…Central Bank to supervise credit unions

IN KEEPING with its mandate to develop and strengthen the financial sector, the Bank of Guyana is considering the establishment of Deposit Insurance in Guyana, Finance Minister Winston Jordan told the National Assembly on Monday as he presented Government’s $250B budget for 2017.

Jordan said deposit insurance promotes financial and monetary stability by providing a safe savings vehicle for small unsophisticated savers, and by mitigating ‘runs’ on financial institutions caused by depositors withdrawing their funds en masse because of a loss of confidence in the financial viability of that institution.

According to the minister, while the establishment of Deposit Insurance is dependent on the passage of new Deposit Insurance legislation, the Bank of Guyana has begun examining critical aspects of its creation; namely, the deposit insurance coverage, contribution and premium rates, and operational procedures in line with FSAP recommendations and recommended best practices.

Jordan noted that the systemic failures of CLICO reinforced the need for enhanced regulation in the insurance sector. The new Insurance Act, which was passed in Parliament earlier this year, is awaiting a commencement date, the Minister assured.

In 2016, a policy decision was taken to bring the supervision and regulation of credit unions under the purview of the BoG. A number of credit unions here have, over the years, run into trouble. Jordan said that in 2017, the Bank will work towards increasing credit unions’ familiarity with international financial reporting standards, and improving internal control systems in a way that is appropriate for their complex governance procedures.

He said, too, that the Finance Ministry will move to institute ‘Agency Banking’, a form of banking in which financial institutions’ representatives carry out some financial services. To continue the enhancement of the efficiency of the financial system, the BoG, with assistance of the World Bank, would undertake a comprehensive and strategic modernisation of Guyana’s national payment system, to advance the use of electronic payments. This move, the Finance Minister stressed, “could save the Government up to $266 million (0.04 percent of GDP) annually by switching from paper-based payment mechanisms to electronic payments, as well as create substantial savings for consumers and businesses.”

CORRESPONDENT BANKING
The minister explained to the House that like other Caribbean economies, Guyana faces a potentially damaging correspondent banking crisis. It was further explained that local banks and financial institutions of small Caribbean economies rely heavily on correspondent banking relationships with global banks to connect with the international financial network. These relationships, Minister Jordan said, allow local residents to receive remittances from abroad, tourists to access cash from their home accounts, “and facilitate the transfer of funds needed to support trade and investment in our region.”

Recently, Minister Jordan noted, concerns about meeting new, stricter rules related to Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) has led correspondent banks to terminate their relationships with their local partners, a practice termed “de-risking”.

De-risking refers to financial institutions’ closing the accounts of clients perceived as high risk for money laundering or terrorist financing abuse; namely, money service businesses, non-profit organisations, correspondent banks, and foreign embassies. The minister explained that foreign-owned banks operating in Guyana have not been subject to de-risking.

Locally owned banks have been severely affected by this, “losing in the aggregate approximately 37 per cent of correspondent relationships by end-June 2016. Thus far, only one bank has been able to establish new correspondent relationships to cover about 75 per cent of those that were lost,” he said.

If this trend continues, Jordan said, financial transaction services may become costlier and more limited, and legitimate transactions may go underground, encouraging the use of cash, and increasing other forms of informality at a time when attempts are being made to deepen financial inclusion.

The Finance Minister stated that Guyana, in partnership with other Caribbean economies and international institutions such as the Financial Stability Board (FSB), International Monetary Fund (IMF), and World Bank, is working to address the threat posed by de-risking through both advocacy and addressing the perceived risks that lead international banks to sever correspondent banking relationships.
These actions have resulted in Guyana’s enhanced compliance with the implementation of recommendations by the Financial Action Task Force (FATF) and the FSB, the Minister said.

Government has moved to enhance its supervisory framework, hence, Minister Jordan stated, the Bank of Guyana (BoG) conducted a review of its risk-based supervision framework and drafted updates and a procedural manual. This enhanced document, the Finance Minister said, would be reviewed by competent authorities prior to publication and implementation.

“Additionally, a comprehensive review of all existing supervision guidelines is slated for 2017; and in this regard, technical assistance is being sought from our multilateral partners.”

The Minister spoke of preliminary results from the IMF and the World Bank Financial Sector Assessment Programme (FSAP) of Guyana, conducted from May 10 – 24, 2016. These, he said, indicated the need for legislative amendments to the Financial Institutions’ Act 1995 in the following areas: The Bank’s resolution powers for failing institutions; sharing of information; licensed financial institutions’ credit exposure limits; prompt corrective action requirements; protection of Bank’s officers and agents; Identification of ultimate beneficial shareholders and significant ownership interest; Definition of related party; consolidated supervision and consolidated reporting; implementing administrative penalties and sanctioning policies; and establishing the responsibility of Directors for safety and soundness of financial institutions.

The Minister gave Government’s commitment to ensure that the necessary amendments to the Financial Institutions’ Act 1995 “are effected in an efficient and timely manner.” He added that during the third quarter of 2016, a diagnostic mission was conducted to identify gaps and make appropriate recommendations to develop a suitable framework for financial consumer protection. In 2016, the BoG made improvements to its stress testing toolkit, based on recommendations from the World Bank Financial Sector Reform and Strengthening Initiative and the FSAP team. In 2017, the Finance Minister emphasized, the BoG would prepare a guideline on stress testing for use by the banking system, develop a macroeconomic stress test model for the economy of Guyana, “and develop a model for the assessment of interest rate risks.”