Barbadians saving for a “raining day” should purchase government savings bonds instead of simply depositing their money at commercial banks.
Central Bank of Barbados Governor, Dr. DeLisle Worrell gave that advice today noting that banks were “unhappy” that his institution had stipulated a minimum 2.5 per cent interest rate to be paid to individual savers.
At the same time, he again voiced concern about the limited financing options for the island’s innovators and smallest businesses.
The respected economist, whose institution regulates all banks operating in Barbados, was speaking this morning at the Fourth Annual Domestic Financial Institutions Seminar at Radisson Aquatica Hotel.
“As you know, individual savers do not do very well at commercial banks, earning 2.5 per cent on savings only because the Central Bank stipulates that minimum. It is no secret that banks are unhappy that there is a minimum at all,” Worrell said.
“I am suggesting to individuals that, for all their rainy day savings, they consider Government savings bonds instead. Savings bonds are just as convenient as savings deposits, because you buy them at commercial banks, and they are just as liquid as savings deposits, because you can cash them in at any time.
“However, if you hold them for the full five years of their maturity you earn an interest rate in the region of five per cent, compounded over five years,” he noted.
Another weakness reiterated by the governor was that the island’s financial sector did not sufficiently fund innovation and small and medium enterprises.
“This is an area of exceptionally high risk, into which conventional financial institutions no longer have any incentive to enter. The stipulations for reserves and provisions against possible loss are now so stringent that even small portfolio allocations for high risk high return propositions may no longer be viable,” he said.
“Conventional institutions, even insurance companies and others with a long horizon, may not be the best sources of funds for SMEs in their initial years. New firms should start with equity funding, so as to avoid debt service obligations during the formative period of the enterprise, before it has a regular clientele and a dependable cash flow.
“Some new firms have been successful in finding equity, in spite of the absence of an organised market for venture capital in Barbados, and some capital has been provided, over the years, by NGOs and others. We need to continue the search for better arrangements for equity funding of new ventures,” he added.
The official said he and others involved in the oversight of the local financial system were “well aware that there are ways in which our financial system needs to be improved”.
“We have never had a perfectly competitive financial system, and if we are realistic we will admit that our financial sector is too small to attract many players. We should think of other ways to encourage higher levels of service and efficiency on the part of financial institutions,” he stated.
Worrell also wanted attention paid to other issues including “the unanticipated consequences of international financial reform for emerging market economies like Barbados”.
“We are discussing this issue at the Regional Consultative Group for the Americas of the Financial Stability Board, and we will place this item on our agenda going forward,” he told participants.
“Also for the future agenda are ongoing projects to improve regional financial surveillance and to put in place formal mechanisms to actively manage any future difficulties of financial institutions that are regional in scope. These efforts are being coordinated by the Caribbean Centre for Money and Finance.”