To become a successful investor, you should at least have a general understanding of our financial system, recognize the main players and their roles, and keep up with the major changes that take place. It is particularly helpful now, that with just a few clicks, you can learn about the entities that make up our financial system; however, it is still a daunting prospect to understand it as a whole unless you are a frequent participant.
The purpose of this article is to provide a macro view, which you can then use as a launching pad to research more about any one area or entity. For clarity, we are focusing on a “layman’s’” description: nothing overly complex, but enough information for you to understand how the parts fit into the whole.
- 1 The big picture
- 2 Central Bank of Trinidad and Tobago (CBTT)
- 3 Institutions created by specific legislation
The big picture
Despite a small population of 1.3 million (we are ranked #151 according to Worldometers [www.worldometers.info]), Trinidad and Tobago has a relatively sophisticated financial system that is continuously evolving towards the standards of countries with more developed markets.
The table below provides an excellent snapshot of the different players in the system (source: Central Bank of Trinidad & Tobago’s 2008 Financial Stability Report). While we haven’t seen a more up-to-date summary, there have not been material changes since 2008. We’ll explore the players as the article progresses.
Another useful summary is provided below (source: Central Bank of Trinidad & Tobago’s 2014 Financial Stability Report): it shows the relative size of each type of player measured by total assets. Commercial banks (eight companies) dominate the system, followed by insurance companies and pension funds, although if you refer to the first table above, there are many more of these entities compared to commercial banks.
With this picture in mind, the easiest way to start breaking down our financial system is by saying it comprises, on one hand, entities that provide financial services, and on the other hand, regulators that supervise their activities (everybody has a boss!).
Financial services includes just about anythinng that involves money and the public, for example, activities of a bank, credit union, insurance business or brokerage, pension fund, and more generally, any securities business or business of a financial nature.
From here, let’s separate the financial system into two components: the securities industry and the “rest”. The reason for this approach is that each component is supervised by a specific regulator. The securities industry is supervised by the Trinidad and Tobago Securities and Exchange Commission (TTSEC) (http://www.ttsec.org.tt/) and the “rest” is mainly supervised by the Central Bank of Trinidad and Tobago (CBTT) (http://www.central-bank.org.tt/).
Let’s start with the role of CBTT and then we’ll look at the role of TTSEC.
Central Bank of Trinidad and Tobago (CBTT)
CBTT’s primary objective is to maintain confidence in, and promote the soundness and stability of, the financial system in Trinidad and Tobago.
CBTT has a very broad mandate and it far exceeds what we will cover in this article. Investors should know that CBTT is responsible for authorizing (and supervising) financial entities to provide financial services: this is referred to as granting a “license” to operate.
Bank versus Non-bank
Financial institutions are licensed to operate as banks or “non-bank” entities (which really refers to all institutions that are not commercial banks). While “banking” business should be universally understood (e.g. you can only obtain a savings or chequing account at a commercial bank), “Non-bank” financial institutions engage in other activities e.g. hire purchase, leasing and financing, mortgage lending, trust services, investment banking, foreign exchange trading, etc.
A current list of authorized financial institutions and non-bank financial institutions can be found here.
You’ll note all commercial banks have to be called “bank” (as they are licensed to engage in banking business). But no other financial institution can have “bank” in its title, except a “merchant bank”, which could be a little confusing. It is specifically called “merchant bank” because it is categorized as a non-bank financial institution – this means it cannot undertake commercial banking business, for example, a merchant bank cannot issue savings and chequing accounts, or credit cards.
Other financial entities
Other financial entities operate in the following sectors:
The insurance sector includes life and general insurance companies, as well as adjusters, agents, salesmen, and brokers. These are all required to be registered with CBTT for them to be authorized to perform their respective roles.
This includes all pension funds. We’ll look at the purpose of pension funds in a future article.
A credit union is one type of co-operative society created under specific legislation (Co-operative Societies Act) and are supervised by the Commissioner for Co-operative Development.
The credit union sector is currently undergoing significant change, and the supervision of the financial activities of all credit unions will be eventually transferred to CBTT when the proposed Credit Union Act is passed.
Bureaux de change
A bureaux de change is an establishment dedicated only to the exchange of currency (buy and sell foreign currency notes, coins and travellers’ cheques in exchange for notes and coins of another currency).
Institutions created by specific legislation
More recently, CBTT has been given responsibility for supervising the activities of a financial nature of two institutions that were created by specific legislation:
Home Mortgage Bank (HMB)
HMB was established under the Home Mortgage Bank Act, 1985 specifically to create a secondary market for mortgage loans. The idea was HMB would buy and sell mortgages to provide liquidity to financial institutions engaged in mortgage lending, and thereby increase the availability of financing for home loans.
In 2007, HMB’s operations were expanded to include merchant banking, trust company, and collective investment schemes (we’ll explain collective investment schemes in a future article).
Trinidad and Tobago Unit Trust Corporation (UTC)
The UTC is a giant of the financial system that currently offers a full range of financial services. Although its principal service offering is mutual funds, it is also authorized to engage in merchant banking, trust, card services, foreign exchange, and financial advisory activities. Note, it is not authorized to carry out banking business.
It is useful to recall the initial and primary objective of the UTC when it was established: “To encourage and mobilise savings of the community and channel same into productive investments so as to promote the growth and diversification of the country’s economy. This objective is achieved through the sale of units to the general public.” (source: Mr. Jerry Hospedales, the UTC’s first Executive Director).
Deposit Insurance Corporation (DIC)
The role of the DIC will be of particular interest to investors, but we will discuss their mandate in the article Investor Protection in Trinidad & Tobago.
As this is becoming a long article, let’s stop here and in Part 2 we turn our attention to the TTSEC and the securities industry as well as briefly look at the National Insurance Board.
We hope this article helped you begin to understand, in a summarized form, our financial system. This series continues with Trinidad and Tobago’s Financial System – Part 2. Hope you check it out!
Please feel free to share your thoughts or experiences in the comments area below! If you have questions, don’t hesitate to Contact Us: we’d love the opportunity to assist you.