By Kiana Wilburg
The banking industry is crucial to every country. Without it you cannot properly and effectively manage an economy. In fact, without it, the world could be pushed into an abyss, financially.
As dramatic as that might appear, even that picture does not begin to capture the financial chaos, corruption and destruction that would abound were one to eliminate such an industry. It has cemented itself as the lifeblood of a country’s financial makeup.
It is with this understanding in mind that this article seeks to explore the importance, function, challenges and the way forward regarding Guyana’s relatively small banking sector.
Guyana’s banking industry is made up of a few commercial banks, insurance companies, securities registrants, non-bank financial institutions, co-operative societies, and money transfer agencies.
The largest banks in the country are foreign-owned and these account for approximately 60% of total assets of commercial banks.
The manager of the banking sector is the Bank of Guyana or Central Bank of Guyana. It was established in 1965.
The Central Bank of Guyana is constantly looking for ways and means to protect itself from infiltration and criminals of all sorts. As such, it is often strengthening the laws it is governed by.
According to the Central Bank Governor, Dr. Gobind Ganga, the framework which provides the parameters for the exercise of the powers and execution of the functions of the Bank of Guyana has been expanded beyond its two main pieces of legislation being the Bank of Guyana Act and the Financial Institutions Act.
He said that the widening of the legislative framework arose from the enactment of the Anti- Money Laundering and Countering the Financing of Terrorism Act No. 13 of 2009, the Insurance Supplementary (Provisions) Act No. 16 of 2009 and the Money Transfer Agencies (Licensing) Act No. 20 of 2009.
Dr. Ganga said it is important to note that the Bank of Guyana Act No.19 of 1998 establishes the Central Bank as an autonomous institution.
According to the Act, the principal objective of the Bank is that “Within the context of the economic policy of the Government, the Bank shall be guided in all its actions by the objective of fostering domestic price stability through the promotion of stable credit and exchange conditions, as well as sound financial intermediation conducive to the growth of the economy of Guyana.”
This Act also includes provisions governing the administration of the Bank, relations between the Bank and licensed financial institutions, and the Bank and the Government. It also places the exclusive responsibility for supervision and regulation of licensed financial institutions on the Bank and tasks it with the responsibility of oversight of the payment system.
As for the Financial Institutions Act 1995 which came into operation on the May 29, 1995, this was created the framework for the regulation of the business of banking and other financial business in Guyana.
This Act consists of nine parts which includes requirements related to licensing of financial institutions, paid up capital, restrictions on banking and financial activities, supervision of licensed financial institutions and provisions for insolvency and winding up.
The Financial Institutions Act remained substantially unchanged since its enactment in 1995 until November 2004, when amendments were made by way of modification of some sections of the Act and the inclusion of new emergency provisions dealing with temporary control.
The 2004 amendments sought to provide for the prevention of the abuse of financial institutions by insiders, enhance corporate governance and strengthen the powers of the Bank to deal with problematic licensed financial institutions.
The Central Bank is also responsible for the licensing and supervision of dealers in foreign currency (cambios). Cambios are licensed to buy and sell foreign currencies. Regulation is conducted in accordance with the Dealers in Foreign Currency (Licensing) Act 1989. The Act originally gave the Minister of Finance the power to grant licences, renewable annually. In 1995 the Act was amended, transferring to the Bank of Guyana, in consultation with the Minister, full responsibility for administering the Act.
The Central Bank is also guided by the Insurance (Supplementary Provisions) Act 2009 and the Money Transfer Agencies (Licensing) Act 2009. One of the most important Acts as cited by the Central Bank Governor is the Anti- Money Laundering and Countering The Financing of Terrorism Act 2009, which repeals and replaces the Money Laundering Prevention Act of 2000.
This law seeks to provide for the prevention of money laundering, combating the financing of terrorism and the civil forfeiture of criminal assets.
PLACEMENT IN THE WORLD
The World Economic Forum’s Global Competitiveness Report (2012-13) rated Guyana 52nd in the world for soundness of its banks, a similar position to its near neighbour – Suriname at 49th.
According to the Central Bank Governor, Guyana is still working on its institutional foundations for financial sector development, placing 166th out of 183 countries in the 2011 World Bank’s Ease of Doing Business Report’s index for getting credit.
In relation to protecting investors it placed Guyana 79th, a ranking in line with much of the surrounding region, ranking the country alongside Brazil. The score reflects the continued efforts to improve legal and regulatory reform to facilitate the expansion of bank credit to the private sector.
In the World Economic Forum’s Global Competitiveness Report (2012-13) Guyana placed 70th in the world (out of 144 countries) for its availability of financial services and 72nd for its affordability of financial services, scoring above Nicaragua, Suriname and Venezuela in both categories.
For financing through local equity market, Guyana ranked 77th again above nations with a similar GDP, coming 17 places above Suriname. With regard to ease of access to loans it placed 76th, again well above Suriname.
While the Banking sector in Guyana has increased its capacity to ensure the legal protection of the industry, there have been a few challenges that it has faced.
One in particular mentioned by Finance Minister, Winston Jordan, was the issue of derisking.
Jordan told Guyana Inc Magazine that local banks in small economies rely on “correspondent banks” with a global presence to connect them to the international financial network.
He said that relationships with correspondent banks allow local residents to receive remittances from abroad, tourists to access cash from their home accounts, and facilitate the transfer of funds needed for trade and investment.
Recently, the economist said that there has been a global trend of correspondent banks terminating their relationships with their local partners.
He said that through May 2016, at least 16 banks across five countries in the Caribbean have lost all or some of their correspondent banking relationships.
Jordan said that one reason that correspondent banks may drop their relationships with local banks is concerns about meeting new, stricter rules related to Anti-Money Laundering and Combating the Financing of Terrorism.
He said that this same concern may apply with regards to other regulations as well, such as the tighter prudential regulation that was put in place in many countries following the global financial crisis. International banks cite excessive compliance costs, unprecedented penalties, vague legal standards and escalating litigation costs as reasons for severing correspondent bank relationships.
The Finance Minister articulated that when a correspondent bank drops a local market (this could be a bank or a country) over concerns about regulatory compliance or other risks, this is called “derisking”.
When a bank loses its correspondent banking relationships, the impact can be mitigated by putting in place arrangements that allow bank clients to continue to access services.
Clients can be sent to other local banks that still have correspondent banks to complete international transfers.
Alternatively, central banks can process payments on behalf of local banks through their own correspondent banking relationships. However, as transfers are diverted through fewer channels, the rising volume of transactions may pose a challenge.
The Finance Minister said that derisking is already affecting Guyana’s financial sector. He recalled that in June, Bank of America announced that it would no longer act as a correspondent bank for the Guyana market. While Guyanese banks are currently served by other correspondent banks, Jordan said that the decision underscores the importance of addressing these perceived risks.
While Guyana has taken recent steps to strengthen its Anti-Money Laundering and Combating the Financing of Terrorism framework, further work remains to be done.
The International Monetary Fund (IMF) has urged the Government to accelerate the implementation of the action plan agreed with the Financial Action Task Force.
The Government is also working with the Bank of Guyana to improve financial sector supervision, and to monitor the risk from derisking on local banks.
THE WAY FORWARD
When it comes to the monitoring of the economy and management of financial services for the nation, the Central Bank has done an exceptional job. But of course, there is always room for improvement.
According to Minister Jordan, the way forward for the manager of the banking sector is paved with numerous measures for improvement.
The Bank of Guyana, he said, is expected to license cambios located outside of Georgetown, in order to facilitate businesses and individuals who reside in rural, hinterland and other remote or isolated areas.
Central Bank has commenced a study on implementing deposit insurance in Guyana, with the goal of rolling out a deposit guarantee scheme by 2017. This action takes on heightened importance to protect businesses and individuals from losses in the case of a bank failure.
Additionally, the Finance Minister said that the Bank is examining the feasibility of agency banking, which would allow local non-banks to provide some financial services.
He opined that Agency banking has the potential to dramatically improve access to banking in rural communities.
The Bank of Guyana also plans to support the expansion of mobile money, which would allow more people to save and transfer money using their phones, thereby reducing the transaction costs.
Of significance is the fact that the IMF and the World Bank, in collaboration with the Bank of Guyana, have started a financial sector assessment.
Furthermore, the Bank of Guyana will be moving towards Basel II implementation, which will strengthen the regulatory framework governing banks and also result in Guyana aligning its capital requirements with internationally recommended best practices.
Basel II, which was introduced in 2006 by the Basel Committee on Bank Supervision, was intended to create an international standard for banking regulators to control how much capital banks need to set aside to guard against the types of financial and operational risks banks face.
Basel II has three pillars: ensuring that bank capital is more risk sensitive, ensuring that banks have adequate capital to support all the risks in their business, and enhancing disclosure requirements to make the risks banks take more transparent.
The Financial Sector Reform and Strengthening (FIRST) Initiative, a project managed by the World Bank, is providing technical assistance to the Bank of Guyana to strengthen supervision of the Non-Bank Financial Institutions (NBFIs) and insurance companies. The initiative aims to close gaps in the 43 supervisory perimeters, regarding prudential and non-prudential standards, and to build supervisory capacity.
The FIRST initiative will assist with the development of a legal and institutional framework for market conduct and financial consumer protection.
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