Jun 2015 Financial News

Economic Viewpoint: Relaunched savings bonds another option (Barbados)

Jun 01, 2015

THE 1990s were considered a watershed in the history of share ownership in Barbados, for a large number of Barbadians who were given the opportunity to become shareholders. 

An Initial Public Offering by the then Life of Barbados Limited, the creation of CIBC West Indies Holdings Limited, demutualisation of the Barbados Mutual (now Sagicor) and the partial privatisation of both the Barbados National Bank and the Insurance Corporation of Barbados took place. These allowed scores of Barbadians to acquire shares, becoming for the first time part of the island’s shareholding class.

Now the country is on the cusp of another significant event following last week’s relaunch of the Barbados Savings Bonds. The new bonds are targeting small and medium savers, although they will be there for everyone.

Importantly enough, they are inclined to create some competition in the local investment market, even as deposits at commercial banks are for the most part, fetching about one per cent or slightly more when compared to the 2.5 per cent until recently. 

Point number one is that usually in Barbados, savings bonds are taken up in a hurry and this new issue could prove very competitive to the other investment opportunities in the financial system.

Point number two is that the Central Bank of Barbados has undertaken a major campaign to promote the bonds, which continue to be a popular form of investing.

Previously, the Government bonds were worth $5 million; they carried an interest rate of five per cent and the maturity date was five years after the issue.

A lot of this has now changed. The relaunched bonds, which will go on the market from today, are worth $10 million with an interest rate of 5.5 per cent. The maximum amount of bonds any one investor could take up will be $100 000 instead of the previous $50 000. For joint holders, the limit will be $200 000.

“In the issue coming up, you will pay $76.24 for every $100 bonds taken up said,” Ms. Linel Franklin of the Central Bank of Barbados.

“This upper limit ensures that the bonds reached the main target for which they are intended, namely small and medium savers,” Dr. DeLisle Worrell, the Bank’s Governor, said.

“It has also been agreed to issue new series of bonds as supplies of available bonds are depleted, so that there will be no shortage of bonds for purchase at anytime,” said the Governor.

Dr. Worrell, who himself is an investor in Government bonds, said that since savings bonds were introduced they have been his preferred vehicle for saving. 

“They are liquid, which means you can cash them in anytime after a year,” Ms. Franklin said.

The relaunched bonds will add to the suite of investment vehicles, which are currently on the market in Barbados. 

According to the Governor, the bonds complement the choices for individuals from banks, insurance companies, mutual funds and credit unions, as well as longer-term government bonds, (treasury notes) and shares issued/traded on the Barbados Stock Exchange. 

“Everyone may choose from this range of services depending on their needs, their financial sophistication, and the amount they have to invest,” he said, while noting that for most of us “savings bonds are a safe, simple and convenient place to start (investing)”.

He also said that what they want to do is to ensure that the public is aware of the range of instruments available for investing, Dr. Worrell said.

“The financial market, like all our markets, are intended to be competitive. So it is a competition to the commercial banks,” the Governor said, noting that it was a range of choice.

It is significant to note and as pointed out by Ms. Franklin that the previous issue (of bonds) was for $5 million. The response in the last five years is that savings bonds went in a flash. She recalled that in 1981 when the issues were for $2.5 billion, they were sold in a week. Recently, they were hanging around, she said.

“So we did a study ... and through focus groups recognised there was a niche market that bought the bonds, which satisfied them and the bonds went in a hurry,” Franklin said.

“But these persons are 35 years older. If they started in 1981, they are now retired and had shifted to the longer-term instruments,” explained Ms. Franklin. 

Of importance too is that the younger persons, who the Bank wanted to benefit from these securities, did not know about them and that resulted in some fall-off in demand. “Hence, the campaign,” she said.

Dr. Worrell said that the survey revealed that people were ignorant about the savings bonds. “The thing we have said that the bonds are as convenient and as liquid as the savings deposits. It is something that is the best kept secret in our financial system,” the Governor stated.

He also noted that the maintenance of the minimum savings deposit rate was in fact a distortion in the system and it was creating difficulties not just for the commercial banks, but for customers who were holding mortgage rates artificially low and under pressure because of that minimum deposit rate.

Source:
Barbados Advocate
Monday June 1, 2015

http://www.barbadosadvocate.com/newsitem.asp?more=business&NewsID=43743