New directions for development banking in the Caribbean: financing to take advantage of unlimited supplies of labour skills and entrepreneurship

Abstract In the early 1980s, within the wider structural adjustment and liberalisation framework, financial sector reform were initiated to allow greater facility of market forces in the pricing and allocation of financial resources. The sector has been increasingly liberalised since then with subsequent on-going reform addressing the legislative and regulatory frameworks. The on-going reforms have sought to improve resource flows for productive investment. Nevertheless, there are persistent fractures and imperfections in the credit market. Development banking seeks to define and resolve the imperfections in credit markets and to address concerns regarding social equity by targeting loan and other support resources to priority sectors that seek to use underemployed resources for capital accumulation and growth. This document is concerned with how development banks might be reformed to be part of the wider agenda of development of the financial sector. The paper argues that the key reforms needed must emerge from the introduction of derivative instruments into the financial markets that define, price and market, and hence spread, the significant credit risk attached primarily to provision of credit as either working capital or finance for fixed capacity building to create capital or to absorb it into production of consumer goods and services. Reforms of development banking are proposed that focus on their role as counterparty in derivative contracts, with emphasis on the introduction of a variety of securitization devices involving redeployment of the public sector resources to which they have access.