropriate credit and advisory policies that guide customers to environmentally friendly solutions. With rising pressure on businesses globally to include the environmental, social and governance (ESG) best practice principles in their business models, financial organisations have been increasingly reviewing their operations, including their lending policies. The objective is for banks to promote ESG values through the activities they support and to also align their operations with these guidelines. This trend is also beginning to emerge in the Caribbean. As it spreads, and financial institutions progressively reduce their financing of unsustainable business activities, firms will be forced to cater for environmental concerns in their business models to access credit.

The Caribbean, because of its natural environment, possesses tremendous potential to develop a thriving climate tech industry. Climate tech refers to technologies that remove or reduce greenhouse gas emissions and those that allow the adaptation to a changed environment. This sector is quite broad, housing businesses from food manufacturing (e.g. Impossible Foods Inc. and Beyond Meat) to energy production (solar, wind, biofuel etc.). Because of growing global awareness regarding the effects of greenhouse gases on the climate and changing government policy, investors are increasingly adopting the mindset that there no longer needs to be a trade-off between controlling pollution and making a profit. This changing attitude is being enabled by technological advancements and reflected in global investment and financing trends. For instance, in 2021, JPMorgan Chase, America’s largest bank, vowed to commit $2.5 trillion to finance sustainable investment over the next 10 years to advance climate action and sustainable development. Closer to home, Republic Financial Holdings Limited (RFHL) has pledged to lend and invest US$200 million toward activities that reduce the impact of climate change and create environmental solutions in collaboration with its clients by 2025. Given this type of attention, many climate tech companies have experienced significant increases in their market value over the last few years, including Tesla, the electric car manufacturer whose market capitalisation expanded from $1.7 billion in 2010, when it went public, to $700 billion in 2021. Another example, Beyond Meats, experienced similar explosive growth after going public in 2019, at a valuation of $1.5 billion and subsequently saw its worth shoot up to $8 billion in 2021.

To effectively support the green agenda, the regional financial sector will need to offer more innovative products and services, some of which it is currently unable to provide. This in part accounts for why the region’s net-zero agenda will be some way behind that of developed countries for the foreseeable future. Globally, green bonds have been issued to the tune of hundreds of billions in recent years, while banks and other institutions support sustainable business activities with concessional and senior loans, mezzanine debt, equity and quasi-equity loans to name a few. Research is required to determine to what extent these and other options may be appropriate for the region and what new types of financial institutions the Caribbean may need to help drive sustainable development initiatives. There will also likely be a need for legislative adjustments in the various regional jurisdictions.

Finally, it’s important for firms in the financial sector to develop strong corporate social responsibility (CSR) programmes. Although many organisations in the sector have a long history of activity in this regard, there may be a need for some refinement to improve their effectiveness. Modern CSR programmes are aligned with the tenets of the ESG framework and as such, will support much of what was discussed in the foregoing. However, these programmes focus heavily on the social pillar of the framework and therefore have the potential to make significant positive interventions in the lives of the vulnerable in society. The objective of CSR packages is to alleviate the burdens faced by, and create opportunities for, vulnerable groups such as the elderly, poor, disabled, women, marginalised youth etc. In so doing, they help to reduce societal ills such as poverty and crime, while also enhancing a country’s growth potential. In fact, well-targeted CSR initiatives that are consistently executed can go a long way to promoting inclusive economic growth. For this reason, CSR programmes can no longer be viewed as optional, but rather as a moral obligation for businesses that can afford them. When substantial and successful action is taken to limit the number of people being left behind by society, we all benefit.

The financial sector certainly has a critical role to play in the Caribbean’s economic transformation process. However, it would be a grave mistake for the industry or key stakeholders to view its part only within the narrow confines of financial intermediation. For various reasons, including tight fiscal resources and the unique characteristics of the region, financial institutions may find that they are being increasingly required to attend to more needs outside of their traditional function. This includes, but is not limited to training entrepreneurs, playing a more active role in protecting the environment and taking more deliberate action to promote inclusive economic growth. The quicker these institutions embrace these new roles, the better it will be for the Caribbean.