ECCB Chairman sets ambitious agenda

In an exclusive interview with The Star Businessweek, Chairman of the ECCB Monetary Council Dr Keith Mitchell talks risk, resilience and reform

When Dr Keith Mitchell assumed the Chairmanship of the Eastern Caribbean Central Bank (ECCB)’s Monetary Council this summer he outlined his priorities as fiscal resilience, regional cooperation and proactive banking.

Dr Mitchell, Prime Minister and Minister of Finance for Grenada, is eager to tackle longstanding challenges during his tenure and will be aided by a favourable financial climate. The global economy expanded by 3.9 per cent this year and is expected to continue this rate of growth into 2019. The Eastern Caribbean Currency Union (ECCU) is also on an upward trend, recording 2 per cent growth this year and projecting 3.5 per cent for 2019.

“The banking system is stable,” says Mitchell. “The licensed financial institutions are generally solvent, banks continue to meet their clearings obligations in a timely and efficient manner [and], most importantly, the public continues to demonstrate confidence in the financial system.”

PREPARING FOR SHOCKS

Banking in the Eastern Caribbean may be stable, but there is plenty to keep the ECCB busy. Mitchell says one of the most pressing issues is credit risk. With Brexit on the horizon, fluctuating oil prices and a volatile geopolitical scene, regional banks need to maintain their ability to absorb shocks. This is threatened, however, by their large volume of non-performing loans (NPLs).  By the end of June 2018 NPLs totalled $1.4bn or 11.4 per cent of banks’ loan portfolios.

Assisting banks in developing better risk management is a raft of legislation. This year the International Financial Reporting Standards (IFRS) 9 came into force, requiring banks to adopt more provisions for loss and introduce more effective safeguards. The ECCB is also working with a Basel implementation team to ensure banks in the region are up to date with Basel II and Basel III. The Basel framework requires banks to have sufficient liquid assets to be able to withstand loss of funding for at least a month.

A more resilient sector will not only be able to survive external shocks, but also overcome challenges at the regional and national level, such as the threat of de-risking. Loss of Correspondent Banking Relationships (CBRs) is an ongoing problem in the Caribbean as the region’s reputation becomes tarnished by international tax regulators. Mitchell says mitigating the impact of de-risking is a “top priority” for the ECCB and adds: “Member governments continue to explore policy options, including the need for more intervention on the political level and the need for greater responsibilities by authorities at the jurisdictional level.

“All stakeholders have a role to play, specifically in terms of increasing transparency, focusing on exactly what is required to maintain CBRs and understanding exactly what the risks are.”

The ECCB has been advocating for the industry on the international stage, meeting with representatives in the UK, Canada and the United States. At the country level, the ECCB is calling for a culture of compliance throughout its member states, and urges all banks to address any gaps in their AML/CFT framework. A collaborative approach will help the region reframe the discussion, according to Mitchell who says: “It is imperative that Central Banks and regulatory agencies act more collectively for greater impact. There is a need for greater representation in all global forums [and] a need to develop and implement a communications strategy to redefine the image of the region from that of a high-risk tax haven to highly responsible and compliant jurisdictions.”

ENCOURAGING ENTREPRENEURS

As the Eastern Caribbean banking system strives to become more resilient, many financial institutions have taken a hardline approach to lending practices, often leaving Small and Medium-sized Enterprises (SMEs) out in the cold.

In many cases, would-be entrepreneurs are thwarted by a lack of access to finance, usually because they do not have the necessary collateral. “Inadequate access to finance remains a major impediment to SME investment and undermines their importance to contributing to economic growth, employment and development,” says Mitchell who stresses, however, that banks cannot bear sole responsibility for the dampening of entrepreneurial growth. “The development of SMEs has to transcend financing and embrace a holistic view of an enabling business ecosystem. The infrastructure for financial services has to be built on the premise that profit orientation and economic development are not mutually exclusive. The goal must be to promote enterprise development and growth by helping businesses gain access to finance, build skills and help them add value to their activities.”

The ECCB aims to launch the Eastern Caribbean Partial Credit Guarantee Corporation by the end of the year. This agency will provide a partial guarantee on loans made by approved financial institutions to small businesses in the ECCU and work with providers to help these fledgling companies boost their skills and financial know-how.

LEVERAGING TECHNOLOGY

The ECCB isn’t just interested in equipping SMEs with the necessary skills and knowledge; it also wants to reach individuals who are excluded from the financial infrastructure. Bringing the unbanked into the existing economic framework can deliver benefits that ripple out to positively impact others.

Mitchell says: “Financial inclusion may facilitate the poor as it will enable them to build savings which can give them access to credit. Access to credit can assist them in increasing their productive capacity which can enable them to create job opportunities thereby generating employment within their respective communities.”

To promote financial inclusion, the ECCB is tackling consumer concerns. “The significant increase in bank fees over the past years and the practice of banks to have account holders maintain a minimum balance, combined with people’s discomfort and intimidation in using commercial bank services have increased the size of the unbanked population,” says Mitchell. Following consultation with industry, the ECCB intends to implement the Prudential Standards on Fees and Charges for Financial Institutions by the end of the year.  It is also looking at modernising the payment system through electronic wallets and “e-money” to make banking easier and more convenient.

In March the ECCB partnered with FinTech firm Bitt Inc to launch a pilot project aimed at creating a digital version of the EC dollar and a blockchain system to support digital payments and transfers. The initiative is expected to begin before the end of 2018 and last up to 19 months. Mitchell says the aim is to “deepen financial inclusion and advance economic growth, resilience and competitiveness.”

The ECCB is celebrating its 35th anniversary this year. Looking ahead to the future, the bank is confident it can keep up with the changing times and maintain stability. As of this month, the EC dollar remains strong, with 98 cents in each dollar backed by foreign reserves. During his tenure as Chairman, Mitchell says he wants to continue delivering on the bank’s strategic goals as laid out in its 2017-2021 Strategic Plan and adds: “By working together with other regional institutions and social partners we can transform our region.”