## 1bhsea2019004

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---

### Overview and scope
- Assessment type: High-level assessment of financial inclusion (for individuals and enterprises) and retail payments in The Bahamas.
- Context: Undertaken in the context of the International Monetary Fund (IMF) Financial Sector Assessment Program (FSAP) mission to The Bahamas from January 15–28, 2018.
- Assessors: Holti Banka and Ivor Istuk (World Bank’s Financial Inclusion, Infrastructure and Access (Finance and Markets Global Practice)); Shalini Sankaranarayan (World Bank) provided input remotely.
- Coverage: (i) Legal/Regulatory Framework and Oversight of Retail Payments; (ii) Retail Payment Systems and Instruments; (iii) Financial Inclusion – Access and Use Cases; (iv) Small and Medium Enterprise (SME) Finance.
- Frameworks/guidance used: Payment Aspects of Financial Inclusion (PAFI); Principles of Financial Market Infrastructures (PFMIs); G20 High Level Principles for Digital Financial Inclusion; World Bank Retail package; G20-OECD High-level Principles on SME Financing.

### Legal/regulatory framework and oversight
- Key statutes/guidance:
  - Central Bank of The Bahamas Act 2000.
  - Payment Systems Act (PSA) 2012.
  - Payment Instruments Oversight Regulations 2017.
  - Credit Bureau Bill adopted 2018 (leading to establishment of a credit bureau).
- Identified issues:
  - Definition of payment institution is narrow and focuses mainly on e-money issuers; needs expansion to accommodate new players offering payment services and/or payments infrastructure (FinTech).
  - Consideration of open banking: banks opening infrastructure to third party providers via APIs; accompany with privacy law adjustments.
  - Unclear whether banks can outsource deposit-taking to agents; regulatory clarity required.
  - No explicit ban on agent exclusivity; recommendation to introduce explicit prohibition to protect competition.
  - Oversight: CBOB should issue detailed on-site and off-site guidelines and incorporate cyber resilience guidelines (reference CPMI/ECB frameworks).
  - Suggestion for CBOB to publish comparative fees for accounts, payment services, and remittances; standardize terminology across banks.
  - Recommendation to establish a formal dispute resolution body within CBOB (e.g., Ombudsman); CBOB intends to recruit to the post in 2019.
- Specific regulatory provisions noted:
  - Payment institutions can hold accounts only in Bahamian dollars and of value not more than B$15,000 unless specially authorized by the central bank.
  - E-money issuers required to hold customer funds in Custodian accounts with commercial banks.
  - Final settlement of e-money transactions shall occur no more than 24 hours after the payment instruction has been initiated.
  - New institutions undergo a monitoring pilot period before full license.

### Retail payment systems and instruments
- Market structure and main systems:
  - Real Time Gross Settlement (RTGS) — The Bahamas Interbank Settlement System (BISS): processes transactions of B$150,000 and above.
  - Automated Clearing House (ACH) — The Bahamas Automated Clearing House Limited (BACHL): clears cheques, direct debits and credit transfers; jointly owned/operated by commercial banks; settlement in central bank money.
  - Card transactions: routed through international card schemes outside the country; settled in commercial bank money in The Bahamas.
- ACH operational details:
  - All banks are participants; CBOB is a direct participant.
  - System rules allow indirect participation (none yet).
  - Multiple clearing cycles during the day; settlement in central bank money via RTGS.
  - Credit transfers/direct debits settle same day; cheques on T+1.
  - No guarantee fund; settlement risk framework includes an unwinding procedure.
  - Standard charges: B$0.9 for clearing a direct debit and credit transfer; B$0.27 for clearing a cheque.
  - Any transaction of B$150,000 or below is processed through the ACH. Transactions between B$150,000 and B$1 million can be processed through ACH or RTGS; any transaction of value B$1 million or above must be processed through RTGS.
  - ACH can process U.S. dollars as well as local currency.
  - System scanned weekly for security breaches; annual cyber crisis response simulations with external experts.
- ACH volume and value (Global Payment Systems Survey 2018) — Volume and Value B$ by instrument:
  - 2014 Volume: Cheques 2,808,412; Direct Debits 38,564; Credit Transfers 1,429,321; Total 4,276,297
  - 2014 Value B$: Cheques 6,930,832; Direct Debits 30,882; Credit Transfers 3,577,536; Total 10,539,250
  - 2015 Volume: Cheques 2,743,184; Direct Debits 60,309; Credit Transfers 1,621,476; Total 4,424,969
  - 2015 Value B$: Cheques 7,122,776; Direct Debits 258,975; Credit Transfers 4,700,273; Total 12,082,024
  - 2016 Volume: Cheques 2,611,102; Direct Debits 97,677; Credit Transfers 1,976,068; Total 4,684,847
  - 2016 Value B$: Cheques 7,033,584; Direct Debits 281,866; Credit Transfers 6,444,773; Total 13,760,223
  - 2017 Volume: Cheques 2,521,096; Direct Debits 90,648; Credit Transfers 2,192,637; Total 4,804,381
  - 2017 Value B$: Cheques 7,157,368; Direct Debits 97,476; Credit Transfers 10,311,602; Total 17,566,446
- Payment cards: volumes and values (Global Payment Systems Survey 2018)
  - Volume:
    - 2014: Debit Cards 4,900,090; Credit Cards 566,247; Total 5,466,337
    - 2015: Debit Cards 7,691,395; Credit Cards 828,344; Total 8,519,739
    - 2016: Debit Cards 8,707,159; Credit Cards 1,319,748; Total 10,026,907
    - 2017: Debit Cards 9,712,919; Credit Cards 1,634,548; Total 11,347,467
  - Value B$:
    - 2014: Debit Cards 5,622,691; Credit Cards 206,589; Total 5,829,280
    - 2015: Debit Cards 1,123,887; Credit Cards 283,258; Total 1,407,145
    - 2016: Debit Cards 1,305,134; Credit Cards 313,977; Total 1,619,111
    - 2017: Debit Cards 1,453,463; Credit Cards 455,820; Total 1,909,283
- ATM and POS terminal counts:
  - Number of ATMs: 2014: 334; 2015: 345; 2016: 402; 2017: 362
  - Number of POS: 2014: 4,908; 2015: 8,853; 2016: 9,146; 2017: 11,306
- Operational observations:
  - Cheque volumes highest but declining slightly; credit transfers growing rapidly.
  - Debit card volumes much higher than credit cards; both rising.
  - No national card switch; domestic card transactions processed outside country.
  - No differentiation between debit and credit card merchant discount rates (MDR); merchants charged same fee despite higher interchange for credit cards.
  - Decline in ATMs as banks withdrew branches from some Family Islands; POS concentrated in main islands.
- E-money status (as of January 2019):
  - One e-money issuer licensed end of 2018 (Island Pay) conducting beta testing and expected to fully launch in 2019.
  - E-money issuer must open Custodian accounts with commercial banks; users can exchange e-money for physical Bahamian Dollars on par.
  - Final settlement for e-money transactions no more than 24 hours after initiation.

### Financial inclusion — account access and use cases
- Market characteristics and actors:
  - Approximately 20 percent of the adult population does not have access to a bank account (approximation from central bank surveys).
  - Main actors: CBOB; 8 commercial banks (2 domestic); 10 credit unions/financial cooperatives; The Post Office Savings Bank; 5 money transfer operators (MTOs); 1 e-money institution (with a second licensed by March 2019).
- Account fees and access:
  - Average monthly fees associated with an account vary between B$5–$19 (CBOB survey).
  - 40 percent of respondents reported they do not understand the structure of the fees they are charged.
  - 78 percent of respondents find overall fees to be high and somewhat high.
- Barriers and underserved segments:
  - Underserved segments: migrants, elderly, low-income infrequent bank users, people in Family Islands.
  - Identification challenges: banks require passport or two other forms of identification; CBOB intervention allowed acceptance of a valid email address or phone number in place of proof of physical residence.
- Government payments and Treasury issues:
  - Treasury holds accounts with two commercial banks; no Treasury Single Account (TSA); no Integrated Financial Management System (IFMS).
  - Customs collects about 80 percent of payments in cash and cheques at ports of entry.
  - Many ports have POS terminals but underutilized; bank branch payments often incur a B$10 charge for payer.
- Use-case examples:
  - Bus transport: approximately 400 buses operate on cash-only flat-fee tickets; Ministry of Transport exploring digital ticketing.
  - Potential to digitize government collections via IFMS, e-government portal, and channel public salaries/pensions/social transfers via the ACH.
- Role of non-bank providers:
  - Credit unions have presence in Family Islands; some issue cards via bank partnerships.
  - Post Office widespread physical presence but issues only money orders; requires modernization for electronic payments.
  - Money transfer operators serve migrants and remote areas; migrants often unbanked and favor cash-based transfers.
  - E-money and interoperable mobile solutions could reduce cash reliance in Family Islands.

### SME finance — overview, constraints, and policy responses
- Firm-size distribution (2014 PROTEqIN Survey):
  - 44 percent of Bahamian firms are medium-sized,
  - 36.2 percent are small (5–19 employees),
  - 19.73 percent are large (over 100 employees).
- Productivity and access metrics:
  - IDB report: firm-level productivity in The Bahamas is on average 17 percent lower than the average Caribbean firm.
  - WB Doing Business rank on Getting Credit: The Bahamas rank 144, scoring 30 points (LAC average 51.6 points).
- Access to finance indicators:
  - Bank account access: 95.7 percent of small firms had checking/savings account (vs. 91.6 percent in LAC); 100 percent of medium firms (vs. 95.2 percent in LAC).
  - Bank lending access: 28.4 percent of small firms had a bank loan/line of credit (vs. 41.4 percent in LAC); 43.6 percent of medium firms (vs. 56.8 percent in LAC).
  - 2014 PROTEqIN: SMEs report rejection rates of bank finance applications as high as 85 percent.
- Main impediments:
  - Information asymmetry, heavy dependence on collateral (mostly land/real-estate), lack of credit reporting, inefficient collateral registration/enforcement, low SME financial literacy.
  - From 2012 to June 2018 private sector bank credit dropped by 11 percent as banks tightened lending standards.
- Public-side programs and legacy issues:
  - Existing programs: Bahamas Entrepreneurial Venture Fund (equity/start-up), Bahamas Development Bank (direct lending), partial credit guarantees previously run by MoF.
  - Legacy issues: governance weaknesses, poor performance, unrealistic investment targets, slow claim processing.
  - Example: Small Business Guarantee of Loans guaranteed loans up to BS$250,000 on maximum term of 10 years; Tourism Development Loan Guarantee up to BS$500,000 on maximum term of 15 years; both described as unreliable and bureaucratic.
  - Bahamas Entrepreneurial Venture Fund minimum investment floor set at US$50,000, considered high for domestic start-ups.
- Policy and structural recommendations:
  - Finalize draft SME Act and introduce an official SME policy with a uniform SME definition.
  - Collect verifiable SME finance data; CBOB to collect SME lending data from supervised entities using the uniform definition.
  - Reorganize public economic empowerment funds: improve coordination, governance, targets, claims procedures, and investment limits.
  - Consider introduction of a late payment law with strict payment terms and penalties to make SME receivables bankable.
  - Facilitate innovative digital financial services via transparent licensing and regulatory adjustments (define factoring, define NBFI financial services in Financial and Corporate Service Providers Act, enact marketplace lending regulation, adopt FinTech strategy).
- Cost of finance (CBB, December 2018):
  - Residential mortgages at 5.34 percent,
  - Consumer lending at 13.28 percent,
  - Prime rate at 4.25 percent.
  - Under the Interest Act: maximum of 20 percent per annum simple interest imposed on Bahamian dollar loans.

### Credit infrastructure, collateral framework, and credit bureau
- Collateral and registration issues:
  - Collateral regime fragmented; no integrated unified secured transactions framework for movable assets.
  - Registrar General Department’s collateral registration is paper-based, slow; documents before 2003 on microfilm; scanned from 2003 onwards creating legal uncertainty.
  - Stamp duty: debenture or mortgage securing a monetary obligation taxed at 1 percent of the monetary obligation, increasing cost of finance.
- Credit reporting progress:
  - Credit Reporting Act and Regulations enacted in 2018.
  - Vendor selection for future credit bureau: CBB invited CRIF S.p.A to apply for license in January 2019.
  - Data providers per Act: banks, NBFIs, credit unions, Bahamas Mortgage Corporation, Bahamas Development Bank; CBB may designate additional providers (public registries, utilities, etc.).
  - Near-term priorities: encourage all data providers to submit data; ensure collection of alternative credit information (utilities, telecommunications, post-paid providers); over time collect factoring, leasing, trade, and transaction data to improve SME credit assessments.
- Alternative data and FinTech:
  - Alternative data sources: utility payments, mobile data, big data, psychometric testing, merchant/marketplace transaction data.
  - Recommendation to adopt regulatory frameworks to enable data release upon customer/trusted third-party request with appropriate data protection.
  - Need for regulator capacity building and a FinTech strategy; Fintech Working Group established by The Bahamas Financial Services Board in 2018.
- Recommended credit infrastructure reforms:
  - Modern digitalized collateral registration system: notice-based security interests over movable property, online access, supported by revised legal underpinning.
  - Revise/lower stamp duty charges on collateral (consider SME exemptions).
  - Operationalize future credit bureau and facilitate collection of wide diversity of data including alternative data and transaction-level data.

### Consumer protection and financial education
- Financial literacy and trust:
  - 42.3 percent of respondents answered basic financial computation/concept questions correctly (2018 OECD-standardized survey).
  - OECD target for member states: at least two-thirds (66 percent).
  - 58 percent of respondents gave financially responsible responses to behavior-related questions.
- National initiatives:
  - May 2018: “Get Money Smart Bahamas” national financial literacy campaign launched by CBOB and Association of Banks; includes website, social media, online courses, Financial Freedom Certificate.
- Gaps and recommendations:
  - Low financial education and weak consumer protection reduce trust and electronic payment adoption.
  - No comprehensive financial consumer protection regulation in The Bahamas; absence of regulated key fact statement (truth in lending form).
  - Recommendation: introduce robust financial consumer protection framework based on international good practices applicable to all regulated financiers; include disclosure rules, fair treatment, complaints handling, dispute resolution mechanism.
  - Expand SME financial training segment in financial literacy campaigns; include digital financial services training.
  - Conduct financial literacy campaigns targeting merchants and migrants.
  - Establish formal dispute resolution body within CBOB (Ombudsman role defined; recruitment planned in 2019).

### Key actionable recommendations (selected and organized by timeframe/actor)
- NT actions for CBOB:
  - Expand payment institution definition.
  - Consider open banking.
  - Clarify agent banking and ban agent exclusivity.
  - Implement oversight and cyber resilience guidelines.
  - Publish bank fees and establish remittances price database.
  - Establish dispute resolution body within CBOB.
- I/NT actions for Banks/CBOB/NBFIs:
  - Expand ACH access to regulated NBFIs.
  - Improve ACH risk management (eliminate unwinding practice).
  - Complete migration to chip-based cards (EMV).
  - Differentiate merchant discount rates for debit and credit cards.
  - Treasury to implement IFMS and channel public payments via ACH.
- NT/MT actions for MoF and other agencies:
  - Design National Strategy on Financial Inclusion and Payments.
  - Consider digital ID unique identifier program with data privacy safeguards.
  - Implement e-government portal and introduce electronic bus ticket system.
  - Finalize SME policy or draft SME Act and define SMEs for data/policy.
- MT actions:
  - Reform collateral registration to digital centralized online registry.
  - Operationalize credit bureau and ensure collection of wide diversity of data.
  - Introduce FinTech strategy and enact marketplace lending regulation.
  - Introduce legal definition of factoring and define NBFI financial services in Financial and Corporate Service Providers Act.
  - Revise governance and claims procedures of economic empowerment funds; revise venture fund investment limits.
- MT/NT actions on consumer protection and education:
  - Introduce robust consumer protection framework and supervision.
  - Expand SME-focused financial education programs and migrant-focused campaigns.
- Specific payments-system recommendations:
  - Undertake cost-benefit analysis for ISO 20022 migration for clearing messages.
  - Consider implementing an Instant Payment System (IPS) with interoperability and central addressing (alias) features.
  - Ensure interoperability in new/upgraded payment systems to achieve Account-to-Account (A2A) interoperability between bank and e-money accounts.
  - Provide merchant incentives for accepting electronic payments (fiscal/monetary subsidies or direct incentives).

*Source: 1bhsea2019004 — IMF technical note excerpt (FSAP mission to The Bahamas, January 15–28, 2018).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 5

### 1bhsea2019004 - EXECUTIVE SUMMARY

### Overview
- The CBOB considers increased financial inclusion as a critical reform area; the FSAP assessed financial inclusion for individuals and enterprises (SME finance), retail payments and provides recommendations.
- The market review used the Payment Aspects of Financial Inclusion (PAFI) framework covering: legal/regulatory framework and oversight; retail payment systems and instruments; access to transaction accounts and use cases; SME policy; credit infrastructure; economic empowerment funds; and consumer protection and financial literacy.

### Legal/Regulatory Framework and Oversight
- The Payment Systems Act of 2012 and the Payment Instruments Oversight Regulations of 2017 provide a good legal basis but require clarity and expansion given rapid technological change.
- Key issues identified:
  - The definition of payment institution is narrow and focuses mainly on e-money issuers; it needs expansion to accommodate new players offering payment services and/or payments infrastructure (FinTech).
  - Consideration of the concept of open banking where banks open infrastructure to third party providers via APIs to perform transactions or check balances on behalf of an account holder.
  - The law allows payment service providers to outsource activities to agents upon CBOB approval, but it is unclear if banks can outsource deposit-taking activity to agents; clarity is needed.
  - No explicit reference to agent exclusivity—recommend adding explicit language banning agent exclusivity agreements to protect competition, especially in remote areas.
  - The CBOB has an oversight framework for payment systems and instruments but should issue detailed guidelines for on-site and off-site oversight and incorporate cyber resilience guidelines.
  - The CBOB should explore publishing comparative fees for accounts, payment services, and remittances across banks and NBFIs on its website as an additional oversight tool.
  - Recommendation to establish a formal body within the central bank for dispute resolution pertaining to payment services.

### Retail Payment Systems and Instruments
- The Bahamas Automated Clearing House Limited (ACH) is the main retail payment system, jointly owned and operated by all commercial banks; it clears cheques, direct debits and credit transfers.
- Domestic debit/credit card transactions are routed through international card networks outside the country.
- Recommendations and findings:
  - Expand ACH access to regulated and supervised NBFI participation and modernize (migration to ISO 20022 standards for clearing messages) to increase competition and financial inclusion.
  - Complete migration to chip-based cards.
  - Differentiate between debit and credit card merchant discount rates (MDR); currently merchants are charged the same fee.
  - Consider introducing an Instant Payment System (IPS) for retail payments to reduce transaction costs, provide real-time settlement, and expand use cases and access channels; any new system should be interoperable with existing systems.
  - Improve ACH risk management by eliminating the practice of unwinding.
  - CBOB should actively promote establishment of effective and sound private sector payment networks and implement an action plan for cheque reduction (particularly among businesses).
  - Banks should undertake a cost-benefit analysis for migrating to ISO 20022 standards for clearing messages.
  - Conduct financial literacy campaigns for merchants.

### Financial Inclusion – Account Access and Use Cases
- Commercial banks have been the main payment service providers but have not met all market needs; NBFIs (credit unions and e-money issuers) expected to play important roles, especially in Family Islands, via competitive pricing, new business models and innovative technologies.
- Digitization of government payments (especially on the collection side) can drive shift away from cash; recommendations include:
  - Treasury implementation of an Integrated Financial Management System (IFMS).
  - Introduction of an e-government portal for electronic government payments.
  - Introduction of electronic bus tickets.
- The CBOB should work with commercial banks to introduce a “basic” account with lower opening/maintenance fees for those who have never held a bank account.
- Simplify account opening and payment transactions by introducing a multi-purpose national digital identification program (unique ID), ensuring data privacy safeguards.
- Continue financial literacy campaigns with a component targeting the migrant community; conduct campaigns to train and incentivize individuals in remote areas to sign up for transaction accounts.
- The Treasury should channel payments such as public salaries, pensions and social transfers directly to beneficiaries’ accounts via the ACH and implement a Single Account Model.

### SME Finance: Overview, Constraints, and Policy Responses
- SMEs face difficulties accessing appropriate finance needed for growth and productivity; access-to-finance issues are systemic with bottlenecks on both demand and supply sides.
- Recommended structural reforms:
  - Finalize the draft SME Act and introduce an official SME policy to serve as a reference point; the policy should introduce a uniform definition of SMEs (being prepared as part of the draft SME Act) and provide well-planned actions to facilitate SME access to finance.
  - Collect verifiable data on SME finance; CBOB should start collecting SME lending data from all supervised entities using the new uniform definition.
- Credit supply issues:
  - Banks focus on large corporate borrowers and less risky salaried consumers; existing NBFIs lack sufficient capital or distribution networks to make substantial impact.
  - Many SMEs cannot provide required fixed collateral or reliable financial information, increasing perceived risk.
  - Inefficiencies in collateral registration and credit reporting hamper risk mitigation.
- Recommended credit infrastructure reforms:
  - Modernize collateral registration process (digital, centralized, on-line registry for all types of collateral).
  - Operationalize the future credit bureau and facilitate collection of data from all banks, credit-providing NBFIs and alternative sources (utilities, telecommunications, other post-paid service providers).
  - Conduct feasibility study on introducing a central “clearance model” for VAT instead of the current post-audit one to facilitate B2B e-invoicing and improve tax compliance.
- Public economic empowerment funds (credit guarantee schemes, development bank and venture capital funds) need reorganization to improve coordination, governance, targets, and reliability; revise governance, claims procedures, and investment limits reflecting start-up market realities.
- Facilitate innovative digital financial services through improvements in licensing and product authorization transparency, and legal/regulatory adjustments.
- Consider legal/market development measures:
  - Introduce legal definition of factoring and typical factoring products.
  - Introduce definition of NBFI financial services in the Financial and Corporate Service Providers Act to increase legal certainty and enable data disaggregation.
  - Introduce a FinTech strategy to increase transparency of regulatory processes and improve licensing efficiency.
  - Enact regulation facilitating marketplace lending (crowdfunding), both debt and equity.
  - Consider removing or decreasing stamp duty on collateral registration for SMEs.
  - Consider introducing a late payment law (strict payment terms and penalties) for payments to SMEs applicable to private and public-sector contractors.

### Consumer Protection and Financial Education
- Low levels of financial education and relatively weak standards of consumer protection undermine trust between providers and customers and reduce access to finance and usage of electronic payment instruments.
- Recommendations:
  - Introduce a robust financial consumer protection framework based on international good practices applicable to all regulated financiers.
  - Introduce new and expand existing SME financial training segments in financial literacy campaigns, including on digital financial services.
  - Establish a formal mechanism within the CBOB for dispute resolution (the CBOB has completed work to define the role of an ombudsman and will seek to recruit to the post in 2019).

### Key Actionable Recommendations (selection from Table of Recommendations)
- NT actions for CBOB: Expand payment institution definition; consider open banking; clarify agent banking; use specific language banning agent exclusivity; implement oversight and cyber resilience guidelines; publish bank fees and establish remittances price database; establish dispute resolution body.
- I/NT actions for Banks/CBOB/NBFIs: Expand ACH access to NBFIs; improve ACH risk management; complete chip-based card migration; differentiate MDRs; Treasury to implement IFMS and channel public payments via ACH.
- NT/MT actions for MoF and other agencies: Design National Strategy on Financial Inclusion and Payments; consider digital ID; implement e-government portal; introduce electronic bus ticket system; introduce SME policy or finalize draft SME Act and define SMEs for data and policy.
- MT actions: Reform collateral registration system to digital centralized online registry; operationalize credit bureau; introduce FinTech strategy; enact marketplace lending regulation; introduce factoring definition; revise governance of economic empowerment funds.
- MT/NT actions on consumer protection and financial education: Introduce robust consumer protection framework; expand SME financial training.

*Source: https://www.imf.org/-/media/files/publications/cr/2019/1bhsea2019004.pdf*

### 11.      Financial infrastructure comprises all institutions, rules, and standards of all the

### 1bhsea2019004 - 11.      Financial infrastructure comprises all institutions, rules, and standards of all the

### Overview and scope
- Assessment type: High-level assessment of financial inclusion (for individuals and enterprises) and retail payments in The Bahamas.
- Context: Undertaken in the context of the International Monetary Fund (IMF) Financial Sector Assessment Program (FSAP) mission to The Bahamas from January 15–28, 2018.
- Assessors: Holti Banka and Ivor Istuk (World Bank’s Financial Inclusion, Infrastructure and Access (Finance and Markets Global Practice)); Shalini Sankaranarayan (World Bank) provided input remotely.
- Coverage: (i) Legal/Regulatory Framework and Oversight of Retail Payments; (ii) Retail Payment Systems and Instruments; (iii) Financial Inclusion – Access and Use Cases; (iv) Small and Medium Enterprise (SME) Finance.
- Frameworks and guidance used: Payment Aspects of Financial Inclusion (PAFI) by the World Bank and the Committee on Payments and Market Infrastructures (CPMI); Principles of Financial Market Infrastructures (PFMIs) by CPMI; G20 High Level Principles for Digital Financial Inclusion; World Bank Retail package; G20-OECD High-level Principles on SME Financing.

### Key milestones in payment system modernization (chronological)
- 2000 – Adoption of the Central Bank Act: Provides overarching framework for responsibilities pertaining to efficiency and soundness of national payment systems.
- 2004 – Establishment of the Real Time Gross Settlement (RTGS) System: The Bahamas Interbank Settlement System (BISS) processes real-time transactions of B$150,000 and above, on a gross basis with finality and irrevocability, and is operated by the central bank.
- 2010 – Establishment of an Automated Clearing House (ACH): Operated by The Bahamas Automated Clearing House Limited (BACHL) and is jointly owned by clearing banks. It processes cheques, direct debits and credit transfers.
- 2011 – Establishment of the Payments Policy and Oversight Unit (Payments Unit): The unit is housed within the Research Department of the Central Bank.
- 2012 – Adoption of the Payments System Act 2012: Provides detailed framework for regulatory and supervisory authority for payments to the Central Bank.
- 2012 – Formal Establishment of the National Payments Committee (NPC): Payments System Act formalized NPC which is chaired by the central bank and consists of public and private market actors.
- 2017 – Adoption of the Payments Instruments Oversight Regulations: Provides a framework for electronic payment services.
- 2018 – Adoption of the Credit Bureau Bill: The adoption will lead to the establishment of a credit bureau.

### Payment systems, instruments, and market structure
- Payment systems in the country:
  - The Bahamas Interbank Settlement System (BISS) — owned and operated by the central bank; settles large value payments.
  - The Bahamas Automated Clearing House Limited (BACHL) — jointly owned and operated by all commercial banks; clears cheques, direct debits, and credit transfers with settlement in central bank money.
  - Card transactions are routed and processed through international card schemes outside the country and settled in commercial bank money in The Bahamas.
- Payment instruments used: cash, cheques and money orders, debit cards, credit cards, prepaid cards, direct debits, credit transfers, and electronic money (e-money).
- Market characteristics:
  - Approximately 20 percent of the adult population does not have access to a bank account. (The percentage of the unbanked adults is an approximation based on central bank surveys. The Bahamas has not been included in any of the international Findex surveys conducted so far.)
  - Cash and cheques still dominate the payments market despite a slight decrease over time.

### Main actors in payments and financial inclusion
- Central Bank of The Bahamas (CBOB)
- 8 commercial banks (2 of which are domestic)
- 10 credit unions/financial cooperatives
- The Post Office Savings Bank
- 5 money transfer operators (MTOs)
- 1 e-money institution/issuer (noted that by March 2019, a second e-money issuer, CaribPay, was licensed in the Bahamas.)

### Roles and functions
- CBOB:
  - Issuer of legal tender.
  - Operator: operates the RTGS system.
  - Regulator: issues regulations related to payment systems, services and instruments.
  - Overseer: oversees payment systems and payment instruments.
  - Catalyst: uses moral suasion and non-binding policy platforms to catalyze action in the private sector.
  - Policy goals: strengthen security and reliability of national payments system, foster use of efficient payment instruments, expand financial inclusion, shift away from paper-based payment instruments.
- Commercial banks:
  - Accept deposits and issue payment instruments (cheques, payment cards, direct debits, credit transfers).
  - Acquire merchants, facilitate money transfers, collection and disbursement of government payments, collection of bill payments.
- Credit unions:
  - Hold deposits and partner with banks to issue payment cards for clients.
- The Bahamas Post (Post Office Savings Bank):
  - Holds deposits; issues money orders but does not issue other payment instruments.
- Money transfer operators:
  - Facilitate primarily domestic and international money transfers and collect payments on behalf of private companies and government agencies.
- E-money issuers:
  - As of the assessment, one licensed in 2018 and expected to be fully operational in the first half of 2019.

### Legal and regulatory framework highlights
- Primary statutes/guidance:
  - Central Bank of The Bahamas Act 2000 (first regulatory guidance pertaining to payments).
  - Payment Systems Act (PSA) 2012 — main Act covering payments; details central bank regulatory and oversight authorities; provides basis for NPC; addresses finality of payments, settlement rules, and insolvency issues; allows physical presentation of cheques and truncation.
  - Payment Instruments Oversight Regulations 2017 — introduced the concept of a payment institution beyond traditional banks, credit unions, and MTOs; includes provisions for e-money issuers.
- Clearing house duties and oversight:
  - Clearing Houses must report changes on system, fees, and rules to the central bank thirty days in advance.
  - Central bank may enter agreements with the ACH on netting arrangements, risk control mechanisms, operation system, financial soundness, and nature of financial arrangements among participants.
- Payment institutions and e-money issuers:
  - Payment institutions can hold accounts only in Bahamian dollars and of value not more than B$15,000, unless given special authorization by the central bank.
  - E-money issuers required to hold customer funds in Custodian accounts with commercial banks.
  - E-money can be exchanged for physical Bahamian Dollars on par at any point in time.
  - Final settlement of e-money transactions shall occur no more than 24 hours after the payment instruction has been initiated.
  - New institutions undergo a monitoring pilot period before being granted a full license.
- Agents:
  - Payment institutions are enabled by law to use agents to carry out activities; any business, financial entity or person can become an agent if central bank requirements are fulfilled.
  - Payment service providers must report information on all agents to the central bank.
  - Liability for funds remains entirely with the payment service provider.
- KYC and AML/CFT:
  - Know-Your-Customer (KYC) procedures have been simplified for low-risk customers without compromising Anti-Money Laundering and Counter Terrorist Finance (AML/CFT) standards.
  - Challenges remain for segments without identification documents (elderly, migrants), and those without an email address or phone number, given absence of postal addresses in The Bahamas.
  - Note: In August 2018 the CBOB eliminated the exchange control restriction on access to B$ accounts by non-residents.

### Recommendations — regulatory and oversight reforms
- Expand the definition of payment institutions in the regulations:
  - Current definition is narrow and focuses mainly on e-money issuers; expand to accommodate new types of players offering payment services and/or payment infrastructure (FinTech).
- Consider introduction of open banking:
  - Adjust regulatory framework so banks would have to open infrastructure to third party providers through application programming interfaces (APIs) to perform transactions or check balances on behalf of an account holder.
  - Accompany this with adjustments to privacy laws.
  - Reference: PSD2 (European Payment Systems Directive) for more on open banking.
- Clarify in regulation if agent banking is permitted:
  - Provide clearer language on whether banks can outsource deposit-taking services to agents and what requirements would apply.
  - Note: postal offices have been successful agents in other jurisdictions.
- Use specific language banning agent exclusivity in the regulation:
  - Current framework lacks a clause barring agent exclusivity arrangements.
  - Explicit ban on agent exclusivity would promote competition, lower costs, and increase financial inclusion; prevent monopolistic behavior in areas with limited agent supply (e.g., Family Islands).
- Implement detailed and comprehensive guidelines for off-site and on-site oversight for e-money providers:
  - Oversight should be risk-based and follow international standards, guidance and best practices.
  - Off-site activities: review systems’ integrity by collecting and processing information on technical and risk-management infrastructure; request selected information at various stages of the payment process.
  - On-site activities: rigorous planning and inspection to determine level of risk and quality of risk management.
  - Develop a risk profile for each e-money service provider and system using information from on-site inspections, off-site reporting, and independent third parties (e.g., external audits).
- Include cyber resilience guidelines in oversight and monitor implementation:
  - Central bank should provide general guidelines based on international best practices and monitor adherence to safeguard systems.
  - Reference CPMI and ECB guidelines covering Identification – Protection – Detection – Response and Recovery.
- As part of oversight, publish bank fees on the central bank’s website and consider establishing a national remittances price database:
  - CBOB should gather fees on basic products and services from all banks and publish them as a comparative “one-stop-shop.”
  - Standardize terminology across banks for products and services.
  - Consider creating a consolidated platform for outgoing remittance prices across different service providers, given that The Bahamas has net outflows of remittances.

*Source: IMF technical note as part of the FSAP mission to The Bahamas (January 15–28, 2018).*

### 41.      Establish a formal body within the central bank for dispute resolution pertaining to

### 41.      Establish a formal body within the central bank for dispute resolution pertaining to 

### Consumer protection and dispute resolution
- Recommendation: Establish a formal body within the central bank (e.g., an Ombudsman) for dispute resolution pertaining to payment services.
- Rationale: Even though CBOB can act as an intermediary between an individual and a financial institution, a formal body would signal to the market that consumers are well-protected and thus serve as a deterrent to market abuses.

### Retail payment systems — Automated Clearing House (ACH)
- Overview:
  - The ACH in The Bahamas, established in 2010, is jointly owned (i.e. equal shares) and operated by all commercial banks.
  - All banks are participants; CBOB is also a direct participant.
  - The system works on a cost recovery basis.
  - System rules allow for indirect participation, but there are no indirect participants yet.
  - The ACH clears cheques, direct debits and credit transfers. The system allows for the processing of truncated cheques as well.
  - Multiple clearing cycles during the day; settlement happens in central bank money through the RTGS.
  - For credit transfers and direct debits settlement happens the same day; for cheques on T+1.
  - No guarantee fund in place; there is a settlement risk management framework and an unwinding procedure if a participant is unable to settle its debt position.
  - Participants have access to information during the day on their preliminary position.
  - Banks incur a standard charge of B$0.9 for clearing a direct debit and credit transfer and a charge of B$0.27 for clearing a cheque.
  - Any transaction of B$150,000 or below is processed through the ACH.
  - Transactions between B$150,000 and B$1 million can be processed through the ACH or the RTGS; if processed through the ACH, the charge for the banks is higher than the standard rate.
  - Any transaction of value B$1 million or above must be processed through the RTGS.
  - While clearing happens in local currency, the ACH has capabilities to also process transactions in U.S. dollars.
  - The system has technological capacity to process other payment instruments (after necessary adjustments) such as cards.
  - Safety: system scanned on a weekly basis for security breaches; annual cyber crisis response simulations with external experts.

- Volume and value of instruments cleared through the ACH (Source: Global Payment Systems Survey 2018 (World Bank))
  - Volume (2014): Cheques 2,808,412; Direct Debits 38,564; Credit Transfers 1,429,321; Total (across instruments) 4,276,297
  - Value B$ (2014): Cheques 6,930,832; Direct Debits 30,882; Credit Transfers 3,577,536; Total 10,539,250
  - Volume (2015): Cheques 2,743,184; Direct Debits 60,309; Credit Transfers 1,621,476; Total 4,424,969
  - Value B$ (2015): Cheques 7,122,776; Direct Debits 258,975; Credit Transfers 4,700,273; Total 12,082,024
  - Volume (2016): Cheques 2,611,102; Direct Debits 97,677; Credit Transfers 1,976,068; Total 4,684,847
  - Value B$ (2016): Cheques 7,033,584; Direct Debits 281,866; Credit Transfers 6,444,773; Total 13,760,223
  - Volume (2017): Cheques 2,521,096; Direct Debits 90,648; Credit Transfers 2,192,637; Total 4,804,381
  - Value B$ (2017): Cheques 7,157,368; Direct Debits 97,476; Credit Transfers 10,311,602; Total 17,566,446

- Analysis of ACH instrument trends:
  - Cheque volumes demonstrate the highest volumes among the three instruments; cheque volumes have been declining across time, but the decline is minor.
  - Credit transfers have shown rapid growth over the last three years and are on the verge of overpassing cheque volumes.
  - Direct debit volumes remain quite low although they have doubled since 2014.

### Payment cards
- Overview:
  - Commercial banks issue all main international card brands in The Bahamas.
  - Types issued: debit, credit, and prepaid.
  - Prepaid cards are offered by some banks to employers to load salaries (particularly those without a bank account) and by individuals who do not want to carry cash when they travel.
  - Issuance of debit cards is typically linked to a savings account.
  - Banks issue co-branded cards for some credit unions; ATM and POS are not unified in the absence of interoperability.
  - No national card switch; all domestic card transactions are processed through the international card networks, outside The Bahamas. Settlement happens in local currency in one of the commercial banks in The Bahamas.

- Volume and value of payments via debit and credit cards across time (Source: Global Payment Systems Survey 2018 (World Bank))
  - Volume (2014): Debit Cards 4,900,090; Credit Cards 566,247; Total 5,466,337
  - Value B$ (2014): Debit Cards 562,2691; Credit Cards 206,589; Total 5,829,280
  - Volume (2015): Debit Cards 7,691,395; Credit Cards 828,344; Total 8,519,739
  - Value B$ (2015): Debit Cards 1,123,887; Credit Cards 283,258; Total 1,407,145
  - Volume (2016): Debit Cards 870,7159; Credit Cards 1,319,748; Total 10,026,907
  - Value B$ (2016): Debit Cards 130,5134; Credit Cards 313,977; Total 1,619,111
  - Volume (2017): Debit Cards 9,712,919; Credit Cards 1,634,548; Total 11,347,467
  - Value B$ (2017): Debit Cards 145,3463; Credit Cards 455,820; Total 1,909,283

- Analysis and operational observations:
  - Debit card payments are at much higher volume than credit cards; both debit and credit card payments have shown consistent rise across time.
  - Credit cards show a higher growth rate than debit card payments in terms of volume.
  - Debit cards are still used to a large extent for cash withdrawals at ATMs.
  - Payment cards issued in The Bahamas cannot be used for e-commerce with foreign e-merchants because cards would need to be linked to a foreign physical address.
  - Each bank operates and maintains its own ATM network.
  - Banks may charge customers a flat fee for withdrawing cash from the ATM of their bank; users withdrawing from an ATM that does not belong to their primary bank often get charged.
  - Number of ATMs has decreased over the last year as some commercial banks withdrew branches from some Family Islands.
  - Most issuing banks are also acquiring banks.
  - POS terminals have increased but are concentrated in the main islands; availability of POS terminals in the Family Islands remains a challenge due to lack of financial literacy, high costs, and low card usage by buyers.
  - Merchants often unaware they can negotiate merchant discount rates (MDR) and may pay high per transaction fees.
  - No differentiation between debit and credit card MDRs; interchange fees are higher for credit cards, so applying the same MDR penalizes merchants who accept debit cards.
  - Some merchants choose not to install POS terminals due to low buyer usage and fixed maintenance costs, reverting to cash and cheques—observed in areas with elderly communities and among segments that use exclusively cash such as part of the migrant community.

- ATM and POS terminals in The Bahamas across time (Source: Global Payment Systems Survey 2018 (World Bank))
  - Number of ATMs:
    - 2014: 334
    - 2015: 345
    - 2016: 402
    - 2017: 362
  - Number of POS:
    - 2014: 4,908
    - 2015: 8,853
    - 2016: 9,146
    - 2017: 11,306

### E-money
- Status as of January 2019:
  - There is only one e-money issuer in the country (Island Pay), which was granted its license end of 2018.
  - Island Pay is conducting beta testing among a set of consumers and merchants in The Bahamas and is expected to fully launch its services in 2019.
  - An e-money issuer can accept funds deposits from clients but must open Custodian accounts with commercial banks where client funds can be held according to Bahamian regulations.
  - Under the e-money model, a user can exchange e-money (held in an e-wallet) for physical cash and vice versa at a representative agent of the e-money issuer.
  - Some players like Island Pay aim to minimize the use of physical cash and keep transactions in the electronic ecosystem.
  - Island Pay is working with both major mobile phone networks in the country.

### Criteria for adoption of payment instruments (Box summary)
- Factors influencing payer choice:
  - Cost (explicit and implicit), Safety and reliability, Convenience, Acceptance, Payment confirmation and reconciliation.
- Factors influencing payee choice:
  - Cost, Acceptance, Safety and reliability, Payment reconciliation and audit trails.

### Recommendations (numbered as in source)
- 60. Expand access to the ACH beyond banks.
  - Rationale: Opening the ACH to non-bank financial institutions would allow them to initiate credit transfers and direct debits, facilitating cost-efficient remote payments not conductible using debit/credit cards.

- 61. Improve the risk management of the ACH by eliminating the practice of unwinding.
  - Rationale: Unwinding exposes participants to credit and liquidity exposures and can lead to knock-on effects and systemic risk. Alternative risk mitigation measures (e.g., a settlement guarantee fund) should be used.

- 62. Undertake a cost-benefit analysis for adopting ISO 20022 standards for clearing messages going through the ACH.
  - Rationale: ISO 20022 uses XML syntax and a common data dictionary supporting end-to-end payment message flow; ensure bank investment costs are not passed onto end users as additional fees.

- 63. Consider implementing an Instant Payment System (IPS).
  - Rationale: Financial inclusion is a priority; IPS could help fill gaps in current payments infrastructure and address archipelago-related access challenges.
  - Characteristics of an IPS (from source):
    - Interbank execution of instant payments measured in seconds.
    - Central addressing scheme enabling client identification using “alias” e.g. tax id number, phone number, e-mail address, based on which participants can obtain other data necessary for execution.
    - Instant bill payments and obtaining bill information.
  - Operational note: An IPS could be operated by the central bank.

- 64. Ensure interoperability when upgrading or introducing payment systems.
  - Objective: Systems should use the same standards and technology requirements to communicate and facilitate exchange of funds without delays or major costs.
  - Role of central bank: Use its catalyst role or include interoperability in regulatory framework.
  - Target: Achieve Account-to-Account (A2A) interoperability between bank accounts and e-money accounts, and among e-money accounts themselves.

- 65. Complete full migration to chip-based payment cards (EMV).
  - Action: All commercial banks should complete migration to EMV and invest in necessary POS infrastructure upgrades.
  - Role of CBOB: Indicate a designated timeframe for full migration.

- 66. Differentiate between debit and credit card merchant discount rates.
  - Rationale: Applying the same MDR for debit and credit cards lacks economic justification and disincentivizes acceptance of debit cards; acquiring banks should revise fees to reflect different interchange fees.

- 67. Provide incentives to merchants for accepting electronic payments.
  - Options: Ministry of Finance could explore fiscal or monetary incentive schemes, e.g., subsidizing installment and maintenance fees of terminals or direct monetary incentives based on the number of electronic payments accepted.

*Source: THE BAHAMAS — INTERNATIONAL MONETARY FUND (excerpt).*

### 68.      Conduct financial literacy campaigns for merchants: Given that many small merchants

### Conduct financial literacy campaigns for merchants

### Merchant financial literacy and cheque-use reduction
- Recommendation: Small Business Development Centre (SBDC) together with the CBOB to conduct financial literacy campaigns and seminars for merchants to address difficulties understanding electronic payments benefits and acquiring bank fee structures.
- Recommendation: Put in place an action plan to reduce cheque usage in the Bahamian market; proactive roles for the Chamber of Commerce and banks to inform businesses about cheque alternatives.
- Observation: Industry indicates most cheques are used for person-to-business salary payments and business-to-business payments to suppliers.
- Current market dynamics: Higher cost to processing cheques at the ACH and high cost of cashing cheques has not deterred use.
- Regulatory option: In the medium-run, CBOB could consider regulations that high-value transactions (i.e. RTGS floor limits) should be made only through credit transfers, following models in other countries including banning cheque use.

### Role of payment service providers in financial inclusion
- Banks have been the main providers of payment products (payment cards, credit transfers, direct debits) but have not fully covered market needs; many have removed branches from Family Islands and individual/merchant fees remain high.
- Fee structure and account access:
  - Average monthly fees associated with an account vary between B$5–$19 (CBOB survey).
  - 40 percent of respondents reported they do not understand the structure of the fees they are charged.
  - 78 percent of respondents find overall fees to be high and somewhat high; ATM withdrawal fees most commonly viewed as costly.
- Account opening and due diligence:
  - Banks require passport or two other forms of identification; central bank intervention moved banks away from proof of physical residence to requiring a valid email address or phone number.
  - A bank account can be opened within a day, but may not be fully functional until the next day or the day after because of due diligence and screening; corporate accounts take longer.
- Underserved segments: migrants, elderly, low-income infrequent bank users, and people in Family Islands.
- Product and channel opportunities:
  - Potential to collect utility bill payments and government payments via internet or mobile banking (credit transfer or direct debit) to avoid cash at branches.
  - Fee design suggestion: public or private institutions for which the bank collects payments should bear the fee rather than the user/payer.
  - Informational campaigns needed alongside channel offerings.
  - Banks should design tailored bank and payment products for underserved segments; some banks issue prepaid cards for employers to pay employees without bank accounts, reducing cash and cheques.
  - Electronic direct debits (one-time authorization) could benefit Family Islands for utility bill payments.
- Credit unions:
  - Credit unions accessible to everyone; one-time membership fee but no other account opening/maintenance fees; account holders become shareholders.
  - Credit unions have physical presence in small Family Islands and have partnered with commercial banks to provide debit and credit cards.
  - Some credit unions wish to issue payment cards directly (would require partnerships with international card networks).
  - Settlement of domestic card transactions happens in commercial bank money, enabling settlement without RTGS central bank accounts.
  - Interest in processing credit transfers and direct debits would require direct participation in the ACH; past attempt by a major credit union was unsuccessful despite comprehensive plans.
  - ACH membership by credit unions could expand services and decrease cash and cheque use, especially in Family Islands.
  - Some credit unions collect bill and government payments but primarily in cash and cheques; exploring partnerships with international money remitters for cross-border transfers.
- Post Office Savings Bank:
  - Post has physical presence on almost every inhabited island and holds deposits that yield interest; issues only money orders as payment instruments.
  - Needs modernization and deployment of new technologies and automated processes to allow electronic payments; internal activities are presently manual.
- Money transfer operators:
  - Physical presence in many remote areas; facilitate domestic and cross-border transfers and sometimes collect bill payments.
  - Migrants tend to use money transfer operators more than banks due to lower fees and because many migrants are unbanked and transact in cash.
- E-money and new entrants:
  - E-money products can enable person-to-person, person-to-business, person-to-government, business-to-business, and business-to-government payments.
  - Infrastructure for merchant e-money acceptance is typically light and mobile (QR codes, mobile POS), improving convenience and cost-efficiency.
  - E-money could replace physical cash in Family Islands; only one e-money issuer exists but is not fully functional yet.
  - Expansion of existing players and entrance of new players (e-money institutions) and interoperable technologies could bring convenience, cost efficiency, and reduce reliance on physical cash.
  - Note: The digital currency project contemplates interoperability.

### Government payments, TSA, and IFMS issues
- Treasury operations:
  - Treasury holds accounts with two commercial banks and executes payments on behalf of all government agencies; agencies send payroll, pension, and social assistance payment information to the Treasury which initiates batch payment orders through its commercial bank accounts.
  - Commercial banks match beneficiaries’ information/accounts and make final disbursements; process is not streamlined and commercial banks play a large administrative role.
- Structural gaps:
  - Treasury does not have a Treasury Single Account (TSA); absence of TSA necessitates multi-step disbursement process.
  - Treasury does not have an Integrated Financial Management System (IFMS); each agency uses its own accounting software, requiring agencies to re-enter payment information into the Treasury’s system, adding time and resource costs.
- Collections and channels:
  - Customs collects about 80 percent of all its payments in cash and cheques at ports of entry.
  - Many ports (except for six islands) have POS terminals for debit/credit cards, but they are not sufficiently utilized.
  - Payers may pay at bank branches or through internet banking but a transaction fee is charged to the payer; Customs is exploring a payments gateway on its website.
  - For most tax payments (business license tax and VAT), payer options include agency payments gateway via debit/credit card, internet banking, or at a bank branch where a B$10 charge is incurred; cheque payments are an option but delayed due to geography and postal service slowness.
- Bus transport use case:
  - Bus transportation functions entirely on cash; approximately 400 buses cover the equivalent number of routes.
  - Ministry of Transport outsources routes to private franchises under annual permits; common practice is flat-fee cash ticket collected by conductor.
  - Ministry of Transport plans to work with bus franchises to explore digitizing the ticket system and introducing necessary infrastructure.
- Treasury settlement handling:
  - When banks collect government funds, they must fund the Treasury’s account at end of day as they cannot hold government funds overnight.
  - Treasury pays banks a fee for disbursing and collecting payments on behalf of agencies.

### Remittances
- Majority of remittances are cross-border outgoing remittances; domestic remittances exist but are limited.
- Cross-border remittances facilitated mainly through informal channels (for illegal migrants) or money transfer operators via cash-in/cash-out.
- Migrants often do not keep funds in transaction accounts and send much income to relatives abroad; consequently, they have not been targeted by commercial banks.
- Opportunity: banks can offer tailored products (e.g., prepaid cards) and leverage international bank presence to facilitate account-to-account transfers for migrants.
- De-risking impacts: financial institutions offering cross-border transfers have experienced de-risking; some lost correspondent banking relationships or faced additional correspondent bank requirements, often leading to higher end-user fees.

### Bill payments and utility collection practices
- Bill payments primarily made in cash and cheques despite electronic channels:
  - Major telecommunication companies collect bills in cash at stores or through agents; alternative channels include online payment gateways, POS terminals, and internet banking; telecommunication companies typically bear transaction fees.
  - Electricity provider offers multiple channels (administrative offices cash, agents cash, cheque mailing, payments gateway, banks in cash or credit transfer) but almost half of payments are made in cash; transaction fees borne by utility provider.
- Utility providers exploring closed-loop systems where users purchase credits stored in mobile wallets to pay for services (prepaid products), expected to decrease cash/cheque collections and drive payments toward electronic mobile wallets.

### Financial literacy: data and campaigns
- Financial literacy survey results (2018, standardized OECD questions):
  - 42.3 percent of respondents were able to provide answers to basic questions about financial computations and concepts around interest rates, including compounding effects.
  - OECD target for member states: at least two-thirds (66 percent) of respondents indicating financially responsible behaviors.
  - 58 percent of respondents in The Bahamas sample gave financially responsible responses to behavior-related questions.
- National campaign:
  - In May 2018, CBOB and the Association of Banks launched a national financial literacy campaign, “Get Money Smart Bahamas”.
  - Campaign features a dedicated website, social media tools, themes including online banking and electronic payments to reduce dependence on cash, short themed courses, and a Financial Freedom Certificate upon completion.
  - Campaign goal: “to equip Bahamians of all ages and socio-economic backgrounds with the knowledge and confidence they need to make sound financial decisions.”
- Further actions:
  - Campaigns and efforts needed from all relevant actors; National Payments Committee important to develop common agenda.
  - Financial education is not part of the formal school curriculum in The Bahamas; adding it could benefit younger generations and potentially have positive spillovers to older generations via household transmission.

*Source: Excerpt from the IMF country report chapter on payments, financial inclusion, and financial literacy in The Bahamas.*

### 100.      The International Gateway for Financial Education led by OECD provides principles and

### 1bhsea2019004 - 100.      The International Gateway for Financial Education led by OECD provides principles and

### Financial education, payment behavior, and integration
- The International Gateway for Financial Education led by OECD provides principles and frameworks for integrating financial education programs in the formal school curricula of countries and provides examples of how a number of countries have achieved the integration.
- The World Bank has developed a set of tools on financial literacy (under the consumer protection framework) that the central bank and the government of The Bahamas could benefit from.
- Financial literacy efforts should target the main aspects that inhibit individuals and merchants from changing payment habits, specifically:
  - (i) perception of lack of sound proof of payment if paper is not used;
  - (ii) fear that the new modalities may be vulnerable to fraud;
  - (iii) fear of dealing with unresponsive, complicated systems prone to operational error;
  - (iv) perception of loss of privacy;
  - (v) perception of cost structure associated with the different payment instruments.

### Policy recommendations to advance inclusion and electronic payments
- Design a National Strategy on Financial Inclusion and Payments:
  - Create an action plan/strategy looking at interlinkages of financial inclusion and payments.
  - Serve as a roadmap for CBOB and other public and private sector actors.
  - Give impetus to the National Payments Committee and enable structured division by working groups for implementation.
- Design a basic bank account product for the unbanked:
  - Introduce a “basic” bank account with simplified identification (ID) requirements to allow initiating and receiving payments, at low fee for those individuals that have never held an account before.
  - Model can be based on elements introduced in Payment System Directive 2 (PSD2) in the European Union.
  - Banks should recognize target population are poor individuals for which a minimum balance requirement is not likely to be a viable option and which may potentially receive some type of social transfers from the government.
  - Basic accounts should enable transfers (receive) funds and pay electronically to/from as many parties as possible, especially routine counterparties.
- Conduct campaigns for training and incentivizing individuals in remote areas to sign up for transaction accounts:
  - Central bank should expand campaigns to households to explain benefits and logistics of signing up for a transaction account (bank or e-money).
  - Central bank can help fill void left by private market players lacking incentive to reach remote areas.
- Consider designing a comprehensive digital ID program:
  - Develop a digital identification program (i.e. unique ID) to ease account opening and enable e-KYC procedures for remote account opening.
  - Current requirement: banks and other non-bank financial institutions require a passport or two other forms of ID to open an account.
  - A national standardized digital ID could help population segments such as children born to migrant parents who lack status until age 18.
  - Data privacy standards must be taken into consideration for the program design.
- Expand role of non-commercial financial institutions:
  - The Bahamas Post, credit unions, and e-money institutions like IslandPay could provide access to accounts and liquidity in areas/islands without commercial bank presence.
  - These institutions could be used for collection and disbursement of government payments.
- Treasury channeling and systems improvements:
  - Treasury should channel government payments such as public salaries, pensions and social transfers directly to beneficiaries’ bank accounts via the ACH.
    - This would spare commercial banks from disbursing from a pool account to each beneficiary’s account.
    - Treasury would need beneficiary account numbers and amounts payable from government entities; government entities remain responsible for data accuracy.
    - Straight-through-processing environment would make reconciliation automatic, only needing confirmation that payment was credited to recipients’ accounts.
  - Treasury should implement an Integrated Financial Management System (IFMS):
    - Address inefficiencies and delays from different information/accounting systems across Treasury and government agencies.
    - Introduce standardization and ensure accuracy and speed in information transmission among agencies and Treasury.
- Implement an e-government portal:
  - A standardized and comprehensive online “one-stop shop” portal for government payment collections could reduce cash and cheque usage, standardize processes, reduce cash handling costs, and save payers transaction fees.
  - The Ministry of Finance has indicated they are examining this option.
- Introduce an electronic bus ticket system:
  - Bus ticket payments are a large retail payments use case by volume; digital tickets present an opportunity to advance electronic payment usage and build user trust.
  - The Ministry of Transport is already considering this option.
- Continue financial literacy campaigns with a migrant focus:
  - Introduce components focusing on the migrant community, given The Bahamas is primarily a remittance sending country.
  - A portion of migrants do not have access to the formal banking system and use informal remittance channels or cash-based money transfer operators.
  - Customized financial education programs tailored toward migrants could be beneficial, such as the World Bank’s Greenback Project.

*Source: 1bhsea2019004 - 100.      The International Gateway for Financial Education led by OECD provides principles and* 

### SME finance — Overview
- 2014 PROTEqIN Survey firm-size distribution:
  - 44 percent of Bahamian firms are medium-sized,
  - 36.2 percent are small (5–19 employees),
  - 19.73 percent are large (over 100 employees).
- A recent IDB report: firm-level productivity in The Bahamas is on average 17 percent lower than the average Caribbean firm.
- Main impediments to SMEs accessing finance:
  - Information asymmetry (lenders lack sufficient data to accurately ascertain applicant risk);
  - Heavy dependence on collateral by banks;
  - Lack of credit reporting/referencing systems and information sharing arrangements.
- WB Doing Business rank on Getting Credit:
  - The Bahamas rank 144, scoring 30 points, trailing the LAC average of 51.6 points.

### SME finance — Current status of access to finance
- Access to finance was ranked the fourth biggest obstacle for business in WB Enterprise Survey 2010, after poorly educated workers, trade regulations and competition from an informal sector.
- Bank account access:
  - 95.7 percent of small firms (5–19 employees) had a checking or savings account compared to 91.6 percent in LAC,
  - 100 percent of medium firms (20–99 employees) compared to LAC average of 95.2 percent.
- Access to bank lending (Enterprise Survey):
  - 28.4 percent of small firms had a bank loan/line of credit compared to LAC average of 41.4 percent,
  - 43.6 percent of medium firms compared to LAC average of 56.8 percent.
- 2014 PROTEqIN Survey findings:
  - SMEs report rejection rates of bank finance applications as high as 85 percent (compared to Barbados 35 percent, Jamaica 55 percent, Suriname 27 percent).
  - Less than one-fourth of companies undertaking investment projects in The Bahamas have been funded by private banks.
- Systemic nature of access-to-finance issues:
  - Bottlenecks on both demand and supply sides of credit.
  - Public-sector policy creation hindered by lack of reliable SME finance information.
- Credit supply characteristics:
  - Credit to SMEs is nominally offered by banks and NBFIs, but bank lending to SMEs is scarce and NBFIs lack capital/distribution for large impact.
  - Banks focus on large corporate borrowers and less risky salaried consumers.
  - From 2012 to June 2018 private sector bank credit dropped by 11 percent as banks tightened lending standards.
- Consequences:
  - Many SMEs cannot provide necessary collateral, documentation, or are deemed too high risk.
  - Increased perception of lending risk drives high collateral requirements.
  - Low business acumen and financial literacy among small entrepreneurs increases lenders’ risk perception.
- Collateral practices:
  - Collateral is mostly land and real-estate.
  - Alternative collateral on movable properties and rights (e.g. accounts receivable, inventory) is not widely used due to lack of financial market innovation and legal uncertainties/inefficiencies in creation, registration and enforcement.
- NBFI and credit union role:
  - Some NBFIs extend credit to SMEs but remain small with limited reach and capital.
  - Lack of capacity/knowledge drives NBFIs to remain focused on consumer loans for salaried customers.
  - Very little financial market innovation, explained by underdeveloped payments infrastructure and cumbersome/long licensing process for new products.
- Cost of finance:
  - Average lending rates reported by the CBB in December 2018:
    - residential mortgages at 5.34 percent,
    - consumer lending at 13.28 percent,
    - prime rate at 4.25 percent.
  - No maximum interest rate imposed on loans in United Stated dollars.
  - Under the Interest Act of The Bahamas, a maximum of 20 percent per annum simple interest is imposed on Bahamian dollar loans.
  - Under the Money Lending Act the courts may in its discretion vary the terms of any loan which it considers to be oppressive or unconscionable.

### SME finance — Public sector policy and data/statistical recommendations
- Lack of universal SME definition:
  - No universal definition to categorize local companies by size; impedes timely data collection and evidence-based policymaking.
- Heterogeneous definitions by credit providers:
  - Each credit provider uses its own categorization based on maximum exposure limits; local banks have adopted differing SME definitions.
  - This diversity complicates collection of uniform disaggregated data on SME lending.
- Need for consolidated and reliable SME data:
  - Absence of reliable data obstructs efficient prioritization of SME development strategies including access to finance.
  - Insight into actual SME size and diversity and available finance enables identification of realistic growth opportunities and policy formulation.
- Recommendations:
  - As part of drafting an SME policy/Act under SBDC policy making, establish reliable data collection.
  - CBB should collect data on SME lending based on a uniform reporting standard that includes a consistent definition of SMEs and share it with other relevant government agencies.
  - Disaggregated data should serve as inputs to creation/update of SME development policies.
- Establish a realistic criterion for categorizing micro, small and medium firms:
  - Three main approaches: (1) number of employees; (2) annual turnover; (3) total assets.
  - SME draft Act explicitly mentions national definition of an SME will be based on combination of: Industry, Annual Sales, Employment Level and Ownership (Capital Structure).
  - Challenge: different stakeholders prefer different criteria (e.g., employment-focused government departments vs. turnover-focused banks).
  - Examples illustrating non-interchangeability of criteria: a retail trader may have few employees but high annual turnover or total assets.
  - Deciding appropriate locally applicable definition requires engagement of all relevant Bahamian stakeholders (MoF, CBB, other relevant agencies, and representatives of the private and financial sector).
  - Consideration: introduce a purpose-driven definition just for financial sector development purposes.

*Source: 1bhsea2019004 - 100.      The International Gateway for Financial Education led by OECD provides principles and*

### 130.      The GoB has put in place various public-sector finance support programs aimed at

### The GoB has put in place various public-sector finance support programs aimed at supporting access to finance for the enterprise sector.

### Public-sector finance support programs: overview and legacy issues
- Programs in place:
  - Equity investment and start-up support funds through Bahamas Entrepreneurial Venture Fund.
  - Direct lending through Bahamas Development Bank.
  - Partial credit guarantees funds previously run by the MoF.
- Documented legacy issues:
  - Governance weaknesses, poor overall performance, unrealistic investment targets, and slow claim processing.
  - Small Business Guarantee of Loans (previously run by the MoF) guaranteed loans up to BS$250,000 dollars on maximum term of 10 years and was described as unreliable and burdened with slow and very bureaucratic claims processing.
  - Tourism Development Loan Guarantee (previously run by the MoF) guaranteed loans up to BS$500,000 dollars on maximum term of 15 years and was described similarly.
  - Bahamas Entrepreneurial Venture Fund has a minimum (floor) investment set at US$50,000, considered overly high for domestic start-up needs.
- Consequences:
  - Private banks unwilling to rely on credit guarantee schemes due to unreliable recovery processes.
  - High venture-fund minimums act as a barrier to entrepreneurs or cause artificial inflation of business plans.

### Planned new SME credit guarantee scheme and SBDC role
- Authorities plan a new credit guarantee scheme to be led by the newly created agency focusing on SME policy (SBDC).
- Key design imperatives (not yet publicly finalized):
  - Governance structure, lending criteria, and claim processing must instill private-sector trust.
  - Fund must respond to realistic SME needs and attract private-bank participation.
  - SBDC is planned to provide financial education activities in addition to funding.

### Coordination and consolidation of empowerment funds
- Identified gaps:
  - Formal coordination mechanism between empowerment funds and institutions is missing.
- Recommended objectives of coordination:
  - Provide coordinated and consistent support across stages of enterprise development.
  - Avoid piecemeal approaches; support graduation from start-up grants to banking with private sector (facilitated by partial credit guarantees).
  - Potential reorganization and consolidation to increase coordination, achieve economies of scale, and improve development impact.

### Different stages of SME development / funding needs (Box 2)
- Seed stage:
  - Primary financing: personal savings, family/friends, second mortgages.
  - Characteristics: highly risky, intangible assets, lack of trading history, informational opacity.
- Start-up stage:
  - Need for external funding; still high risk and too small for venture capital.
  - Relevant sources: government grants/seed programs, business angels.
- Growth stage:
  - Requires further capital injection; may still not qualify for longer-term debt.
  - Relevant instruments: leasing, factoring, invoice discounting platforms, marketplace finance, integrated on-line merchant platforms, alternative credit scoring.
- Advanced stage:
  - Firm has track record, can provide collateral, increased transparency.
  - Relevant: longer-term lending, corporate governance, real-estate registries, debt and potentially equity capital markets.

### Public procurement, G2B/B2B payments, and late payments
- Evidence and impacts:
  - Anecdotal evidence indicates late payments and long payment terms cause liquidity problems for Bahamian businesses.
  - Delays occur in both private and public sectors, varying by agency.
- Reforms underway:
  - Public Financial Management & Performance Monitoring Reform Project.
  - eProcurement and Supplier Registry (ePSR) electronic procurement system.
  - Under the new public procurement act, 20 percent of all procurement of local products and services would be tendered from local SMEs.
- Proposed legal/contractual interventions:
  - Introduce a late payment law / rules with strict payment terms and penalties to decrease arrears.
  - Design penalty interest that is:
    - Based on an easily accessible market reference rate plus a penalty margin.
    - Automatically applied and not requiring the creditor to issue prior notice of non-performance.
  - Intended effects:
    - Make SME receivables bankable as collateral.
    - Enable receivables discounting and access to working capital finance.
    - Signal government commitment to improving public financial management and SME development.

### Recommendations (SME support, payments, and funds)
- Enact SME act with clear development goals and targeted support for SMEs.
- Define SMEs for data gathering and policy formation purposes to facilitate reporting on SME lending and SME-disaggregated information collection.
- Consider introduction of a late payment law (strict payment terms and penalties) for payments to SMEs applicable to private and public-sector contractors.
- Introduce a formal coordination mechanism and action plan for cooperation between public empowerment funds targeting SMEs (credit guarantee schemes, development bank and venture capital fund).
- Revise governance of empowerment funds:
  - Introduce transparent and efficient claims procedures.
  - Revise investment limits to reflect start-up market realities (venture capital fund).

### Credit infrastructure: importance and priority reforms
- Rationale:
  - Financial infrastructure improvements disproportionately benefit SMEs due to opacity, information asymmetry, and lack of real-estate collateral.
  - Financial infrastructure includes payments systems and credit infrastructure: secured transactions, mortgage finance, credit reporting and financial technology.
- Key gaps to address:
  - Absence of efficient risk mitigation due to inefficient financial infrastructure.
  - Need for a functioning credit reporting system, improved collateral creation and registration, and payments system legal/regulatory improvements.

### Collateral framework: current regime and issues
- Legal background:
  - Main collateral types from Common Law: mortgages, pledges, debentures, charges, promissory notes.
  - No integrated/unified legal framework for secured transactions across movable assets; system is fragmented by borrower/asset type.
  - Conveyancing and Law of Property Act governs legal mortgages of real property, personal property and fixtures; registration in the Registry of Records at the Registrar General Department required to preserve priority per the Registration of Records Act.
  - Companies Act and International Business Companies Act permit debentures, legal mortgages, and first priority floating charges; debentures must be made and issued as a deed and recorded to preserve priority.
  - Choses in Action Act regulates assignment of rights (basis for factoring and receivables finance); requires express notice in writing to the debtor; Act silent on assignment of future claims and electronic assignment.
- Operational and cost issues:
  - Registrar General Department’s collateral registration is paper-based, slow, convoluted, and lacks flexibility; searches conducted by clerks or lawyers.
  - Documents recorded up to 2003 are on microfilm; from 2003 onwards scanned and may be accessed online, creating legal uncertainty for competing priorities.
  - Stamp duty burden: under the Stamp Act, a debenture or mortgage securing a monetary obligation is taxed by a stamp duty of 1 percent of the monetary obligation secured, substantially increasing the cost of finance.

### Credit reporting: recent progress and next steps
- Progress:
  - Enactment of legal framework facilitating a national credit reporting system in 2018.
  - Selection of vendor for the future credit bureau in January 2019 (CBB invited CRIF S.p.A to apply for license).
  - The Bahamas Credit Reporting Act and Credit Reporting Regulations cover licensing of credit bureaus, data collection, processing, data protection, disclosure to data subjects, and dispute processes.
  - Credit information providers per the Act: banks, NBFIs (regulated under Financial and Corporate Service Providers Act), credit unions, Bahamas Mortgage Corporation, Bahamas Development Bank; CBB may designate additional providers (public registries, utilities, sellers of goods on credit).
- Near-term priorities:
  - Encourage all data providers to submit data as required by the Act and begin using credit information in credit decisions as it becomes available.
  - Ensure the future bureau collects alternative credit information sources permitted by the Act, including utilities and telecommunication post-paid service providers.
  - Leverage high market concentration in electricity, telecommunications, and internet providers to minimize stakeholders needed for data sharing.
  - Over time, collect factoring, leasing, trade data, and transaction data (merchant, mobile/e-money, marketplace, ecommerce) to improve SME creditworthiness assessments.

### Alternative data, FinTech, and regulatory considerations
- Alternative data options:
  - Utility payments, mobile data, big data, psychometric testing models, merchant and marketplace transaction data.
- Regulatory recommendations:
  - Consider regulatory framework for release of information upon customer or trusted third-party request.
  - Provide adequate, but not restrictive, data protection mechanisms.
  - Build regulator capacity, raise awareness, and support public education around new financial technologies.
  - Encourage alternate scoring providers to consult with credit bureaus to ensure comprehensive borrower indebtedness overview.

### Recommendations (credit infrastructure, collateral, and credit reporting)
- Introduce a modern digitalized collateral registration system that is:
  - Notice-based for security interests over movable property.
  - Accessible online.
  - Supported by revised legal underpinnings to allow consistent creation of security interests across borrower types and property types.
- Revise and/or lower stamp duty charges on collateral:
  - Consider SME Policy or Act to lower or remove stamp duty charges for certain types of (productive) SME loans to make finance more affordable.

*Source: 1bhsea2019004 - 130. The GoB has put in place various public-sector finance support programs aimed at supporting access to finance for the enterprise sector.*

### 159.      Operationalize future credit bureau and facilitate collection of wide diversity of data.

### 159.      Operationalize future credit bureau and facilitate collection of wide diversity of data.

### Credit bureau scope and data collection
- Data from all banks, but also credit providing NBFIs and other valuable sources of alternative credit information such as utilities companies, telecommunication services, and other post-paid services providers should eventually be collected and processed by the bureau.
- Where available, the regulator should encourage the collection of transactions data, trade credit data, and create the necessary conditions to allow for the development of alternative credit scoring technologies, including the use of psychometric tools to develop credit histories for thin-file clients, and in particular for SMEs.

### E. Providers of Credit to SMEs and Credit Products — overview
- Formal credit market in Bahamas is dominated by banks in terms of lending volumes.
- Among regulated firms there are also NBFIs providing credit and Credit Unions with relatively large membership base but limited participation in lending volumes and somewhat troubled history.
- The Bahamas still does not have a very vibrant digital financial services sector providing finance to entrepreneurs but some NBFIs are exploring financial technology and leveraging digitization to offer finance to unbanked and underbanked.

### Regulatory framework
- The Bahamas financial system regulation and supervision is split between two regulators and regulation is provided in several acts depending on the type of institutions.
- The CBB is the regulator and supervisor of banking activities and activities of credit unions pursuant to the Banks and Trust Companies Regulation Act and The Bahamas Co-Operative Credit Unions Act.
- The Securities Commission regulates and supervises provision of the financial services outside the banking and credit unions system pursuant to the Financial and Corporate Service Providers Act.
- There is no specific legal framework for non-bank providers of microfinance services.

### Banks — characteristics and constraints
- Bahamian banks focus primarily on large corporate borrowers and less risky salaried consumers leaving smaller enterprises widely underserved.
- Reasons banks tend to stay reserved when it comes to SME finance: Profitability (overhead costs of SME business), low level of SME financial education, informality, collateral issues, lack of credit information, registration of collateral and enforcement (foreclosure).
- Although some banks have specialized departments dealing with SMEs, the majority do not; understanding of what are the SMEs differ from a bank to a bank.
- Bank lending is concentrated in the corporate and consumer lending sectors.
- Banks are conservative in SME product offering; majority rely on heavily collateralized mortgage finance and overdraft (revolving) facilities.
- Lending against movable property is generally perceived as risky due to the “real-estate bias”; borrowers are less likely to repay loans secured with movable property than those secured with immovable property (land or buildings).
- Unreliable court administration and slow enforcements of property rights negatively impact perceived value of movable assets.
- Invoice / receivable finance products like factoring and supply chain finance are known but not widely offered by banks due to lack of legal clarity and certainty when it comes to assigning invoices and lack of potential clients because of small base of manufacturing.
- Obstacles to factoring: lack of business experience, financial records and electronic invoicing.
- Asset based finance and financial leasing are rarely explored; limited secondary market for repossessed collateral seen as biggest obstacle for leasing. Finance leasing contracts are regulated under the Hire Purchase Act.
- Banks showed great interest in credit guarantee schemes as a way to circumvent lack of fixed collateral or discounted value of movable collateral; banks would use guarantees as a collateral supplement/enhancement only and would not be willing to lower their lending criteria.
- Due to negative past experience guarantee funds would have to be managed by a reliable institution, have clear and transparent claim procedures and reflect realistic lending criteria.

### NBFIs and Financial Innovation — regulatory gaps and opportunities
- The Financial and Corporate Service Providers Act regulates licensing and regulation of financial and corporate service providers outside the banking system but does not have a definition of “financial services”; the term has been interpreted using the definition issued by the WTO.
- According to the official Notice of the Securities Commission, NBFI financial services include: Money Lending, Financial Leasing, Money Broking, Credit Extension, Mortgage Broking, Escrow Services, Financial Advisory/Consultancy Services, and Financial Intermediation.
- The Securities Commission ensures persons operate in accordance with the Act and licensing is required for the listed activities; due to inexistence of definition in the Act the register of NBFIs does not differentiate between companies licensed to offer different services, making it impossible to discern the number of NBFIs that offer credit services.
- Providing definition of financial services in the Act would increase legal certainty and facilitate development of innovative providers (FinTech).
- Lack of legal and regulatory clarity and burdensome licensing procedures limit penetration of alternative credit products such as: digital credit, supply chain finance (based on e-invoice discounting) and factoring.
- Current interpretation stops short from defining receivables finance (factoring) and providing legal/regulatory framework for market-place lending (debt and equity crowdfunding).
- The Securities Industry (Business Capital) Rules were drafted in 2017 with the intention to allow entrepreneurs to raise capital using crowdfunding, but have not yet been enacted into a law.
- Supply side bottlenecks for development of Bahamian capital market finance for SMEs: underdeveloped secondary market for potential exits and perceived high risk of investments in medium companies and local start-ups.
- Demand side issues: lack of entrepreneurial culture, low level of business acumen among businesses and underdeveloped network of support programs (accelerators, mentorship programs, funding opportunities).
- Electronic transactions and e-invoicing improvements would support reliability of invoices and exploration of invoice discounting techniques.

### Positive examples and VAT treatment
- Omni Financial Group Limited is seriously exploring offering of receivables-based finance to SMEs and venturing into digital credit products; Omni was approved for $1 million funding through the IDB’s Multilateral Investment Fund (MIF).
- The VAT Act treats all providers of financial services in the same manner; VAT treatment depends on type of services and recipient, not on who provides them.
- In general, financial services supplied to persons or businesses in The Bahamas are exempt from VAT. Financial services supplied to persons or businesses outside The Bahamas are normally zero rated.

### Digitization, FinTech strategy, and regulatory tools
- There is generally very little innovation in the financial market, partially due to underdeveloped payments infrastructure and cumbersome and slow licensing process for new products.
- Digitization can help bridge obstacles hampering SME development; examples include platforms for value chain creation, white label POS devices, working capital financing invoice-discounting platforms, alternative credit data — psychometric testing/mobile data.
- Relevant authorities do not have a formal FinTech strategy; market players see this as a bottleneck for further development of digital services.
- In 2018 The Bahamas Financial Services Board established a Fintech Working group to provide recommendations to the government and regulators.
- Box 3 summarizes approaches to promote FinTech and financial innovation: Innovation hubs, Regulatory sandboxes, Public-private partnerships.
- In April 2019 the government published the Digital Asset and Registered Exchanges (Dare) Bill for consultation.

### Recommendations (178–181)
- 178. Introduce definition of NBFI financial services in to the Financial and Corporate Service Providers Act.
- 179. Enact regulation facilitating market-place lending (crowdfunding), both debt and equity.
- 180. Adopt a FinTech strategy. The authorities should strive to create an enabling environment for digital finance by monitoring the developments in the Fintech field and by establishing consulting linkages with these companies. A well-defined FinTech strategy should be developed in order to provide for clarity to potential FinTech investors, as well as to protect consumers from potential abuse. This includes streamlined licensing procedures and regulation facilitating digital contracting, digital reporting (Regtech), API usage and alike. On the other hand, the authorities should also closely monitor potential risks and implement appropriate rulemaking in the sphere of data management (storage, protection and usage), AML/CFT and financial consumer protection.
- 181. To increase legal certainty and predictability of factoring transactions, a clear legal definition of factoring and the most typical (basic) versions of factoring products should be introduced. This would also support the swift resolution of conflicts, by providing clear guidelines to local courts on how to recognize, interpret and support factoring transactions.

### F. Demand Side Issues (Consumer Protection and Financial Education) — Business License and Tax System
- According to the Business License Act every person conducting business within The Bahamas is required to have a business license.
- Typical business license is the Annual Business License which covers most typical types of business; other types: Temporary Business License (specific contract for a specified period of not more than three years) and Occasional Business License (up to seven days).
- High level of informality persists, particularly among smaller firms. WB Enterprise survey: percentage of firms competing against unregistered or informal firms is 74.6 percent in small firm segment and 52.6 percent in medium, compared to 65.9 percent and 59.9 percent in LAC region respectively.
- Business license taxes are calculated based on a percentage of the turnover for the preceding year:
  - Where the turnover is less than or equal to $50,000 the tax is $100.
  - Where turnover is between $50,001 and $500,000 per annum the tax is 0.50 percent.
  - Where the turnover is greater than $500,000 per annum but not exceeding $5 million per annum the tax is 0.75 percent.
  - Where the turnover is greater than $5 million per annum the tax is 1.25 percent.
- The government recently announced its intention to revise these numbers and to introduce new categories of tax starting from 0 percent rate to 2.5 percent.
- The Bahamas’ tax collection systems are merged under one umbrella of the Department of Inland Revenue (DIR), responsible for collection and administration under the Business License Act; the Real Property Tax Act; the Stamp Act and the Value Added Tax Act.
- A business needs to register for VAT if it makes taxable supplies that exceed the VAT registration threshold of $100,000.
- Where the annual turnover from taxable activity exceeds 5 million dollars the registrant has to file by electronic means in accordance with the Electronic Communications and Transactions Act.

*Source: 1bhsea2019004 - 159. Operationalize future credit bureau and facilitate collection of wide diversity of data.*

### 187.      VAT system is still based on the traditional post-audit system. Firms declare their output

### 1bhsea2019004 - 187.      VAT system is still based on the traditional post-audit system. Firms declare their output

### VAT system and e-invoicing (clearance) approach
- Current practice:
  - Firms declare their output tax each month on their VAT Return.
  - Firms must declare all sales which fall within the VAT period on the relevant VAT Return.
  - Firms’ input tax is offset against their output tax and they pay to the Comptroller of VAT the balance.
- Clearance (pre-approval) e-invoicing approach:
  - Issuance of e-invoices linked to a tax authority system with real-time pre-approval (clearing).
  - Implemented in many countries, including examples in Latin America, Russia, Turkey and Tunisia.
  - Revenue authority systems digitally approve invoices while assigning unique identifiers to each invoice.
  - Invoices can be registered in a centralized and public register, and made available for discounting based on electronic assignment.
  - Expected benefits: increased trust, improved tax collection, increased enforceability of invoices, and increased appeal for financing against accounts receivable.

### SME record-keeping, lending constraints, and data shortcomings
- Due to the absence of corporate tax in the Bahamian tax system:
  - SMEs do not usually keep books and financial records except for VAT reporting needs.
  - This limits availability and reliability of information on business operations, creating an additional hurdle for lending to the sector.
- Consequences for finance:
  - Limited business acumen and financial literacy of small Bahamian entrepreneurs increases the perception of risk of lending to the sector.
  - Increased perceived risk drives high collateral requirements.
  - Many assets-scarce SMEs do not have access to formal credit products.
- Specific data point on firm ownership structure:
  - According to the WB Enterprise survey, 58.2 percent of small firms and 38.1 percent of medium firms are run as sole proprietorships in Bahamas.

### Financial education and financial consumer protection
- Financial literacy and trust:
  - Many SMEs lack a full understanding of financial products and their potential benefits, causing mistrust of financial services providers.
  - Low financial literacy affects SMEs’ ability to:
    - decide on appropriate sources of funding,
    - respond to due diligence requirements,
    - negotiate financing terms and structuring,
    - manage accounts.
- Regulatory gaps:
  - There is no comprehensive financial consumer protection regulation in The Bahamas.
  - Existing requirements relating to disclosure and affordable lending stop short of good international practices.
  - There is no regulated key fact statement document (truth in lending form) for banks to apply.
  - High prevalence of sole proprietorships increases importance of protecting SME owners similarly to individual consumers.
- Complementarity:
  - Improvements in financial infrastructure and public financial grant programs need to be accompanied by targeted business and financial education activities.
  - Gaps in financial literacy and consumer protection standards undermine trust and access to finance.

### Recommendations
- Introduce a robust financial consumer protection framework followed by appropriate financial consumer supervision practices.
  - Framework should be based on international good practices and applicable to all regulated financiers.
  - Framework should include detailed rules on disclosure requirements, fair treatment of consumers, and a mechanism for complaints handling and dispute resolution.
- Continue expanding the SME training segment of financial literacy campaigns and make it a permanent topic of financial education strategies.
- Undertake a feasibility study on the introduction of the so called “clearance” VAT system.
  - Expected to support development of e-invoicing, aid formalization efforts, increase quality of credit information, and reduce risk for factoring transactions.

*Source: 1bhsea2019004*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1bhsea2019004.pdf_