The Role of the Bahamas Development Bank in the Bahamian - Coursework Example

?Running Head: THE ROLE OF THE BAHAMAS DEVELOPMENT BANK IN THE BAHAMIAN ECONOMY The Role of the Bahamas Development Bank in the Bahamian Economy Insert Name Insert Grade Course Insert Instructor’s Name 22 January 2011 Outline Introduction State of the Bahamian economy Financial Assistance and criteria for consideration Role in Equipment Acquisition Fiscal Support Role in Tourism Mobilization of Capital Resources Mobilization of Capital Resources The Role of the Bahamas Development Bank in the Bahamian Economy Introduction The growth of the economy of Bahamas owes a lot from the role played by the nation’s financial institutions such as the Bahamas Development Bank. The aim of this work is to show the role played by the Bahamas Development Bank in the Bahaman economy. This is achieved by revealing the current state (strengths and weak points) of the Bahamian economy, showing how the bank the operations of the Bahamas development Bank attempt to solve those weaknesses, and how this contributes to the Bahamian economy. State of the Bahamian economy Before exploring the role played by the Bahamas Development Bank in the Bahamian economy, it is imperative to look at the state of the Bahamian economy: its strengths and weak points before addressing how the Bahamas Development Bank plays a role in addressing these weak points. Being among the best offshore global banking centers, Bahamas has come up with a non-simple banking structure that caters for the services of both domestic and foreign investors. Both the central bank of Bahamas and the Bahamian international banks and Trust have a complete list of about 272 financial institutions that are legally mandated to conduct business with the public (US Department of Commerce, 1992, p. 40). The states in the Caribbean went through several challenges in 2004. Examples of these include declining real sector production, a reduction in their export trade, pressure from other parties regarding the exportation of sugar and bananas, increased indebtedness and a season highly characterized by natural perils and catastrophes. Moreover, though categorized as middle – class economies, majority of these nations have a good score of their citizens who are poor. Statistics from the Caribbean Development Bank indicate that the poor form between one and twenty six percent of the population. In a bid to deal with these challenges, Bahamas has had to conserve economic stability, strengthen the tourism and fiscal financial sectors, enhance the security of citizens, and support family islands and growth of small businesses through buttressing social services and improvement of the transport sector (Commonwealth Secretariat, 2006, p. 16). The Bahamas authority plays this role through its financial institutions like the Bahamas Development Bank, among others that get their external sources of finance from other lending agencies such as the Caribbean Development Bank. In the recent years, there has been a reported rapid growth in both the financial, Nassau and tourism sectors. In the recent years, Bahamas has become popularly known as a center for offshore banks and trusts apart from being a strategic location for carrying out international currency business (Khambata, 1996, p. 95; Bernardi, 2008, p. 107). This has been facilitated by the overall openness of the economy, proximity to the United States and The Bahamas’ tax haven state. Apart from generating income and employment for the country, financial services enhance the nation’s tax haven image. The attainment of the nation’s high-level per capita income can be attributed to the growth in the service sector that has really increased the national income of Bahamas (Karagiannis and Witter, 2004, p. 150). The major cause of the post war growth in the Bahamian economy can be attributed neither to structural reforms neither in the country’s production base nor to any changes in the functioning of its economy. The change can rather be attributed to the enlargement of the tourism and financial sectors. In fact, the pattern of growth in Bahamas stems from the primary production directly to services. There has been very negligible establishment of secondary services and consequently a weak link between these sectors. Due to the expansion of the service sector, Bahamas manifests trends of high consumption. This produces low domestic savings and constraints in balance of payment (Karagiannis and Witter, 2004, p. 151). Bahamas manifests a structural imbalance and development disorder that can be attributed to lack of local initiative in production and supply. Moreover, while foreign aid in essential, overreliance of the country on foreign aid may make it to really be constrained in exploration of its local resources. To help in the increase of local production, there are several roles that the Bahamas Development plays to ensure that the nation’s economy is thriving. These are discussed in the sections that follow. Financial Assistance and criteria for consideration The Bahamas Development Bank started its operations in 1978. Since then the Bank has been providing several functions that have been of importance to the Bahamas economy. The Bank is known to provide both medium and short-term finance to diverse sectors. Such sectors include tourism, industrial, agricultural, and small-scale businesses (The Common Wealth of the Bahamas, 2007). The bank has a capital base of about 11.5 million dollars. Several institutions have accorded credit lines to the bank. Among them, are the Caribbean Development Bank, European Development bank, and the American Development Bank. Manufacturing, fishing, tourism, and transportation are the main sectors that the lending from the Bahamas Development Bank has been channeled to, with a greater percentage being accorded to the fishing industry. The financing of the Bahamas Development Bank is mainly provided through loans that attract low interest rates whose grace period depends on the project for which it is intended. The bank’s current paid up capital is about $ 400,000 and a single enterprise’s loan financing may hardly go above 10% of this (US Department of Commerce, 1994, p. 65). In its financing, The Bahamas Development Bank gives more financial assistance to agricultural projects compared to the no9n-agricultural ones. For the case of those projects that already established, the Bahamas development bank may give up to 100% of the costs required for their enlargement. The bank disburses all its loans in the Bahaman dollars. In the case of certain circumstances such as the absence of other sources, the bank may take the position of equity investment. In situations like that one of an investor either establishing or modernizing a given enterprise, other investment sources may provide loan guarantees. In accordance to the necessity and availability of the bank’s resources, technical assistance may be used to supplement project financing (US Department of Commerce, 1994, p. 65). For projects to be regarded as eligible for funding by the bank, they must be from some specific sectors. These include agricultural, transportation, construction, tourism, and marine, among others. Those projects that belong to the Bahaman citizens are the only ones that may qualify for the funding from the bank. Apart from being used as permanent working capital, finance from the Bahamas Development Bank may be used for carrying out repairs, building and construction and acquirement of plants and equipment. In making application for a loan from the Bahamas Development Bank, the applicants directly channel their request to the bank. Information that is required for formal application entails, the project description, marketing strategy, costs of operation, management proficiency, projection of sales and where funds will be obtained from. According to the necessity, the Bahamas Development Bank may fund the preparation of this background. The bank’s Board of Directors must approve the loan request, loan guarantee, or equity financing. In evaluating the proposed projects, there is certain criterion that is used. It entails fiscal, economic, and commercial feasibility, technical viability, marketing plans, management power, and ability to utilize local raw materials, employment generation, and environmental effect among others (US Department of Commerce, 1994, p. 66). Role in Equipment Acquisition In Bahamas, one of the key things that make bought operators satisfied and motivated is the assurance that substantial and sustainable quantity of cargo will be provided ongoingly throughout the year. One of the main reasons that have caused the operators not to upgrade their equipment to suit transportation of produce is the fact that the production of agricultural produce is not only erratic, but also seasonal. For a long time, there has been lack of assurance from any entity to the boat operators can guarantee them lucrative returns if they invested in sufficient facilities that carry out cold storage. The boat operators cannot even receive an assurance from anyone regarding the minimum quantity of produce for the entire year. It is not surprising that due to this, boat operators have not indicated much interest in upgrading their facilities. As the market opportunities are being identified and farmer production enlisted, this can form a very good basis regarding the approximate amount of produce to be transported from each island. Therefore, this can provide important base for information that can be used to strike deals with boats that operate on each island. Rather than raising prices, the best incentive is perceived to be the existence of the minimum regular cargo volumes. Refrigerated chambers have been installed by several boat operators. They have done this and allocated a fixed cost per box of cargo despite the restriction of cargo availability to specific seasons of the year. Operators will not necessarily be motivated to install cold chambers due to increased transport costs. This is because they will still be very uncertain regarding the frequently available volume of cargo. The utilization of refrigerated transport capacities in the return trips boats to the islands will be granted more emphasis during the implementation of the project. Coordinating the transportation of fresh or perishable produce could be a better way of utilizing such capacities. Both the existence of affiliated retailers in the islands and the establishment of a voluntary retail chain will help in the facilitation of this activity. The PE in Nassau could be responsible in supplying the foodstuffs required by each of these retailers (IICA, 2007, p. 60). Fiscal Support Thus, the upgrading of various boat vessels by the boat owners will call for investment support. The type and extent of such improvements will therefore be based on the agreement that the collaboration between the agricultural department and transport ministry will make with the boat operators. Due to the awaiting increased crop production under the project, boat owners will thus be guaranteed of adequate cargo from their respective islands. Since the boat operators do not have any other source of income, the Bahamas Development Bank will then step in to offer them loans for upgrading. These loans are through a certain fund that the Bahamas Development Bank was lending from the Inter-American Development Bank (IDB) for investments that are similar to these. Given that the nature of the upgrading of boat vessels requires installation of refrigerated facilities with their respective apparatus, the loans may not therefore be large enough and the operators will need to offer boats as security (IICA, 2007, p. 60). In cases where operators may be opposed to either the refrigeration or mortgaging of their vessels, there is still an alternative. The alternative is that the boat owners can be provided with the refrigerated chambers from the Produce Exchange, which they will later on be required to repay. Deduction of a given sum per box of produce being transported from its selling price could form the criterion to be used in repaying the loan back. The duration of payment of value of the chamber will be dependent on the size of the volume being transported. This means that greater volumes will be required to be paid faster than smaller ones. In this regard, refrigerated transport facility will be at the disposal of the boat operator. The latter will not assume any extra investment risks. Since the project has the capacity to promote production volumes, it will therefore assume the risks (IICA, 2007, p. 60). The wisest of boat operators would therefore choose to be loaned by the Bahamas Development Bank since it has low interest rates and can finance them effectively. Role in Tourism The Bahamas Development Bank works in collaboration with the Inter-American Development Bank. This collaboration has contributed immensely to the country’s latest strategy. The international Development Bank has concentrated on those projects that will improve the nation’s competitiveness especially in vital sectors such as tourism, among others. This also entails not only investing in the nation’s basic infrastructure, but also an upgrade of its public utilities. Moreover, the bank has played a big role in ensuring that any adverse environmental effect from the enlargement of the tourism sector has been minimized. Additionally, the bank is collaborating with authorities in Bahamas to conduct a household survey (IMF, 2001, p. 37). Mobilization of Capital Resources The Bahamas Development Bank is responsible for the key task of mobilizing capital resources. This is carried out in form the credit and technical aid to the productive sector within the economy, and thus bringing about the development of the economy. In the past, about half of the bank’s resources represented paid up capital. The bank obtains its funding from both the local and external means. Paid up capital and lines of credit from local institutions, as the Central Bank and others constitute the chief sources of the bank’s domestic funding. In most cases, the domestic sources can be obtained at a cost that is slightly lower than the existing market rates. The bank accesses external sources of finance in form of loans and lines of credit. These are obtained from International lending bodies like the Caribbean Development Bank and the European Development Bank, among others. Since its inception, the average loan that the bank has been approved is about thirty thousand dollars, implying that smaller to medium-sized enterprises have formed a major part of its customers. There has been a high rejection rate, which may point out to the need for improvement in the area of preparation of projects (IICA-Bahamas, 1989, p. 121). The fisheries sector has received the highest approval and consideration from the bank. In loan allocation, the Agricultural sector has also been well considered and in terms of size, its loans have been of the lowest average value. Although the bank has reported to consider the farm sector, it has also reported the relatively low lending level to the challenges of obtaining collateral that is acceptable from the borrowers. A major constraint to collateral financing in Bahamas is represented by both the absence of titles to farm lands and the predominance of property that are generational and commonage in the agricultural sector (IICA-Bahamas, 1989, p. 120). The configuration of disbursed loans varies in accordance to the enterprise. The loan repayment period is spread over 7 – 15 years. There is equity of about 30% to be provided by the borrower although in the fishing sector it is lower (about 10%). Interest rates are in the range of 10-12% but may vary depending on the amount of funds being loaned. There are some adjustments when it comes to the suspension on principal payments (IICA-Bahamas, 1989, p. 121). The fiscal performance of the Bahamas Development bank has not been very satisfactory with constant losses being registered for several years’ right from the time it started operating. Unavoidable overhead costs, defaulting borrowers, and low margins of operation have been explained to be the main causes of the bank making low profits. The bank had provided the most effective institutional mechanism for deploying capital resources to the Agricultural sector. To be able to fully explore this purpose of the bank, it will be paramount to not only increase its capital resource base, but also buttress its institutional abilities (IICA-Bahamas, 1989, p. 121). A systemized structure through which the bank can tap resources from the local capital market on a continual basis should be established. There have deliberations on the same issue with both the Central Bank and the National Insurance Fund, and there is need to pursue them further. The existing peculiar system of land tenure relaters to a major constraint to the effective provision of farm credit in Bahamas. Due to limited access to free hold registered property, it is difficult to extensively use land as security when applying for loans. Therefore, lending institutions that provide lending credit such as the Bahamas Development Bank will need to provide alternative collateral to be used by loan applicants to secure financial aid. This presents a great hurdle to the Bahamas Development bank, which is responsible for principally providing credit to the agricultural sector. The bank will thus have to step up its ability in several areas like project appraisal, preparation, evaluation, and monitoring. This is the only way to enable it play its duty as a leader in development financing (IICA-Bahamas, 1989, p. 121). Provision of sufficient non-secured agricultural loan was facilitated by the establishment of the Agricultural Credit fund. This was done with support from USAID. Under this strategy, guarantee for the repayment of the loans extended by participating financial institutions is provided by the government. The lack of improper functioning of this arrangement has demoralized the financial institutions that participate. In designing any program for agricultural development, there ought to be an intensive analysis of the aspect of collateral and other related issue of the Bahamian agricultural credit. However, there are several alternatives that can be explored such as utilizing the principal crop-lien, increasing integration of marketing plans with the credit administration plans, and letting collection points be marketing cooperatives (IICA-Bahamas, 1989, p. 121). Conclusion Bahamas has been experiencing an upsurge in its economical growth especially in the tourism and service sectors. This has made it to be an offshore of banks and trusts apart from being a hub for international currency business. Contributing factors to this growth are the openness of its economy, proximity to the United States and its tax haven state. However, there has been lack of local initiative in increasing the nation’s supply and demand. This has been coupled with over consumption, a state that is likely to make the nation rely on international support. To help it explore its local resources, the Bahamas development provides lending services to various sectors of the economy such as agriculture, tourism, services, fishing, building, and construction, among others. Lenders are offered low interest rates. The bank obtains its finance both locally and from other international financial institutions. The current experienced growth in the economy of Bahamas can be attributed to the role played by this bank in fiscally supporting the local sectors. References List Bernardi, L., 2008. Tax Systems and Tax Reforms in Latin America. New York: Routledge. (Online). Available from http://books.google.co.ke/books?id=-n22UqRynyoC&pg=PA107&dq=Bahamas+is+center+for+offshore+banks+and+trusts&hl=en#v=onepage&q=Bahamas%20is%20center%20for%20offshore%20banks%20and%20trusts&f=false (Accessed on January 22, 2011). Commonwealth Secretariat. 2006. Small States Economic Review and Basic Statistics. Volume 10. London: Common Wealth Secretariat. (Online). Available from http://books.google.co.ke/books?id=ox0Ddi6j08IC&pg=PA16&dq=roles+of+the+Bahamas+Development+Bank+in+supporting+small+businesses&hl=en#v=onepage&q&f=false (Accessed on January 22, 2011). IICA. 2000. Agricultural Services Development Project - Development of Irrigation Projects in the Bahamas - Marketing of Agricultural Produce in the Bahamas - Environment Issues of the Bahamas. New York: IICA Biblioteca Venezuela. (Online). Available from http://books.google.co.ke/books?id=FnEqAAAAYAAJ&pg=RA1-PA60&dq=Role+of+Bahamas+Development+Bank+in+Bahamas+agriculture&hl=en#v=onepage&q&f=false (Accessed on January 22, 2011). IICA-Bahamas. 1989. Agricultural services development project. 1989 The Bahamas Fase I Agricultural Service Development Project. New York: IICA Biblioteca Venezuela. (Online). Available from http://books.google.co.ke/books?id=IvCcASTGVmMC&pg=PA95&dq=Bahamas+is+center+for+offshore+banks+and+trusts&hl=en#v=onepage&q&f=false (Accessed on January 22, 2011). International Monetary Fund (IMF). 2001. The Bahamas, 2001 Article IV consultation: staff report and public information notice. Washington DC: IMF. (Online). Available from http://books.google.co.ke/books?id=M1uklsLnn7AC&pg=PA37&dq=role+of+Bahamas+Development+Bank+in+tourism&hl=en#v=onepage&q&f=false (Accessed on January 22, 2011). Karagiannis, N. and Witter, M., 2004. The Caribbean Economies in the Era of free Trade. New York: Ashgate Publishing. (Online). Available from http://books.google.co.ke/books?id=bJR5nr8TgFQC&pg=PA152&dq=roles+of+the+Bahamas+Development+Bank+in+Bahamian+economy&hl=en#v=onepage&q&f=false (Accessed on January 22, 2011). Khambata, D., 1996. The practice of multinational banking: macro-policy issues and key international concept. Westport: Green Wood Publishing (Online). Available from http://books.google.co.ke/books?id=IvCcASTGVmMC&printsec=copyright#v=onepage&q&f=false (Accessed on January 22, 2011). The Common Wealth of the Bahamas. 2007. Bahamas Development bank- Arrangement of Sections. (Online). Available from http://laws.bahamas.gov.bs/statutes/statute_chapter_357.html (Accessed on January 22, 2011). US Department of Commerce. 1992. Caribbean Basin Finance Opportunities: A guide to financing trade and investment in Central America and the Caribbean. New York: Diane Publishing. (Online). Available from http://books.google.co.ke/books?id=ZgH1uAbVuvwC&pg=PA40&dq=Role+of+Bahamas+Development+Bank+in+Bahamas+agriculture&hl=en#v=onepage&q&f=true (Accessed on January 22, 2011). US Department of Commerce. 1994. Andean and Caribbean Basin financing Directory. New York: Diane Publishing. (Online). Available from http://books.google.co.ke/books?id=yR_vnjS3e8IC&pg=PA65&dq=Role+of+Bahamas+development+bank+in+industrial+development&hl=en#v=onepage&q&f=false (Accessed on January 21, 2011). Read More