Recent Economic Crisis and the Caribbean Banking Industry

Subject: Economics
Pages: 7
Words: 1843
Reading time:
9 min
Study level: College


Research Question

The investigation will focus on the impacts of the recent economic crisis and the measures that were taken to save the banking industry in the Caribbean region. Hence the central question will be:

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  • How did the recent economic crisis affect the performance of the Caribbean banking industry?

In order to answer this question effectively, the following sub-questions will also be considered:

  1. What were the specific impacts on the banking industry?
  2. Were there internal factors that made the region vulnerable to the effects of the economic crisis?
  3. What measurers were taken to address the effects of the crisis?
  4. Did the measures taken achieve their purpose?

Why this Question is Interesting

The recent economic crisis undermined the performance of the banking sector in the Caribbean region (Hughlette 2010, vol. 46, pp. 350-456). This led to the closure of some financial institutions. Consequently, the citizens who invested in the institutions that collapsed lost millions of dollars. Many investors have lost confidence in the region’s banking industry and this has limited investments in the sector (Ingo & Mattoo 2009, vol. 30, pp. 1-20). Besides, various governments have spent a lot of funds in rescuing financial institutions (Hanan &Mansuri 2009, vol.88, pp. 232-241). There is a reduction in economic growth due to limited credit facilities. This is because the banks in the region are underperforming (Leora, Berger & Rima 2009, vol. 30, pp. 99-118). It is therefore necessary to investigate how the economic crisis affected the performance of the banking industry. The findings will provide the data or information that is needed to make polices that can be used to restore stability in the region’s banking industry.

Effects of the Economic Crisis

The Caribbean region is currently experiencing a fiscal deficit of 4% of its total GDP due to the effects of the economic crisis (Sergent 2010, vol. 23, pp. 67-78). In some countries like Jamaica, the deficit is as high as 9% (Fretes & Villela 2008, vol. 23, pp. 102-120). Surinam experiences the lowest fiscal deficit of 2.3%. The region’s banking industry was not severely affected by the economic crisis due to the following reasons. First, the region has always been conservative concerning investments in instruments with high risks such as derivatives (Tsikeky, Moreira & Hamilton 2009, vol. 40, pp. 350-400). Hence the risk profile in the region was low. Second, the region had limited exposure to instruments associated with mortgages and derivatives which were responsible for the economic crisis. Finally, the region’s banking industry has little integration with international financial markets (Mayes 2006, vol. 8, pp. 20-39). Besides, the region had avoided borrowing from overseas banks (David 2007, vol. 6, pp. 36-78). Thus it was not affected through the contagion effect.

The economic crisis had two main negative effects. First, it led to the closure of Stanford ltd and the collapse of CL Financial ltd (Hughlette 2010, vol. 46, pp. 350-456). The two institutions had invested in real estate and equities which have high risks. They also offered products which had high returns but associated with greater risks. The collapse of these institutions lowered the investor’s confidence in the industry. Second, the economic crisis led to excess liquidity in the economy (Hughlette 2010, vol. 46, pp. 350-456). There was a great reduction in the demand for loans as economic activities slowed down (Caruana 2010).

Internal Factors that Made the Region Vulnerable

First, there was no proper supervision of the banking industry in the region (Flaherty 2010, vol. 3, pp. 1-6). Hence the governments could not protect the investors by regulating the activities of financial institutions (Economic Commission for Latin America and the Caribbean 2009). Second, most financial institutions lacked proper internal controls to guide their investments (Shah 2010). Thus they invested in high risk instruments such as derivatives. Finally, the institutions that were greatly affected had failed to raise the minimum capital and liquidity requirements (Sahay, Robinson &Cashin 2006, vol. 991, p. 178)

Measures Taken

First, regulatory measures such as minimal capital and liquidity requirements were introduced by governments (Ayadi & Behr 2009, vol. 3, pp. 179-201). Second, various central banks reduced interest rates in order to encourage borrowing and improve liquidity in the economy. Finally, the local banks adopted sound banking principles. This included high service quality as well as being conservative in giving loans and investing in high risk instruments (Whiteway 2010, vol. 34, pp. 321-356). Credit creation was based on the level of deposits instead of inter-bank or international borrowing (Weber & Derbellay 2008, vol. 10, pp. 1-16).

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Effectiveness of the Measures

The conservative approach in credit creation helped in maintaining the level of non-performing loans at below 3% (Bourne 2008, pp. 1-6). However, the conservative approach in investing in foreign markets reduced the region’s economic growth (Economic Commission for Latin America and the Caribbean 2009). Despite the reduction in lending rates, the demand for loans is still low due to underperformance of the economy (United Nations 2009). The fiscal consolidation policies implemented by various governments led to increase in poverty and inequality (Gupta & Buvincic 2009, vol. 23, pp. 347-369).

Proposed Methods

The triangulation approach will be used due to the wide scope of the study (Axim & Pearce 2006, P.56). It will involve the use of three methods namely; interviews, surveys and document search (Kothari 2008, p.90). The choice of interviews has been informed by the adaptability they offer (Kvale 1996, p.73). For example, the body language of the respondent can help in obtaining more information. The use of surveys is justified by the fact that they can be completed at the convenience of the respondent and can also reach many people (Ethridge 2004, p. 63). Document search will be helpful in finding information on previous work on the topic (Kumar 2005, p.89). The use of several methods will help in ensuring accuracy of the findings (Scruggs & Mastropieri 2006, p.91)


The study will be conducted in all the 13 countries in the Caribbean region. The participating financial institutions will be chosen at random (Lohr 2009, p.78). This will reduce bias by giving every institution an equal chance of being selected (Kalton 2006, p.43).


Interviews will be used to collect primary data (King & Horroty 2009, p. 102). They will involve structured questions that guide the study as well as questions that will transpire in the course of the interview. The questions will aim at capturing facts about the topic instead of personal opinion (Salmons 2009, pp. 45-78).


Surveys will also be used to collect primary data (Groves, Fowler & Couper 2009, p. 98). It will involve administering anonymous questionnaires to the respondents (Fowler 2009, p. 45). The questionnaires will be mailed to the respondents. A letter explaining the purpose of the study and how the questionnaires are to be completed will also be mailed to the respondents (Foreman 1991, p.76).

Document Search

Document search will be used to collect secondary data. The data can be obtained from journals, text books, libraries and internet sources. The sources will be vetted for accuracy and relevance before being reviewed (Philips & Stawarski 2008, p.99).

Data Analysis

The collected data will be analyzed using statistical tools such as ANOVAs, Chi squares, percentages and mean.

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The determinants to be measured include:

  • Economic performance: profits of banks, percentage of non-performing loans, credit creation and level of deposits.
  • Vulnerability: investment policies, capital structures and risk assessment policies
  • Measures: regulatory policies used by governments, roles of central banks and investment policies.
  • Effectiveness of measures: liquidity in the economy and stability of financial markets.


Potential Practical and Empirical Obstacles

The main obstacle in the study is access since the investigation has to be done in several countries. Travelling to these countries require a lot of time and financial resources (Fuller 2009, p.67). Access to secondary data can also be a challenge. While articles on the topic exist at the local libraries, it will be important to visit libraries at the Caribbean countries for more accurate information. Since the materials in these libraries can only be used within the libraries, it will be necessary to make several visits. Thus the libraries will be visited throughout the week except on public holidays when they are closed.

Conceptual and Theoretical Problems and Difficulties

While interviewing the key informants, they might be reluctant to disclose some information such as the financial positions of their companies. Some respondents might fail to complete and submit the surveys in time. Ambiguity or unclear instructions in the surveys can also make it difficult to answer the questions (Foreman 1991, p.88). Hence the respondents might reject the questionnaires. The information in some of the secondary sources of data is based on opinions instead of facts. Thus the information obtained from such sources might not be helpful in making accurate conclusions. Finally, the respondents might give inaccurate information due to lack of adequate knowledge on the topic.


The main concern in this study is confidentiality over the information given by the respondents. To ensure confidentiality, the surveys will be anonymous and the names of respondents will not be mentioned in the dissertation (Smith & Francis 2006, p. 112). The information given by the respondents will be used for academic work only (Mauthner, Brian & Jessop 2002, p.56). It will also be necessary to obtain permission before obtaining information from employees of various companies (Gregory 2003, p. 93). The relevant authorities will be contacted before retrieving information from government databases.

Position as a Researcher

As a researcher in the field of economics and business, I do have prior knowledge about some aspects of the topic. Thus it will be necessary to avoid making conclusions based on personal opinion. The conclusions will have to be based on evidence collected during the study. Finally, it will be necessary to be professional during the study (Israel & Hay 2006, p.79).


A part from investigating the impact of the recent economic crisis on the Caribbean banking industry, the study will also focus on the effectiveness of the measures that were taken to address the effects. Even though the recent economic crisis did not have a severe effect on the industry, the performance of most banking institutions has greatly reduced. Despite the measures taken by the various governments, central banks and financial institutions in the region little success has been achieved. Consequently, this research will first aim at identifying the knowledge gap in the existing literature. Attempts will then be made to bridge the gap through interviews and surveys that will help in obtaining the needed information. Upon approval by the University of Leicester, the next step will be to conduct a literature review with the aim of obtaining an acceptable perspective on the topic.


Task 15 Jan. 20 Jan 1 Feb. 15 Feb. 1Mar. 15 Mar. 2 April 16 April 3 May 17 May
Submission of proposal
Literature review
Searching information on methodology
Feedback on research proposal
Booking appointments
Data collection
Sorting data
Data analysis and interpretation
Writing the fair copy of the dissertation
Review of the final copy
Submission of dissertation


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