Financial Crime World

Haiti’s Banking System Lags Behind Neighbors in Stability

A recent study has revealed that Haiti’s banking system is less stable than its neighbor, the Dominican Republic. According to the research, the Z-score of the Haitian banking system averaged 10.1759, with a maximum value of 17.6844 and a minimum value of 6.2233. This is significantly lower than the average Z-score of the Dominican Republic’s banking system over the same period, which stood at 25.2404.

Factors Contributing to Instability

  • High level of political instability: Haiti scored a mean -1.0436 on the political stability index with a standard deviation of 0.3763.
  • Lack of effective regulation: The regulatory quality index averaged -1.0184, indicating weaknesses in the financial sector.

Correlation between Banking Stability and Macroeconomic Variables

  • GDP growth rate: Positive correlation with banking stability, suggesting that improvements in the macroeconomic environment can contribute to increased stability in the banking system.
  • Exchange rate: Positive correlation with banking stability, indicating that depreciation of the local currency may not necessarily stimulate economic growth.
  • The study found a strong positive correlation between property rights index and investment freedom index, indicating that these two economic freedom indices are closely linked.

Negative Correlation between Bank Lending-Deposit Interest Rate Spread and Banking Stability

  • High spreads can be detrimental to financial stability, suggesting the need for policymakers to address this issue.

A regression analysis of macroeconomic factors on banking stability was conducted. The results showed that:

  • GDP growth: Highly statistically significant at a 1% level, with a p-value of 3.91e-06.
  • Exchange rate: Highly statistically significant at a 1% level, with a p-value of <2e-16.

The study found that for every unit increase in the GDP growth, banking stability increases by 0.335. Similarly, for every unit increase in the exchange rate (depreciation of local currency), banking stability increases by 0.140. The overall model was significant, with 66% of the variation observed in banking stability explained by these two variables.

Conclusion

The findings of this study are consistent with previous research, which has shown that improvements in macroeconomic conditions can contribute to increased banking stability. However, the results also highlight the need for policymakers to address Haiti’s high level of political instability and regulatory weaknesses to improve financial stability.