The central bank

The central bank is the head of the financial sector in any economy. The central
bank is not involved in ordinary banking business. Its twofold purpose is:
• to oversee the operations of all financial institutions in the economy; and
• to implement monetary policy on behalf of the government.
Among the central banks in the region are the Central Bank of Trinidad
and Tobago, the Central Bank of Barbados, the Bank of Guyana, the Bank of
Jamaica and the Eastern Caribbean Central Bank.
Functions of the central bank
 It has the sole rights to issue notes and coins for the country.
 It is the bank for all commercial banks.
 It is banker to the government. T
 It implements monetary policy on behalf of the government.
 It manages foreign exchange reserves.
 It supervises non-bank financial institutions

Commercial banks
A commercial bank provides individuals and firms with banking services.
Commercial banks are profit-making enterprises. Some commercial banks in
the Caribbean region are: RBTT, Scotiabank and Republic Bank.
• Commercial banks accept deposits from individuals and firms. The
depositors are paid interest by the bank. The rate of interest is the price
charged for borrowing money.
• Commercial banks make loans to individuals, firms and the
government. Individuals might need a loan for purchasing a house, for
educational purposes or to start a small business. Firms use loans to invest,
and they might create more jobs. The government might need a loan to
meet expenses or to bridge its current expenditure if revenues do not come
in on time.
• Commercial banks offer safekeeping services. Customers use the bank
safety deposit boxes to store important documents and valuables, such as
property deeds and jewellery.
• Commercial banks offer a wide range of services. Services offered by
the banks include: letters of credit, bills of collection, customer payment
services, cheque services, credit and debit card services, and 24-hour
banking.
• Commercial banks offer foreign currency banking services. Banks
issue travellers’ cheques, and buy and sell foreign currency. They issue bank
drafts in foreign currencies. Commercial banks in the region now accept
deposits in foreign currency such as the US dollar, the Canadian dollar and
the pound sterling.
Commercials banks are financial intermediaries.

Stock markets
• The stock market is one of the most important sources through which
companies can raise money.
• At the stock market, investors can quickly and easily sell shares, and so
obtain cash. This is an advantage of investing in stocks, compared with, say,
real estate.
• The price of shares can be an indicator of business conditions in an economy.
Rising share prices, for instance, tend to be associated with an increase in
business investment, and falling share prices with a decrease.
• Share ownership allows private individuals to earn additional income.
• A stock exchange is often the most important component of a stock market.
Stock exchange
A stock exchange is a corporation that brings buyers and sellers of company
stock together. The stock exchange is also called a ‘bourse’. It provides facilities
for stockbrokers and traders to trade company stocks. A stockbroker is a
licensed individual who acts as an agent for clients, buying and selling shares in
the market on the client’s behalf. The stockbroker really makes the market, as
he/she brings buyers and sellers together. To be able to trade shares on a certain
stock exchange, the company has to be listed there. The company must be a
public limited company. Some examples of stock exchanges in the region are
the Trinidad and Tobago Stock Exchange, the Jamaica Stock Exchange, the
Guyana Stock Exchange and the Eastern Caribbean Securities Exchange.

• The stock exchange facilitates the trading of shares, as the exchange is

responsible for the collection and delivery of shares. It guarantees payment
to the seller. This eliminates the risk to an individual buyer or seller that the
other party could default on the transaction.
• The stock exchange contributes to increased prosperity of the economy
as businesses obtain funds, and companies and households have the
opportunity to invest and even make profits.
Credit union
A credit union is a cooperative financial institution that is owned and controlled
by its members. Credit unions differ from traditional financial institutions in that
the members who have accounts in a credit union are that credit union’s owners.
Some credit unions in Trinidad and Tobago are: the Eastern Credit Union
Cooperative Society Ltd, the Teachers Credit Union Co-operative Society Ltd
and the Trinidad & Tobago Police Service Credit Union Co-operative Society Ltd.
Only a member of a credit union can deposit money with that credit union,
or borrow money from it. Credit unions are committed to helping members
improve their financial situations. Credit unions typically pay higher dividends
on shares (or interest on deposits) and charge lower interest rates on loans
than banks. Credit union revenues (from loans and investments) must exceed
operating expenses and dividends (or interest paid on deposits) in order for the
credit union to stay in business. Credit unions are not as profitable as banks, as
they focus on serving members.
Development bank
A development bank is an institution set up to facilitate growth and production
in a particular sector in the economy. It grants loans at competitive rates to
potential investors. Developments banks do not accept deposits from the
general public. Funds are obtained from international and regional institutions,
and grants from the government.

Insurance company
Insurance is an agreement whereby a company guarantees to give compensation
for loss of life or property, for damage to property, for injury or for illness in
return for payment of a regular sum of money. This sum of money is called a
‘premium’. Insurance companies provide insurance. Some examples of
insurance companies in the region are: Sagicor and CLICO. They operate on
the principle that not everyone will suffer the same loss to the same extent at
the same time.

• The services offered by insurance companies are a security to firms and

individuals. Private property is protected against risk of loss. Businesses are
protected against loss of or damage to property by fire, and stock and goods
in transit are protected against loss. Insurance offers security for traders.
• Insurance companies use their funds to purchase government and private
sector securities.

Mutual fund
A mutual fund is a collective investment company. An investor buys a share in
the mutual fund and is paid a dividend based on the number of shares he holds.
The dividend might be at a fixed rate, or it might vary depending on the
performance of the fund. The fund pools money from many investors and
invests their money in a range of securities. The advantage of the mutual fund
is that the investor has the services of an expert fund manager to make
investment decisions. The investors’ collective funds are used to invest in
securities to which the individual investor might not normally have access.
Building society
A building society is a financial institution owned by its members that offers
banking and other financial services, especially mortgage lending. The term
‘building society’ first arose in the nineteenth century in the UK. Groups of
people pooled savings so that members could buy or build their own homes.
Today, building societies offer services similar to those offered by commercial
banks. Such services include a range of savings accounts, money transfers and foreign
currency transactions.

Informal credit institutions

For many years, the financial sector in the Caribbean economies remained
relatively underdeveloped. However, the people of the Caribbean had financial
needs that had to be satisfied. Informal financial institutions developed, arising
from the needs of the people. In later years, formal financial institutions
extended to reach a larger part of the population. However, the people of the
Caribbean still held onto these simpler institutions. As a result many of these
informal institutions exist to this day. Some of them include:
• Sou sou. This is an informal arrangement where a small group of people
contribute an equal fixed sum each week or month on payday to a common
fund, called a pot. The total amount paid in by all participants goes to one
member of the group each week or month. This sum is called a hand. In
some sou sou, there is a small tax on participants to pay the person running
the sou sou. This is called a box. People will ‘throw’ a sou sou with others
whom they know, such as neighbours or work colleagues. Clearly, if you
took one of the earlier hands, it is as if you are borrowing the sum of money
at zero per cent interest and repaying by instalments in later weeks/months.
If you took a later hand, then it is as if you were saving up your money to
get a lump sum later. The sou sou lives on to this day in Caribbean islands
such as Trinidad and Tobago, St Lucia, St Kitts and Tortola. Versions of this
arrangement are called Partner and Meeting Turns. This savings scheme is
popular amongst Caribbean people, South Americans, and Africans and their
descendants in other parts of the world, such as the USA.
• Money lenders. In Caribbean societies, money lenders or usurers also used
to conduct a fair amount of business. We might question how fair the
business was, though. The usurers usually lent money at very high rates of
interest to borrowers. However, the borrower might not have to put up any
security (collateral) to obtain the loan. Money lenders and their activities
still survive in Caribbean societies, especially the rural areas.

Insurance companies guiding principles

1. Insurable risks
2. Pooling of risk
3. Utmost good faith
4. Proximate cause
5. Indemnity
6. Subrogation
7. Contribution
8. Average clause

Types of Insurance

1. Life insurance

 Whole life policies

 Term policies
 Endowment policies
 Special policies
 Home purchase policies
 Unit-linked policies

2. Non-life insurance - These are subdivided into categories

Marine Insurance
 Hull
 Cargo
 Freight
 Shipowner’s liability

Fire, motor or aviation insurance

 Motor
 Consequential loss policies
 Minimum legal cover
 Third party cover
 Third party fire and theft
 Comprehensive
 Aviation insurance

Accident insurance-property
 Personal insurance
 Liability insurance
 Public liability
 Employer’s liability
 Fidelity guarantee

Structured questions
1a. What is a Treasury bill?
b. Explain two differences between a Treasury bill and a corporate
bond?
c.Who provides funds for businesses to grow?
d Explain the role of two financial institutions in your economy. [8mrks]

2 Penny and Bill are newlyweds. They wish to purchase a new home, as
well as to start a joint savings account for the future.
a Giving reasons, explain which financial institution the
newlyweds should go to obtain a home ownership loan.
b Giving reasons, explain which financial institution the couple
should save with.
c Explain why the informal sector might not be useful for their
needs. [6mrks]

3a How does the existence of the stock exchange assist public limited
companies and potential investors?
b Why does a credit union charge a lower rate of interest than a
commercial bank for the same loan?
c Explain four functions of a central bank.[10mrks]