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What’s happening with loan growth in Barbados?

April 22, 2015 by Kimberly Waithe 1 Comment


By: Kimberly Waithe

Loans from commercial banks in Barbados stand at one of its lowest levels since the early 1990s. In fact, commercial bank credit has been sluggish since 2009, averaging around 0.6% annually over the past five years with recent figures showing a decline by -1.1%. This outturn represents a significant reversal considering that during 2004 to 2008 due to a credit boom lending grew by an average of 15% annually.

With the exception of the personal and government categories, declines in lending were seen across all of the main sectors (Figure 1). Loans to Government rose by US$31.7 million (35.7%) mainly due to a local bank providing partially funding for a medium-term facility during the first quarter of 2014. The personal sector, which assessed around half of total loans, grew marginally by 1.6%, which could be a reflection of consumers delaying their investment decisions in an environment of economic uncertainty (see Figures 1 and 2). On the other hand, loan growth to all other sectors were limited and further constrained by weak domestic demand.  Particularly, decreases were recorded for the tourism (13.7%) and construction (3.1%) sectors, which have been two of the main drivers of economic activity in Barbados over the last several years (Figure 1).

Figure 1: Commercial Bank Credit by Sector         

1
Figure 2. Total Loans by Sector
2Source: Central Bank of Barbados

Given that loan growth has generally trended with domestic economic activity, commercial bank credit has been constrained by low and negative real economic growth, which has averaged 0.2% over the last five years (Figure 3). Moreover, businesses have been facing challenges in accessing credit with Barbados ranking 116 in the ranking of 189 economies, with the top regional performers being Jamaica (12th) and Trinidad and Tobago (36th).In fact, more than 30% of firms surveyed in Barbados believe that access to finance is a serious constraint to doing business. Some of the main challenges cited were the lack of knowledge regarding various funding facilities, high collateral requirements and the bureaucratic and legal challenges that must be overcome in order to access financing.

 

Figure 3: Loan Growth and real GDP growth

3
Source: Central Bank of Barbados

 

So what does this mean? 

Although the banking system is highly liquid with overall capital adequacy ratios of around 19%, well above the 8% minimum requirement of the Central Bank, loan growth has been trending in the opposite direction.  The effect on growth goes both ways, that is, while lending has been sluggish as a response to weak economic conditions, at the same time lower private investment decreases the contribution of these sectors to economic output. In fact, credit to the non-financial private sector has been declining since 2011, contracting by an estimated -4.6% in 2014.

The Government, through the provision of incentives, aims to promote large, private tourism-related capital projects as a means of boosting growth. However, is this enough? Is the economic climate further exacerbating an underlying problem with respect to accessing credit? Are banks being more cautious in lending given the domestic environment? Are businesses aware of the various lending facilities?  What I would conclude is that increased efforts are needed to create an enabling environment for private investment. This can be achieved by improving the availability of credit information to facilitate lending decisions as well as reducing the lengthy bureaucratic procedures and legal proceedings associated with accessing credit. Moreover, greater macroeconomic stability lowers the risks related to borrowing. Stability would spark investor and consumer confidence and boost economic activity going forward.


Filed Under: Barbados, Economy & Investment Tagged With: bank, Barbados, Caribbean development, credit, domestic economic activity, economic growth, loan growth

Kimberly Waithe

Kimberly Waithe, a citizen of Barbados, is an economics consultant at the Inter-American Development Bank, Barbados country office since July 2014. Her responsibilities include monitoring and reporting on economic performances and prospects in Barbados and the OECS. Previously, she was a senior economist in the Ministry of Finance and Economics Affairs in the government of Barbados, from 2011 to 2014. She started her career there in 2008 as an economist. There she monitored and evaluated key planning and strategic documents for Barbados and reported on specific aspects of the economy. In addition, she assisted in the preparation of the annual Barbados economic and social reports along with the journal of public sector policy analysis. She has also published several research papers in international and local journals. Her research interest includes public finance and public policy, economic development, and energy economics. Ms. Waithe holds a Master’s degree in Financial and Business Economics and a Bachelor degree in Economics and Management (First Class Honors) from the University of the West Indies, Cave Hill Campus.

Reader Interactions

Comments

  1. Kim Williams says

    November 24, 2015 at 5:50 pm

    “The effect on growth goes both ways, that is, while lending has been sluggish as a response to weak economic conditions, at the same time lower private investment decreases the contribution of these sectors to economic output.”

    Lending has been sluggish due to weak economic condition, what are these conditions?

    Reply

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Caribbean Dev Trends

We provide unique and timely insights on the Caribbean and its political, social, and economic development. At the IDB, we strive to improve lives in the Caribbean by creating vibrant and resilient economies where people are safe, productive and happy.

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