Development Crossing

Corporate Social Responsibility (CSR) and Sustainability

International Financial Centers and the Financial Crisis: could a development approach allow sustainability?

Trinidad & Tobago is currently gearing to become the Caribbean’s top International Financial Centre (TTIFC). According to the Oliver Wyman August 2007 report, which recommends Trinidad as ripe for this opportunity, three types of financial services are to be focused on:

1. Capital Markets – where Trinidad & Tobago is currently the CARICOM leader in debt capital markets.
2. Credit Card Collections Centre.
3. Middle/back-office – Trinidad & Tobago’s local banks and insurance companies account for 60 percent of total bank assets in the West Indian region.

Trinidad & Tobago’s move towards becoming the Caribbean main financial hub is not without challenges, as stated by the country’s Central Bank Governor, Ewart S. Williams in his IFC Symposium Address of April 2008. Many countries in Latin America compete for International Financial Center spotlight, Chile, Brazil and Costa Rica to name a few. Mr. Williams has put forth recommendations to propel the TTIFC:

1. The importance of having a stable lead foreign anchor financial institution with the ability to provide a wide range of financing options in various base and foreign currencies.
2. A need to quickly and effectively create a credit tracking structure within territories for which financial services are to be provided.
3. Have the region’s countries, and developed countries support and desire to partake of the services which the IFC will provide.

The current global slowdown proves a formidable challenge to existing International Financial Centers (IFCs) around the globe, far more for those newly beginning in an emerging market economy. Still, within change there is opportunity. Historically, IFCs have thrived in a competitive environment, which is normal, as the financial world is Darwinist at best (or should I say worst). In actuality, the almost ruthless, cut-throat nature of the global finance industry has our economy where it is today: in pain. In this arena, is the present über-competitive model really the key to sustainability? Can our global financial culture truly adapt?

I believe, Polyanna-esque as it may be, that collaboration is key. However, collaboration among which types of entities? After all an IFC is about wooing institutional clientele and affiliates to do business in a central location, usually due to economies of scale. Would it not be beneficial to encourage global and regional development banks to play a much stronger role in IFCs’ activity?

With a development bank taking more active roles, emerging market International Financial Centers such as the TTIFC would win with a “champion” lead financial institution which can not only meet the requirements of financing options, but can simultaneously provide sound assistance in creating the credit infrastructure needed within the Caribbean financial services industry to facilitate expanded, developmental lending activity.

By now we have talked our ears off about the sub-prime lending crisis. Consumer banks lent to less-than-creditworthy individuals loans with less-than-perfect loan structures. And then investment banks took the loans and turned them into “investment grade” derivative instruments Now, if these loans had an underlying micro-management and developmental component to it, things may have turned out quite differently, for the better that is. Development banks and other institutions such as the Grameen Bank make high risk loans everyday, many times with a 1 – 3% default rate. Old news, but important news, since the key to keeping default rates low is micromanagement of the debtors.

The point is if consumer and investment banks wanted to be creatively cut-throat, they should have realized the amount of client micro-management that would have been needed to keep their deals afloat, rather than go belly up. These banks and institutions that now (if they still exist) are undergoing contortions of regulations and restructurings to regain trust. And these banks traditionally fill International Financial Centers. We need a better mixture of institutions we can trust in our IFCs – if only to decrease reputational risk.

I once contacted the International Finance Corporation, the World Bank’s private sector lending arm, on its involvement in International Financial Corporation creation, namely for Trinidad & Tobago. The answer I received was unclear. I think that this World Bank arm gives technical advice to the Government, but does not necessarily actively participate in the International Financial Center itself. I hope that more participation exists.

Private lending arms of the World Bank, the Inter-American Development Bank, and for our region, the Caribbean Development Bank should have, in my opinion, major roles in the region’s IFCs. For example, the International Finance Corporation (coincidentally also called “IFC”) as the World Bank’s private sector lending arm meets all requirements to be the lead anchor institution for, say the TTIFC.
The International Finance Corporation provides the following:

1. Loans and intermediary services
2. Advisory services on credit infrastructure
3. Member countries support IFC – immediate decrease of franchise risk
4. Already operating in Trinidad as headquarters for the Caribbean region.

The International Finance Corporation is multilateral in nature, already acknowledged by the regions’ sovereigns, and is known for its stance on sustainable development while encouraging free trade and competition in both finance, infrastructure and trade markets. In addition, institutional clientele would take great comfort and derive due diligence from a development bank’s support of the TTIFC.

On the topic of clientele, introduction of such development branches within our IFCs may introduce a more innovative type of obligor. Obligors who need capital for wind powered turbines, hydrogen powered electricity, and even our “small-scale” sustainable infrastructure projects concerning human capital and entrepreneurship (see www.caribbeaninvestornetwork.com). We may be able to turn competitive hubs into financial centers for innovative progress.

I am unsure whether any multilateral development institution has ever actively participated in a country’s/region’s International Financial Center. I hope so. Maybe the time was not yet right, or ripe for such inclusion. We must admit that this present time is unlike any other, and new ways of being and doing are gradually called for. We need to make our base secure, regain trust in the finance industry, and this active inclusion just might be a start in the best direction.

Views: 78

Comment by Dorothy Mejia on September 20, 2009 at 1:40pm
Hello Francis,

Speaking as an American that has watched the house of cards that is corporate finance fail, I have a somewhat different opinion of what a successful community looks like. Financial institutions are an industry, just like any other industry, except that their product is backed by the US government here, and has been made the backbone of US economic policy. Bigger is not the best of structures for, in the age old words of someone, "The bigger they are, the harder they fall". When the fall can lead to utter devastation, we might start looking at Economic Localization as a way to avoid this trap.

I believe that small communities investing in themselves and reaping the benefits solely in the local community is the only way to avoid the type of collapse we have seen recently. Self-sufficiency, localization of survival services (food, water, power, infrastructure, security, finance), and transparent financial deals openly published to the entire population are the only way to go. When we invest money other than locally, we are risking our survival on the whim of others. In plain, common-sense terms, this is nonsense.

It would be wonderful to see more nations that are ready to expand and grow invest in themselves and let that investment mature organically. I hope that others will take a closer look at what really contributed to the financial collapse, and choose a wiser course while they still can.

Best Wishes,
Kay Mejia
Comment by Astrid Franchiska Kowlessar on September 20, 2009 at 2:40pm
Oh absolutely Dorothy I agree that localization and even decentralization is truly necessary - say investments and development meted out via municipalities even - I am very much a proponent of microfinance initiatives, which truly build community development.

My main interest in the ideas above stems from this - presently there are many International Financial Centers already existing or being created (as in Trinidad) whether we like it or not. So at least if they put in a development spin on the financial center instead of using this old, traditional model of only inviting the top corporations to be part of the IFC, there might be some 1. good 2. sustainability coming out of the IFC.

Truly, the real change comes from strengthening communities.

Thanks,

Astrid
Comment by Dorothy Mejia on September 20, 2009 at 3:06pm
Good point, Astrid. Do you know what the IFC's charter is for Trinidad?
Comment by Astrid Franchiska Kowlessar on September 22, 2009 at 2:07pm
Which IFC Kay - the international financial center or the World Bank's IFC? The latter has regional headquarters in Trinidad - for the Caribbean. In terms of their specific mandate for lending/investing, I'm not sure.

Regards

Astrid

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