Friday, February 22, 2008Dollars and Sense

Michael SpencerBanking in the Virgin Islands: Growing in Sophisication

Throughout the last few decades the banking sector in the British Virgin Islands has evolved to such an extent that it now plays an integral part in the territory’s premier Financial Services sector. The origin of banking in the BVI dates back to the 1960s, when the first banks started operations in the territory. To date the industry has grown to six banks, operating in what might be considered a very small market.

The first bank to open its doors in the British Virgin Islands was the Virgin Islands National Bank. In 1961 this branch of the St Thomas based bank paved the way for other high street banks. Barclays bank arrived for business in 1965 with the Bank of Nova Scotia and Chase Manhattan following a year later. These banks were welcomed with enthusiasm, as locals finally had a choice in banking services. These services focused exclusively on the domestic market with an equal amount of private and business clients opening accounts with the banks. In modern terms, asset growth was slow but not sufficiently slow as to discourage the bankers. There was a gradual increase in the demand for international banking services that took a dramatic up turn in the mid 1980s. Today, there are five commercial banks operating in the BVI – Scotiabank (British Virgin Islands); FirstCaribbean International Bank (formerly Barclays Bank PLC – created as a result of merger between Barclays and CIBC in the Caribbean); Banco Popular de Puerto Rico; First Bank; and the Development Bank of the Virgin Islands. The sixth player, VP Bank is a Private Bank offering comprehensive private and trust banking services to international and domestic clients.

The primary focus of the local banking industry revolves around commercial banking with assets and deposits growing substantially both in size and range of products available. Over the years, the commercial banks have contributed significantly to the growth and development of individuals and businesses in the Virgin Islands by providing various forms of financing for small businesses, mid and large scale projects, as well as residential mortgages. Today, the banking environment in the British Virgin Islands has become highly competitive, with banks expanding their product offering and services to meet the demands of a savvier local clientele. Currently, all of the commercial banks offer a diverse range of products and services including: Personal, Corporate, Investment, and International banking. FirstCaribbean has had a dedicated International banking division for a number of years, and Scotiabank has recently formally established a similar unit offering services to non-resident clients. In addition, FirstCaribbean will soon be offering a new wealth management proposition to its domestic and international clients.

By 1984 however, the Government of the British Virgin Islands passed the International Business Companies Act. This proved a timely piece of legislation as it served to attract trust companies from Panama who were seeking alternative jurisdictions from which to continue serving their clients. Within a couple of years ten Panamanian trust companies had registered their businesses in the BVI. Their presence proved to be the catalyst for the rapid growth in the international financial services offered in the BVI. Whilst the wider Financial Services sector is more dependent upon various forms of investment banking, local banks have to date been unable to capitalize on these opportunities. Even though a number of the local banks do offer such services, they are limited in scope and managed primarily through overseas head offices. Nevertheless, the investment banking arena in the BVI is gradually changing as major development projects are being progressed by private investors and the Government, and hence is a potential area for growth for the five commercial banks.

Another key area seeing major development within the BVI is the real estate market, and as this sector continues to grow, it can depend on the full backing of the banking industry. Each of the local banks has been aggressively financing various types of real estate projects – from homes to multi-million dollar resort developments. One of the main advantages of the BVI market is that banks are able to offer very favourable deposit and lending rates since the local currency is the US dollar. This is an attractive feature for foreign investors who are able to transact business in hard currency and on typically familiar terms. Also, because clients today have come to expect easy and real time access to their accounts and in keeping with global trends in electronic banking capability, most local banks in the BVI now offer such services.

It is crucial to recognize that an effective regulatory regime is critical to the success of any international finance centre, and this is especially important in the banking industry. The BVI regulatory framework is managed in accordance with international standards as the regulator has the statutory responsibility to license, supervise and regulate the banks under the Bank and Trust Companies Act. All of the banks are therefore required to be compliant with the standards under the Bank and Trust Companies Act. The financial services regulator – the Financial Services Commission (FSC) has ensured that the BVI financial community is stable and well regulated. Additionally other forms of regulation are in place with respect to Anti-Money Laundering, and it is essential that all banks adhere to these requirements. Banks are expected to have compliance officer regimes in place to ensure that their operations are amenable to the laws and regulations of the BVI.

The second phase of Basel (a round of deliberations by central bankers from around the world under the auspices of the Basel Committee on Banking Supervision) is currently under discussion and doubtless will have an impact on the BVI regulatory standards and amongst other areas, regulatory capital requirements are likely to be adjusted. The recent acceptance of the BVI by IOSCO (International Organization of Securities Commissions) is further evidence of the confidence that the international financial community has in the BVI.

Expectations of the local and international clientele have evolved, and it is important that service levels meet or exceed these expectations. The availability of efficient banking services and products is critical to the success of banking sectors in general, but even more so in an International Finance Centre, like the BVI. The decision to use an International Finance Centre to establish a business company or a mutual fund invariably entails the formation of a bank account to transfer funds. It is therefore absolutely essential that the banking system is sophisticated enough to accommodate the wide range of clients’ requirements. This aspect of banking in the BVI is continually being developed and all of the banks have incorporated various customer service training programmes to orient staff with the objectives of the business and the needs of their clients.

Commercial banks in the BVI have long recognized that there needs to be an efficient way for transactions to be facilitated between the banks. An Electronic Funds Transfer system or an Automated Clearing House is slated for introduction in the next few years, resulting in greater efficiency in the local banking system and improved customer satisfaction. Banks are also aiming to enhance their product offering and usage. Investment banking is one such area. Whilst most banks have access to the traditional range of investment banking products, they are not used extensively in the BVI due to a lack of critical mass. Investment banking is acknowledged as being a major component of any country’s banking sector, as it adds to the stability of the industry by enabling governments and companies to raise capital quickly at an efficient cost. It also allows them to spread the risk of assets across different investor categories rather than having them concentrated in the banking segment.

These alternatives are not new to BVI investors as the local investment clubs provide an alternative to utilizing bank funding. There is however room for growth as there are other products under the investment banking umbrella that can be used to support the financial system. The BVI, along with most Caribbean countries, has not used the full range of investment banking products and services but it is reassuring to know that this is changing as critical mass is being achieved in many countries.

But the banks are not all about business. Traditionally banks in the BVI have had a good track record where corporate social responsibility is concerned. It is admirable to note that all of the banks are committed to partnering with various organizations and initiatives in the BVI community. They tend to focus their efforts on education, youth, health and social services and other community programmes through donations and active employee involvement. As central pillars in the community, it is important that financial institutions continue to support worthy causes to help meet social needs.

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