Absence of competitive pricing impedes private sector credit
The lack of price competition in the banking sector could be hampering credit to the private sector, despite the Bank of Jamaica's (BOJ) enhanced liquidity operation since last year that has improved banks' short-term liquidity condition, according to the International Monetary Fund (IMF).
An IMF staff report presented to the Fund's executive board for the ninth review of Jamaica's economic support programme in September, says that given the economic slack and outlook for moderate inflation, there is scope for supporting growth through additional monetary loosening.
It said the BOJ's recent rate cuts, made in April and August this year, are welcome steps to align interest rates with the fall in inflation expectations.
However, the lower policy rate has yet to transmit to higher private-sector credit due, in part to weak monetary transmission through an underdeveloped financial sector, said the report.
"Credit growth is also likely hampered by a lack of price competition in the banking sector and the slow shift in banks' business model from lending to the Government towards greater private-sector lending," the report said, noting the improvement in the banks' short-term liquidity condition.
The IMF report also noted that the BOJ plans to begin regular auctions of the 14-day repos this month, which would further improve the certainty of liquidity provision and support credit creation.
"Staff encouraged the BOJ to proactively expand its toolbox for monetary operations to better manage liquidity, especially given the expected liquidity increase in February 2016, when a large domestic government bond repayment comes due," it added.
Despite a gradual decline, the spread between lending and savings rates in Jamaica is still among the highest in the region, and credit access is a particular constraint for micro, small and medium-size enterprises (MSMEs), the report said.
In that regard, the Jamaican authorities are working with the World Bank on an assessment of the partial guarantee arrangements by the Development Bank of Jamaica.
The authorities are also exploring other areas of reform to reduce the cost of MSME lending as part of their financial inclusion strategy which will be finalised by end-2015.
An IMF official, at a recent forum, bemoaned the high liquidity ratios in local as well as foreign-owned banks, yet low and costly credit to the private sector, including MSMEs in Jamaica and the Eastern Caribbean currency union.
He noted that banks were reluctant to lend because of high risk, lack of collateral and proof of ability to repay, lack of financial records, business plans, marketing strategy and managerial capability.
Earlier this year, Richard Byles, co-chairman of the Economic Programme Oversight Committee, attributed the overall slow growth of the Jamaican economy during fiscal year 2014-15 to the relatively low credit to the private sector.
Later, BOJ Governor Brian Wynter said he remained concerned about the relatively low rate of expansion of private-sector credit from the banking system.
He noted that the sustained economic expansion, which is among the objectives of the IMF programme, will not happen without strong private-sector credit growth.
The IMF also said in the September report that the BOJ will continue to respond to liquidity needs in the financial system.
"Over the course of fiscal year 2015-16, the BOJ will also further refine its monetary policy operations, such as by providing longer-term liquidity instruments if the need arises and narrowing the width of the interest rate corridor in order to further increase certainty in its liquidity provision at a price consistent with its policy goals," the report said.