The Economic Value of the Financial Services Industry in The Bahamas February 2007 Contacts: Adam Sacks [email protected] Erik Britton [email protected]
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The Economic Value of the
Financial Services Industry in The Bahamas
February 2007
Contacts: Adam Sacks [email protected]
Erik Britton [email protected]
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February 2007
Executive Summary Financial services play a crucial role in supporting the Bahamian economy, both directly by providing highly rewarding employment opportunities for Bahamians, and indirectly by procuring from and providing vital services to other key sectors of the economy, such as tourism and real estate, and to individuals. In this report, we assess the overall economic contribution of the financial services industry in The Bahamas. We find that:
• Approximately 27% of Bahamian GDP is directly or indirectly attributable to the financial services industry, making it the second most important industry in The Bahamas, after tourism.
• Financial services support around 22,000 jobs in The Bahamas, over 13% of total employment.
• The job opportunities in the financial services sector are among the best-rewarded jobs available, attracting wages of B$48,000 in the banking sector and B$42,000 in the insurance sector - between 75% and 100% higher than the national average of B$24,000.
0%
5%
10%
15%
20%
25%
30%
GDP Employment
Ancillary servicesFCSPsOther financial servicesInsuranceBanks
Total* contribution of the Financial Services Industry to the Bahamian economy, by source sector
* low catalytic estimate
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The contribution of the financial services industry to the Bahamian economy has four components: direct effects, indirect effects, induced effects and catalytic effects.
• The direct impact on GDP of the financial services industry in The Bahamas was worth nearly B$850 million, or 15% of total GDP in 2004 (compared to 21% for tourism).
o Banking contributed over B$500 million o Insurance contributed around B$220 million o Financial and Corporate Service Providers (FCSPs) contributed over B$30 million o Other financial services (investment fund administration, capital markets, and
investment advisory services) contributed over B$90 million
Banks59%
Insurance26%
FCSPs4%Other FSI
11%
• Direct employment in financial services was nearly 9,300 in 2004, 6.2% of total employment in The Bahamas. That share is lower than the share of GDP, since average productivity (value added) per employee is higher in the financial services industry than in other industries. Total direct financial services employment breaks down as follows:
o Banking: 4,366 o Insurance: 3,580 o FCSPs: 354 o Other ‘narrow’ financial services: 1,001
• The financial services industry has a wider impact on the Bahamian economy than simply the activity and jobs in those companies directly part of the industry. Financial services companies source goods and services from companies outside their industry, thereby generating activity in the rest of the Bahamian economy. These industries themselves will in turn source goods and services from suppliers, and so on. This multiplier effect is known as the ‘indirect effect’ of the financial services industry. Account
Direct FSI15%
Direct Tourism
21%Rest of
Economy64%
Composition of FSI Direct GDP Composition of Bahamas GDP
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also needs to be taken of the economic activity generated by the spending of people who work in the financial services industry and its supply chain, the ‘induced effect’. The multiplier impacts depend upon the extent of linkages between sectors.
• The value added multiplier1 for the financial services industry is estimated to be 1.6. This means that for every B$1 million of value added directly generated by the financial services industry, another B$0.6 million of output is generated indirectly in the supply chain and from the induced spending of those directly or indirectly employed by the financial services industry. This multiplier is higher than that of tourism because the financial services industry imports less as a share of its business.
• The employment multiplier is higher than the output multiplier, at 2.0, once again reflecting the high productivity of the financial services industry.
• The combined direct, indirect and induced impact of the financial services industry supported a total of 18,690 jobs in The Bahamas in 2004 (12% of total employment) and made a value added contribution to GDP of nearly B$1.4 billion, or 24% of Bahamian GDP.
• The main beneficiaries of these indirect and induced impacts are the real estate and other business services sectors. The financial services sector procures a large proportion of its service inputs from the other business services sector – including legal services, for example. And employees of the financial services industry and its suppliers, being relatively well paid, make extensive use of luxury or high-end services such as real estate services.
• In addition, the provision of financial services generates ‘catalytic’ benefits for other industries with particularly close ties to the financial services industry, contributing further to their significance. It is difficult to be sure how large these catalytic effects might be, but our estimates suggest that, conservatively, they comprise between 2.2% and 3.4% of GDP. This contribution breaks down as follows:
o Tourism (incremental visits): 1% to 1.4% of GDP o Real estate (incremental transactions): 0.8% to 1.2% of GDP o Construction (incremental development): 0.1% to 0.2% of GDP o Other industries (investment and efficiency gains): 0.3% to 0.6% of GDP
• The total direct, indirect, induced and catalytic impact of the financial services industry in The Bahamas contributes 26.2% to 27.4% to Bahamian GDP.
1 In the terminology this is a “Type II” multiplier and in formula terms is equal to (direct impact + indirect impact + induced impact ) / direct impact.
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• The financial services industry also generates substantial government revenues. In 2004, the broad sector was responsible for $200 million in government revenues and 19% of the tax base.
• Finally, the financial services industry provides important benefits to the residents of The Bahamas that are not reflected in economic indicators such as GDP. Households and firms alike are able, thanks to the provision of financial services, to save their money securely, to access capital markets both for borrowing and lending, and to benefit from informed advice as to how to improve their financial position. These benefits improve the welfare of individuals in The Bahamas, probably substantially, but they are not quantified in this report, which focuses on effects that show up either in employment or in GDP.
The table below summarises the overall economic impact of the financial services industry in The Bahamas. The total impact figures answer this important question: what portion of the Bahamian economy would be lost if the financial services sector disappeared.
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Summary of economic contribution of the financial services industry in The Bahamas
Contribution to Bahamian GDP, 2004, % of total
Direct Indirect Induced Catalytic Total
Banks 8.9% 1.1% 3.3% 1.3% - 2.0% 14.5% - 15.3%
Insurance 3.9% 0.5% 1.4% 0.6% - 0.9% 6.3% - 6.6%
Other fin. services 1.6% 0.2% 0.7% 0.2% - 0.4% 2.8% - 2.9%
FCSPs 0.6% 0.1% 0.3% 0.1% 1.0%
Ancillary industries 0.0% 1.1% 0.4% 0% 1.5%
Total 14.9% 3.0% 6.1% 2.2% - 3.4% 26.2% - 27.4%
Contribution to Bahamian employment, 2004
Direct Indirect Induced Catalytic Total
Banks 4,366 973 3,749 1,478 – 2,297 10,566 – 11,386
Insurance 3,580 440 1,704 674 – 1,048 6,399 – 6,773
Other fin. services 1,001 125 416 134 – 209 1,676 – 1,751
FCSPs 354 44 147 47 - 74 592 - 618
Ancillary services 0 1,307 483 1,790
Total 9,301 2,890 6,499 2,334 – 3,628 21,024– 22,318
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International and domestic breakout of the impact of financial services
Contribution to Bahamian GDP, 2004, %
Direct Indirect Induced Catalytic Total International 5.48% 0.71% 2.09% 0.74% 9.02% Domestic 9.45% 2.32% 3.99% 1.42% 17.17% Total 14.93% 3.03% 6.08% 2.16% 26.20%
Contribution to Bahamian GDP, 2004, B$
Direct Indirect Induced Catalytic Total Distribution International 309,994 40,058 118,515 42,092 510,659 34%Domestic 535,114 131,373 225,647 80,142 972,275 66%Total 845,108 171,431 344,162 122,234 1,482,934 100%
Contribution to Bahamian Employment, 2004
Direct Indirect Induced Catalytic Total Distribution International 1,885 373 2,238 804 5,300 25%Domestic 7,416 2,516 4,261 1,530 15,724 75%Total 9,301 2,890 6,499 2,334 21,024 100%
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The Contribution of the Financial Services Industry in The Bahamas 1 Introduction Financial services play a vital role in supporting economic growth and employment in The Bahamas, oiling the wheels of other industrial sectors, encouraging investment and improving the quality of that investment, providing a secure home for savings and access to capital markets for firms and households alike, as well as providing high paying job opportunities for Bahamians. Estimates from the Central Bank of the Bahamas place the economic contribution of the financial services industry to Bahamian GDP in the range 15% to 20% in 20042, but provide little detail as to how that contribution breaks down across industries. The purpose of this report is to build as rich and complete a picture as possible of the contribution of financial services to the Bahamian economy.
Overall, we find that:
• Considering its full range of impacts, approximately 27% of Bahamian GDP is attributable to the financial services industry, making it the second most important industry in The Bahamas, after tourism.
• Financial services impacts support approximately 22,000 jobs in The Bahamas, 13% of total employment.
• The job opportunities in the financial services sector are among the best-rewarded jobs available, attracting wages of B$48,000 in the banking sector and B$42,000 in the insurance sector - between 75% and 100% higher than the national average of B$24,000. Wages are even higher among the respondents to our survey of the financial services industry, who report an average annual wage in excess of B$55,000.
The rest of the main body of this report considers in detail the contribution that the financial services industry makes to the Bahamian economy in terms of both Gross Value Added (GVA) and employment. The Annex provides a detailed methodology setting out how we arrived at these estimates. The crux of the analysis is based upon data from the Department of Statistics and Central Bank of the Bahamas. To supplement this information, Oxford Economics conducted a survey of 37 financial services companies to quantify the catalytic benefits of financial services realised by other parts of the economy.
The economic contribution has four components:
Direct impacts – the output created and jobs supported by financial services firms. For the purposes of this study financial services firms are defined as those operating in the banking,
2 “Gross Economic Contribution of the Financial Sector in The Bahamas (2005)”; Central Bank QER March 2006
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insurance, financial and corporate service providers, investment fund administration, capital markets and investment advisory services, as well as other financial services industries.
Indirect impacts – these are the effects that occur in the wider supply chain of the financial services industry as these firms purchase goods and services from suppliers in The Bahamas. These impacts are quantified in terms of the value added they create among suppliers and the number of jobs supported.
Induced impacts – these are the impacts that arise from the spending by those people employed in the financial services industry and its supply chain.
Catalytic impacts – the provision of financial services in The Bahamas also facilitates the growth of other industries in The Bahamas. These ‘spillovers’ or ‘catalytic effects’ are most pronounced in the tourism and real estate industries: the international financial services that The Bahamas provides encourages foreign visitors to stay in The Bahamas while visiting their account managers, contributing to the growth of the tourism industry. And many such visitors also purchase and develop property in The Bahamas, contributing to the strength of the real estate industry.
Below, we go through each of these effects in turn.
2 Direct impacts
The estimation of the direct impact of the financial services industry in The Bahamas depends on which industrial sectors are defined as making up the financial services industry. This is rather difficult to define precisely, since some sectors are involved in some activities that are very close to financial services even though they do not count as financial services sectors when it comes to constructing the national accounts. For example, our survey indicated that companies in other sectors consider financial services provision as a secondary activity.
For the purposes of this study, we assume that the financial services industry includes all of the following sectors:
• Banking, including private banking and trust services • Insurance • Financial and Corporate Service Providers (FCSPs) • Other financial services, including investment fund administration, capital markets, and
investment advisory services
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The direct impacts of the financial services industry thus defined will therefore comprise the total employment and value added in each of these sectors. In 2004:
• Total direct employment in these sectors was 9,301, or 6% of total employment in The Bahamas. Of that employment, 4,366 was in the banking sector including banking trusts, 3,580 was in insurance, 1,001 was in other financial services and an estimated 354 in FCSPs.
• Their total direct contribution to GDP in 2004 was worth B$845 million or 15% of Bahamian GDP. The GDP contribution is substantially larger than the employment impact, because average labour productivity (value added per employee) in the financial services industry is substantially larger than in the rest of the economy.
• Research conducted by one of the authors of this study on behalf of the Ministry of Tourism concluded that tourism directly generates 21% of Bahamas GDP. Therefore, the two largest industries in The Bahamas comprise a total of 36% of the Bahamian economy.
Direct employment for nearly 10,000 Bahamians…
Total direct employment in the financial services industry is highly focused on Bahamian citizens. Of the 9,301 direct employees of financial services in 2004, an estimated 8,925 were Bahamians.
…in high-paying jobs in financial services…
Direct employment in the financial services industry is highly rewarding financially. Average annual earnings in the banking sector, at $48,000, were 100% higher than the national average in 2004, and in the insurance sector, at $42,000, they were 75% higher than the national average. This is borne out by the evidence from our survey of the financial services sector, which suggests that average annual earnings in the companies that responded to the survey are in excess of B$55,000, compared to a whole-economy average of $24,000 in 2004. Table 1 shows how average wages compare across a range of different industries in The Bahamas.
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Table 1: average annual wages in The Bahamas, by industrial sector
B$000s 2004
Banking services 48
Domestic banks 40
Offshore banks 70
Insurance services 42
Real estate and other business services
27
Communications services 39
Manufacturing 22
Transport services 25
Hotels & restaurants 21
Retail & wholesale services 18
Whole economy 24
Source: Department of Statistics, Oxford Economics calculations
…with extensive training also provided
High wages in financial services reflect high levels of human capital among the employees of financial services companies. To some extent, employees enter the industry already furnished with some of this human capital, in the form of degrees and other qualifications and experience. But the financial services industry also makes a contribution to the growth of human capital among its employees, by providing formal and informal training for them. 77% of the respondents to our survey offer some sort of formal in-house training to their staff, and 83% send their staff on external training courses. On average, 88% of all staff in the financial services companies that responded to our survey benefit from some form of training. According to data from the Central Bank, the banking sector alone has sent nearly 800 Bahamian employees abroad for training courses during the last five years, spending a total of over $12 million on staff training of which $5.8 million were spent by the international banking sector.
Offshore banks play a key role
Within financial services, total employment in the banking sector in The Bahamas has two components – the domestic banking sector and the offshore banking sector. The domestic
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sector provides services largely to Bahamian firms and households, while the offshore sector provides services largely to foreign firms and households.
• Of total banking-sector employment of 4,366 in 2004, 1,114 (26%) were employed in the offshore banking sector, of whom an estimated 912 were Bahamians.
• Of the total direct value added of the banking sector of B$503 million in 2004, around B$190 million (38%) came from the offshore banking sector.
• The value added per employee in the offshore banking sector is nearly twice as large as in the domestic banking sector. This is reflected in both higher profits for offshore banks and higher wages for their employees. Average salaries for employees of offshore banks were B$67,000 in 2005.
In order to calculate the international component of all of financial services (those offered to non-resident customers), Oxford Economics used the offshore proportion of banking employment and wages as a proxy against the full range of financial services. The results of this analysis are shown in the Executive Summary of this report.
3 Indirect impacts
For the purposes of this study the indirect impacts of the financial services industry encompass all the jobs and value added in accountancy and an estimated one-third of legal financial services. This share of legal financial services was derived from interviews with the principal commercial providers of legal services in The Bahamas. The indirect impacts also include the jobs and value added generated via the supply chain to the financial services sector. Most of the supply-chain jobs and value added are concentrated in a set of industrial sectors that are closely related to the core financial services sector.
These include the following industries: • Media, marketing and PR services • IT services • Real Estate services • E-commerce services Unlike the ancillary industries of legal services and accountancy, the indirect impacts within these sectors are due to their supply-chain linkages to the core financial services sector. And there are some jobs and value added in other sectors that are also supported indirectly by the financial services industry.
Indirect impacts can be calculated using information derived from Input-Output tables, which identify how much each industrial sector spends on procurement of intermediate goods and
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services, what proportion of that procurement expenditure leaks into imported goods and services, and how the proportion that remains is distributed across the other industrial sectors in the economy. Because The Bahamas does not presently produce Input-Output tables, we adapted the published Input-Output tables for Hawaii (in many respects a similar island economy, with strong tourism and commercial sectors) to be consistent with the national and industry accounts of The Bahamas using Bahamas Department of Statistics data. The result of these adjustments is effectively a Bahamian I-O table, using inter-industry coefficients from a similar island economy.
It is reasonable to assume that the distribution of procurement expenditure of the financial services industry across other industrial sectors is similar within both island economies. That is the assumption that we have made in this report. The I-O table serves as a framework to track the flows of Bahamian purchases and income among industries and consumers.
Analysis of the Input-Output tables yields estimates of the value added and employment indirectly supported by the financial services sector in The Bahamas. These indirect effects capture not only the ‘first-tier’ impacts of financial services procurement, but also all the subsequent tiers. So if financial services procure inputs of legal services, for example, the indirect multiplier captures not only the jobs and value added supported by that procurement in the legal services sector, but the jobs and value added supported by the procurement of that portion of the legal services sector, and so on through all the subsequent tiers of impact.
• The total indirect value added supported by the financial services industry in The Bahamas was worth $171 million in 2004, 3.0% of GDP, of which 1.1% was attributable to the ancillary financial services industries of legal services and accountancy
• Total indirect employment supported by the financial services industry in The Bahamas came to 2,890 in 2004, 1.8% of total employment, with 0.8% attributable to accountancy and legal services.
• Of the total indirect impact of financial services, around 23% of the impact on GDP and 13% of the impact on employment is attributable to international financial services (those offered to non-resident customers).
Together, direct and indirect employment supported by the financial services industry came to 12,191 in 2004.
4 Induced impacts
The induced impacts of the financial services industry encompass those jobs and that value added that are supported by the expenditure of the employees supported directly and
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indirectly by the financial services industry. The total quantity of this expenditure is derived from the household expenditure survey in The Bahamas. The distribution of this expenditure in terms of leakages into imports and across different industrial sectors is derived from the input-output analysis.
• The induced value added generated by the financial services industry was worth B$344 million in 2004, 6.1% of GDP.
• The induced employment generated by the financial services industry was 6,499 in 2004, 4.1% of total employment.
• Of the total induced impact of the financial services industry in The Bahamas, 34% is attributable to the international sector.
Together, the indirect and induced value added and employment supported by the financial services industry generate estimates of the ‘multiplier’ effects of financial services. The value added multiplier for Bahamian financial services is 1.6. That implies that for every B$1 million of direct value added generated by the financial services industry, a further B$0.6 million is supported down the supply chain and by the expenditure of direct and indirect employees.
The indirect and induced employment multiplier is larger than the value added multiplier, at 2.0, implying that for every 100 jobs in the financial services industry, a further 100 jobs are supported down the supply chain and by the expenditure of the direct and indirect employees of the financial services industry. The higher employment multiplier again reflects high labour productivity in the financial services sector. Employment down the supply chain and in the industries supported by the spending of direct and indirect employees of the financial services sector is not so productive as financial services employment, so more indirect and induced jobs than direct jobs are required to produce each unit of indirect value added.
Chart 3 sets out the total value added impacts of the financial services industry in The Bahamas in 2004, broken down into direct, indirect and induced effects, and distributed across the core financial services sectors which generate these effects. The total value added supported by the financial services sector was worth B$1,361 million in 2004, or 24% of Bahamian GDP.
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Chart 3
Contribution of the Financial Services Industry to Bahamian GDP (2004)
0
200
400
600
800
1,000
1,200
1,400
1,600
Banks Insurance Otherfinancialservices
FCSPs Ancillaryindustries
Totalfinancialservices
Induced
Indirect
Direct
B$ millions
Chart 4 shows the total employment impacts of the financial services industry, broken down in the same way. Total employment supported by the financial services industry in The Bahamas was 18,690 in 2004, or 12% of total employment.
Chart 4
Contribution of the Financial Services Industry to Bahamian Employment (2004)
0
2
4
6
8
10
12
14
16
18
20
Banks Insurance Otherfinancialservices
FCSPs Ancillaryservices
Total financialservices
Induced
Indirect
Direct
000s
Together, the indirect and induced value added and employment impacts (the blue and the green bars in the charts above) were worth 50% and 80% of the direct value added and
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employment effects. Certain industries in The Bahamas benefit disproportionately from these indirect and induced impacts of the financial services industry. The distribution of these effects across the industrial sectors in The Bahamas are set out in Chart 5 (value added) and Chart 6 (employment) below.
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Chart 5
Indirect and Induced Contribution of the Financial Services Industry to Bahamian Gross Value Added - by Industry (2004)
0 10 20 30 40 50 60 70 80 90 100
Manufacturing
Utilities
Construction
Wholesale and retail
Hotels and restaurants
Transport
Storage and communications
Real Estate
Legal Services
Accountancy
Other Business Services
Public Admin & Defence
Education
Health
Other
B$ millions
Indirect
Induced
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Chart 6
Indirect and Induced Contribution of the Financial Services Industry to Bahamian Employment - by Industry (2004)
0 500 1,000 1,500 2,000 2,500
Manufacturing
Utilities
Construction
Wholesale and retail
Hotels and restaurants
Transport
Storage and communications
Real Estate
Legal Services
Accountancy
Other Business Services
Public Admin & Defence
Education
Health
Other
Persons
Indirect
Induced
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Chart 5 shows that the main beneficiaries of the indirect and induced value added impacts of the financial services sector in The Bahamas are the real estate and other business services sectors. In the real estate sector, the induced effects are far more pronounced than the indirect effects (though both are large). This reflects the fact that in addition to the real estate transactions of the financial services industry itself, its employees, and those supported down the supply chain to the financial services sector also make extensive use of real estate services. As we have seen, these employees are relatively well paid, and as a result they devote a relatively high proportion of their income to high-end or luxury goods and services – services like real estate.
Chart 6 shows that the main employment impacts are focused in the wholesale and retail sector, though the impacts on real estate, construction and other business services employment are also large, as is the employment in the ancillary industries of legal services and accountancy. The impacts on retail employment come largely via the induced effects, as well-paid financial sector employees spend money in shops in The Bahamas.
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5 FSI Impact on Government Revenues The financial services economy contributes in its own right to government revenues. The sectors within financial services are directly assessed in a variety of ways. These direct taxes include business license fees, company registration fees, work permits, banking fees, and IBC registration fees. In addition, financial service companies pay import duties, property taxes, indirect business taxes, and national insurance for its employees. Total direct FSI government revenue tallied $113 million in 2004. The majority of these revenues were generated through import duties, national insurance payments, and IBC-related fees.
Direct FSI government revenue, $ million, 2004
IBC fees, $15.7
National insurance, $24.2
Property tax, $8.1
Import duties, $30.5
Other indirect, $11.0
Company registration, $1.4License, $11.3
Work permits, $2.5
Other banking fees, $8.1
Similarly to the GDP impact analysis, the financial service sector’s indirect and induced tax generation can also be quantified. An additional $87 million in taxes was produced by the financial services sector through its suppliers, related industries, and income effects. Half of these taxes, or $44 million, are import duties.
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Indirect and induced FSI taxes, $ million, 2004
Stamp Duty from Imports, $12
Export Tax, $1
Other Stamp Tax, $14
Other tax, $2
Import Tax, $44
Motor Vehicle Tax, $2
Property Tax, $6 Business and professional licence, $6
In total, $200 million in government revenues were generated by financial services and its related sectors in 2004. In order to calculate the share of total taxes, we first remove the direct national insurance contributions as these are not strictly considered taxes in the central government accounts. On this basis, financial services is responsible for 19% of all taxes in The Bahamas. The reason this is lower than the corollary direct, indirect, and induced GDP impact of 26% is primarily that imports represent a relatively lower share of FSI business than that of the rest of the economy. This, in fact, is indicative of the economic contribution of FSI which has relatively low import leakages.
Total FSI government revenues, $ million, 2004
$0$25$50$75
$100$125$150$175$200$225
Indirect andInduced
Direct
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6 Catalytic impacts
The catalytic impacts of the financial services industry capture the extent to which the economic performance of other industrial sectors is boosted by the activities of the financial services industry, other than via the indirect and induced impacts set out above. It is extremely difficult to be sure about the magnitude of these effects – for some industries, they are likely to be negligible or even zero. But there are good reasons to believe that the financial services industry does generate such catalytic or ‘spillover’ effects in The Bahamas. As part of this report we surveyed the members of the Bahamas Financial Services Board, in part to try and assess the range and magnitude of these catalytic effects. The responses to the survey are very interesting, and suggest that these effects are substantial. According to our analysis of the survey results:
• The provision of international financial services out of The Bahamas generates more than 160,000 extra visitor nights in The Bahamas each year, some 2% of total visitor nights, as customers for financial services visit The Bahamas to meet with their account managers. This figure is based on the results of our survey of BFSB members which indicated the number of client visits and their length of stay.
• These results pass the reasonableness test when compared with Ministry of Tourism figures on business travel to The Bahamas which represents roughly 10% of all visits. Assuming a shorter length of stay than leisure visitors, FSI business travellers represent 38% of business travel to The Bahamas.
• The impact on tourism revenues is likely to be even more pronounced, since the majority of visitors who come to make use of financial services in The Bahamas are high-end tourists, most of whom stay in high-end hotels such as the Hilton, Atlantis or the Ocean Club. The catalytic impact on tourism export revenues alone is sufficient to boost Bahamian GDP by around 1% to 1.5%.
• In addition, our survey suggests that foreign customers of Bahamian financial services have made over 3,500 purchases of real estate in The Bahamas over the last five years. Conservatively assuming that only one-tenth (350, or 70 per year) of these transactions could be considered incremental or attributable to the financial services industry, this boosts the value added of the real estate services sector by 5% to 7.5%, contributing around a further 0.8% to 1.2% to total Bahamian GDP.
• In total, according to our survey, around 9,000 to 12,000 foreign customers of Bahamian financial services also own real estate in The Bahamas. Again, on conservative assumptions, around 900 to 1,200 of those real estate owners might be attributable to the services provided by the Bahamian financial services industry. They make use of
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construction and repair and maintenance services in order to build, extend and maintain their properties each year. This spending boosts the output of the construction sector in The Bahamas by around 2% to 2.6%. That implies a contribution of a further 0.1% to 0.2% of GDP each year.
• Moreover, 70% of financial services companies responding to our survey state that the provision of their services has led their customers to increase their investment in The Bahamas. 63% state that they help their customers to make better investment choices in The Bahamas. And 26% state that the provision of their services encourages entrepreneurial activity on the part of their customers. Among a range of highly uncertain estimates, these are the most uncertain, but it is possible that the impact via this raft of effects contributes between 0.3% and 0.6% to Bahamian GDP.
Overall, the catalytic impacts of financial services in The Bahamas (conservatively) contribute between 2.2% and 3.4% to Bahamian GDP. That implies a total economic impact of the financial services industry of between 26.2% and 27.4%.
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7 Conclusions Our analysis suggests that the financial services industry in the second most important industry in The Bahamas, after tourism, in terms of its overall contribution to GDP and to employment. The direct effects of the industry are the single most important contribution. But, taken together, the indirect, induced and catalytic effects of financial services are as important again as the direct impacts. Chart 7 summarises the overall contributions to GDP and employment in 2004 (on conservative assumptions about the magnitude of the catalytic effects), identifying the impacts from each of the different sub-sectors of financial services – banks, insurance, FCSPs, and other narrowly defined financial services.
Chart 7
0%
5%
10%
15%
20%
25%
30%
GDP Employment
Ancillary servicesFCSPsOther financial servicesInsuranceBanks
Total* contribution of the Financial Services Industry to the Bahamian economy, by source sector
* low catalytic estimate
Table 2 summarises the economic impact of the financial services industry in The Bahamas, in terms of its contributions to GDP and to employment, identifying all of the different channels of effect – direct, indirect induced and catalytic effects, and applying ranges to the catalytic impacts reflecting the unusually high degree of uncertainty surrounding these estimates.
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Table 2: summary of economic contribution of the financial services industry
Contribution to Bahamian GDP, 2004, %
Direct Indirect Induced Catalytic Total
Banks 8.9% 1.1% 3.3% 1.3% - 2.0% 14.5% - 15.3%
Insurance 3.9% 0.5% 1.4% 0.6% - 0.9% 6.3% - 6.6%
Other financial services 1.6% 0.2% 0.7% 0.2% - 0.4% 2.8% - 2.9%
FCSPs 0.6% 0.1% 0.3% 0.1% 1.0%
Ancillary industries 0.0% 1.1% 0.4% 0% 1.5%
Total 14.9% 3.0% 6.1% 2.2% - 3.4% 26.2% - 27.4%
Contribution to Bahamian employment, 2004
Direct Indirect Induced Catalytic Total
Banks 4,366 973 3,749 1,478 – 2,297 10,566 – 11,386
Insurance 3,580 440 1,704 674 – 1,048 6,399 – 6,773
Other financial services 1,001 125 416
134 – 209 1,676 – 1,751
FCSPs 354 44 147 47 - 74 592 - 618
Ancillary services 0 1,307 483 1,790
Total 9,301 2,890 6,499 2,334 – 3,628 21,024– 22,318
Overall, taking into account direct, indirect, induced and catalytic effects, around a quarter of Bahamian GDP and around 22,000 jobs are supported by the activities of the financial services sector in The Bahamas.
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Methodology Appendix 1 Construction of an Input-Output table for The Bahamas In this section we describe the approach adopted and data used by Oxford Economics to construct an input-output table for The Bahamas using existing datasets and interpolated information from another island economy. Building a full input-output table would require an extensive survey of all businesses in The Bahamas and could only be developed at a considerable cost. Figure 1 is a simplified diagrammatic representation of an input-output table for a three sector economy. Existing Bahamian data provided much of what was required to build a more detailed version of this table for The Bahamas. Data on labour and capital (profits) were sourced from the Central Bank of the Bahamas (cells L and P in the diagram below), along with total intermediate consumption for each sector and data on imports. Data for total consumer expenditure (cell C) were sourced from the Department of Statistics. In order to complete the input-output table it was necessary to draw on additional data sources and make a set of assumptions. For example, in order to fill in the suppliers of domestic intermediate consumption for each sector (matrix ic) two main steps were required. • First, the value of domestic intermediate consumption was calculated by subtracting
imports by firms from total intermediate consumption. Although total import data was available from the Central Bank of the Bahamas, an assumption of how much firms imported was required.
• Second, it was necessary to estimate exactly which firms these domestic purchases were made from. For the purposes of this project, estimating the economic contribution of financial services industry to the Bahamian economy, the key sector was that of banking. For this sector we use data from the production accounts of financial institutions in The Bahamas. For the other, less directly relevant sectors, the domestic intermediate consumption data was distributed across suppliers as it is in Hawaii. The final assumption required was to estimate where consumers spend their money (cells c). Data on total consumer spending was sourced from the Department of Statistics, and it was assumed that Bahamian people purchased a similar mix of goods and services to people living in Hawaii.
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Figure 1 – An illustrative input output table with only 3 sectors
Outputs Intermediate demand Final Demand Total
Inputs Food Man. Serv. Cons. Inv Gov Exp. Total
Domestic intermediate consumption Food Manufacturing Services
ic
c
Other inputs Imports I Labour L Capital P Total C
2 Modelling the Economic Contribution of the Financial Services Industry to the Bahamas Direct – The direct contribution of the Financial Services Industry to the Bahamas has been measured both in terms of Gross Value Added (GVA) and employment. The GVA statistics are directly sourced from the Central Bank of the Bahamas and cover: Banking, Insurance, Financial and Corporate Service Providers (FCSPs) and other financial services. Due to the level of disaggregation available, a number of assumptions have been made to arrive at separate employment estimates for Banking, Insurance, FCSPs and other financial services. The employment data for Banking has been sourced directly from the Central Bank of the Bahamas. The number of employees in the Insurance industry has been estimated using data from the Central Bank of the Bahamas on wages and salaries in the industry and average earnings data from the Department of Statistics. The numbers of proprietors have been estimated by using information on the ratio of proprietors to employees in the Insurance industry in a representative country, Hawaii. All detailed sector employment estimates are consistent with the more aggregate employment data published by the Department of Statistics. Indirect – In order to estimate the indirect contribution of the Financial Services industry to the Bahamian economy it is necessary to understand both the value of goods and services they purchase from their supply chain and whether these goods and services are bought locally (from other Bahamian firms) or imported. The input output table for The Bahamas, the
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construction of which was described in section 1 of this appendix, gives the information required to make this calculation. Induced – In order to estimate the induced contribution of the financial services industry to the Bahamian economy it is necessary to estimate the earnings of workers in every industry and where they spend these earnings. Data on earnings for each industry are sourced from the Central Bank of the Bahamas. The estimated input-output table for The Bahamas gives the required information - where this money is spent, which industries and whether or not they are based in The Bahamas. Using the input-output table it is simple to calculate the first-round multiplier effects (indirect and induced) of any industry included in the table. However, in order to calculate the true contribution that an industry makes to the Bahamian economy it is necessary to undertake some manipulation of the input-output table. This manipulation enables the user to calculate not only the ‘first-round effects’ (the value of the domestic purchases by firms and workers employed in the industry in question) but also the second, third and all subsequent rounds as well. For example, the first-round effect for financial services would indicate the value of the purchases made by the financial services sector from, for example, the transport sector. The second-round effect would be the value of the purchases made by the transport sector in order to supply the financial sector and so on for the third, fourth and subsequent round effects. The manipulation that enables us to make this calculation from an input output table is termed the ‘Leontief inverse’ after Wassily Leontief who first published the technique.
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3 Survey methodology In order to assess the Catalytic or spillover impacts of the financial services industry on the economy of the Bahamas, Oxford Economics undertook a comprehensive survey of Bahamas Financial Services Board members. The survey focused on business activities of firms in the financial services sector in The Bahamas, and on their interactions with the rest of Bahamian economy as a whole, and with the tourism and real estate industries in particular. We solicited responses from approximately 150 members of the Bahamas Financial Service Board and received 37 completed surveys, representing a wide variety of firms and industries within the financial services sector. The survey contained about 20 questions3 and asked about firms’ primary and secondary activities, size, staff composition, staff training, ways to support other sectors, ways to benefit Bahamian residents, and ways to influence the economic contributions of their customers. The responses to these questions enabled us to explore to what extent the activities of the financial services industry contribute to improved productivity and performance in other sectors of the Bahamas economy. Respondents include many of the major players in the Bahamas financial services industry, and the offshore presence of some of the top-tier international financial corporations. In terms of primary business activities, the respondents were distributed across different areas of financial services as follows: Almost half of the financial services firms in The Bahamas were involved in offshore (private) banking and trust services and about 15% of the respondents were investment management firms. The remaining firms were evenly spread across other areas within financial services, including retail banking (6%), insurance brokerage (9%), accountancy (9%), and family office type services (6%). The other 12% of the respondents were firms whose main client base is comprised of financial services companies. Such firms include real estate brokers and legal service companies, whose services are crucial to the development of the financial services sector. We received responses from a wide variety of companies, ranging from very small (15% of the sample firms had annual gross revenue of less than $1 million), to very large (6% of the sample firms had annual gross revenue of at least $200 million), and with over 60% of firms having an annual gross revenue between $1 million and $20 million. However, most of them did have one characteristic in common in terms of their employee structure; that is their
3 A complete copy of the survey questionnaire is appended below
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mainly Bahamian full-time staff. For a majority (85%) of them, Bahamians account for more than 70% of their full-time staff. The survey responses also revealed some clear insight into how the financial services sector supports the development of other sectors in the Bahamian economy. The main channels for such cross-sector effects include: Activities in the financial services sector bring high-end customers and high-end
investment to the tourism industry and real estate industry in the Bahamas:
Nearly 60% of the financial services firms in The Bahamas have offshore private banking and trust services, or investment management, as their primary business activities. A substantial fraction of the respondents indicated that their business helped draw high-end visitors and real estate investors to the Bahamas.
In addition guests of the financial services firms tend to stay in The Bahamas for
3-7 days for their trips, and often stay at high-end hotels or clubs like the Hilton, the Atlantis/Ocean Club, Lyford Cay Club, and the Wyndham at Cable Beach.
The financial services sector provides intensive training to its employees, increasing their
intellectual capital:
Over 70% of financial services firms provide either external or on-the-job formal training programs, and the rest have informal on-the-job training for their employees.
For 70% of the firms, over 90% of their employees undertook such training. Most of these programs are short ones lasting from 1-5 days; however, some of
them are rather long training programs lasting from somewhere around 1-3 months to 3-6 months.
Examples of such programs include software training, compliance seminars, and co-worker mentoring programs and so on. We should also note that since most of these employees are local Bahamians, such human capital investment will have a permanent effect on the Bahamian economy in the long run, through increasing the quality of its pool of skilled labour.
The financial services sector contributes to the Bahamian economy as a whole by
providing access to the global capital market and facilitating investment opportunities, which foster entrepreneurial spirit and encourage entrepreneurial activities throughout the economy:
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The respondents indicated that their directors were frequently consulted by local
Bahamians on their quests for entrepreneurial development, advising on a casual and personal basis on all aspects of moving their ideas forward. Financial services firms also often helped secure the capital that’s needed to realize local Bahamians’ entrepreneurial aspirations.
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Economic Significance of the Financial Services Industry in The Bahamas The Bahamas Financial Services Board has contracted with Oxford Economics to assess the economic importance of financial services and its associated activities in The Bahamas. This survey will take about 5 minutes and is designed to evaluate some of the indirect benefits of the financial services industry.
1. What is your principal business activity? What is your secondary business activity?
2. If you are not directly involved in financial services, what is your relationship to
the financial services sector?
Provide services to financial services companies. Please describe: Provide debt or equity for real estate activities. Please describe: Provide debt or equity for other business activities. Please describe: Clients are employed in the Financial Services Industry in the Bahamas.
If you checked this box, what proportion of your clients are employed in this industry?
Other. Please describe:
3. How many persons do you employ (full-time-equivalents) in The Bahamas? 1-5 6-10 11-20 21-30
31-50 51-75 76-100 >100
What proportion of these employees are Bahamian?
4. What is the average annual wage (including benefits and any bonuses) of your
employees in The Bahamas? $15,000-$19,999 $20,000-$29,999 $30,000-$49,999 $50,000-$74,999 $75,000-$100,000 >$100,000
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5. What is your annual gross revenue?
<$1 million $1-$5 million $6-$20 million $21-$50 million $51-$75 million $76-$100 million $101-$150 million $151-$200 million >$200 million
6. What proportion of your business is from resident Bahamians?
<10% 11%-20% 21%-40% 41%-60% 61%-80% 81%-100%
7. In what ways does your business support other sectors (e.g. tourism, real estate,
construction)? Facilitates hotel and related real estate development Brings high-end visitors to The Bahamas for tourism Brings high-end real estate investors to The Bahamas Other
Can you give any specific examples?
8. a) What sort of training do you provide? Formal on-the-job training programs. Please describe: Formal external training. Please describe: Informal on-the-job training. Please describe:
b) What proportion of your staff undertake some sort of training in each year? c) What proportion of your training programs last longer than 3 months?
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9. In what ways does your business benefit residents of The Bahamas? provides access to debt provides investment opportunities provides greater security to savings Facilitates entrepreneurial development Other
Can you give any specific examples?
10. a) On average, how many of your customers from abroad come into your offices in the Bahamas each year?
b) On average, for how many days do they stay in the Bahamas on each visit? c) Which hotels do they usually stay in? What proportion stay in:
The Hilton? Atlantis? Other hotels?
d) What proportion of your clients who visit your premises in the Bahamas have
purchased real estate in the Bahamas over past 5 years? e) What proportion of your clients who visit your premises in the Bahamas own
property in the Bahamas? 11. In what ways do your services influence the economic contribution of your
customers?
Leads them to increase their investments in The Bahamas Leads them to improve their investments in The Bahamas Promotes business productivity / efficiency Other
Can you give a specific example?
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