Reforming Credit Infrastructure in the Caribbean Region
Access to finance is among the greatest challenges that businesses face in the Caribbean. Many people in the region also lack financing to plan for daily consumption and key expenses such as education and health. “Lack of access to affordable and appropriate financing in both Jamaica and in the region continue to plague the MSME sector,” says Karen Hylton, Small Business Financing Specialist in the Ministry of Industry, Investment and Commerce of Jamaica. The Covid-19 pandemic has further exacerbated these constraints, as it had a profound negative impact on people and local economies, heavily dependent on imports and tourism.
According to the IMF Regional Economic Outlook, published in October 2021, economic recovery in the region is underway but the pandemic still casts shadows. Real GDP is projected to grow by 6.3% in 2021, followed by a more moderate growth of 3% in 2022, but it would not catch up with pre-pandemic trends in the medium-term due to weaknesses in the investment climate, among other constraints. Improving access to finance can help regional recovery, as a healthy and vibrant credit infrastructure allows for an efficient and rapid clearance of financial markets.
As result of a collaboration between the ICR facility and the Caribbean Export Development Agency (CEDA), we recently published a report which suggests specific solutions to strengthen credit infrastructure in the region. The report focuses on credit reporting and secured transactions systems. Credit reporting systems include credit bureaus and public registries, which publicize credit histories and allow for the assessment of financial risk, and the legal frameworks behind their correct functioning. Secured transactions systems include electronic registries for notices of security rights (i.e. collateral registries) and their enabling legal frameworks, which allow for the publicization of rights on moveable assets. The report analyzes these systems in fifteen countries that are part of the Caribbean Forum (CARIFORUM), a subgroup of the Organization of African, Caribbean and PacificStates (OACPS).
Scattered legal frameworks, inadequate private credit bureaus, and scarcity of collateral registries
The new report finds that asymmetric credit information between borrowers and lenders in the Caribbean region is exacerbated by the uneven presence of legal frameworks for credit information sharing and secured transactions, the under-optimal diffusion of licensed private credit bureaus, and the dearth of public credit registries and collateral registries. As the table below shows, among the fifteen countries assessed only the Dominican Republic, Guyana, Haiti, and Jamaica have dedicated credit reporting legislations that regulate the operations of credit bureaus. Private credit bureaus operate in four other countries – Barbados, Belize, Suriname, and Trinidad and Tobago – following code of conducts introduced by the private sector, without the supervision of a central authority. Interestingly, these codes have allowed the functioning and, in Trinidad and Tobago, the thriving of a credit information market, notwithstanding the legislative vacuum.
Credit infrastructure slightly improved during the last ten years
The credit information market took shape in some Caribbean countries where it had long been missing, while international credit information companies like Creditinfo and CRIF have expanded operations in the region. Legislative reforms have typically included the drafting and approval of new credit information (or reporting) bills, or the streamlining and improvement of existing regulations like in Guyana, which in 2016 amended its 2010 Credit Reporting Act. The Eastern Caribbean Central Bank (ECCB) successfully introduced a harmonized legal system in the Organization of Eastern Caribbean States (OECS) countries in 2017. “Credit reporting legislation is necessary to promote the growth and development of the ECCU Credit Reporting System and the development and operationalization of a credit bureau within the single financial and economic space,” said ECCB Governor Timothy Antoine during the 87th Meeting of the Monetary Council that approved the reform. The ECCB is now supporting the launch of a unified credit bureau and it has recently started to replicate those efforts to introduce a unified system for secured transactions. In 2018-19, The Bahamas enacted a credit reporting legislation, but its credit bureau is not fully operational yet. In 2018, the Surinamese Bankers Association started a collaboration with BNETS, a private company that owns the Surinamese interbank network, to launch a pilot project under which banks collected credit information under the existing legal system, and eventually established the Central Credit Bureau Suriname (CCBS) as a non-licensed credit bureau in June 2020. Jamaica has had a dedicated legal framework for secured transactions since 2013, when it passed dedicated legislation and it established the National Security Interests in Personal Property (NSIPP) Registry. It is now working on the improvement of the secondary markets for collateralized goods and the facilitation of new commercial platforms. “Liquid secondary markets are an important component to a comprehensive and efficient secured transaction regime, as they help financial institutions determine how much credit to extend based on the assessment of the value of the collateral and more accurately measure their exposures when managing provisioning requirements,” Ms. Hylton points out. The Dominican Republic introduced a new secured transactions law in 2020 and it is now in the process of operationalizing the collateral registry.
Several solutions exist to improve credit information markets and secured transaction systems
First and foremost, Caribbean countries should strengthen the regional institutional infrastructure appropriate to the credit demand by individuals and businesses. As the informal sector is prevalent in virtually all countries in the Caribbean region, the credit infrastructure should try to address the lack of credit information about informal businesses too. For example, innovative fintech solutions can enable banks to capture the spending behavior of sole proprietors unknown to the fiscal authority and approximate their creditworthiness accordingly.
Ideally, any credit infrastructure reform should be preceded by the introduction of a policy that details the rationale for change and positions it within the broader country context and budget plan. Legal reforms would preferably precede institutional reforms and typically include the drafting and approval of new credit information (or reporting) bills, or the streamlining and improvement of existing regulations. Institutional reforms involve the improvement of credit coverage or the widening of available credit products with the introduction of private credit bureaus. On the secured transaction front, some Caribbean countries should review their existing legal system to ensure that key provisions for secured transactions are included, while others may choose for a complete overhaul of the system. The table below shows reform recommendations at the regional level, while the new report details reforms options at the country level.
Finally, a strong political leadership in the reform process is key for success, and even more importantly, countries in the region have many untapped opportunities for collaboration and cooperation, including sharing and learning from their own reform experiences, taking advantage of regional initiatives that could allow for the creation of regional markets, and further tapping into the expertise of development partners that have had a long presence in the region.