Thu | Jan 18, 2018

Jamaica’s financial development lags its neighbours

Published:Wednesday | December 23, 2015 | 12:00 AMSteven Jackson

The financial system in Jamaica lags that of its neighbours with spreads three times higher than more efficient Caribbean markets, according to the International Monetary Fund (IMF) in a sector analysis on its 10th review of the economic support programme.

The IMF recommend that deposit-taking institutions issue new loan products in order to attract more small businesses, implement new infrastructure in order to cut overheads, and increase competition among banks.

When compared to countries such as The Bahamas, Barbados and Trinidad & Tobago, Jamaica's levels of financial development has lagged since 1995, the IMF said in its analysis, titled Financial Deepening and Inclusion in Jamaica.

"Jamaica lags in all three financial institution development categories - both depth and access are weak in Jamaica but it scores particularly low on efficiency, driven by high overheads, spreads, and margins," said the IMF.

It added that the deposit-lending interest rate spread in Jamaica averages 14 percentage points, compared to about six percentage points in both Barbados and Trinidad and Tobago, and three percentage points in The Bahamas.

"This generates a measured net interest margin of about three times that of Bahamas, the best performer in the group," added the IMF.

The inefficiency continues in the area of overhead costs, which are almost eight times as high as those of Barbados. Lending to the private sector in Jamaica remains at a relatively low level, or 29 per cent of gross domestic product (GDP), within the context that deposits total 40 per cent of GDP. Additionally, only 11 per cent of households have a credit line. In contrast, nearly 30 per cent report borrowing from family and friends or an informal lender.

"Several policies could be leveraged to improve financial deepening and increase access to finance. Increasing the number of products targeted to low income households, SMEs (small and medium sized enterprises) and agricultural finance such as micro-insurance, regular saving products, factoring and leasing would improve inclusion," the IMF report said.

"The existing partial credit guarantee of the Development Bank of Jamaica could be revamped to help mitigate information asymmetries and credit risks for the lender, while enhanced transparency and financial literacy would allow consumers to better compare products. Costs of financial services could be decreased through an expansion of payment infrastructure and policies to promote banking competition," the report added.

The IMF said that among SMEs, a similar picture emerges: "Only 26 per cent report having a credit line, compared to over 50 per cent in both Trinidad & Tobago and Barbados."

About 13 per cent of firms in Jamaica use banks to finance working capital, compared to a quarter in Trinidad and Tobago. These low levels of actual usage could be related to the high levels of collateral, which average about 207 per cent of the value of the loan, only lower than those in The Bahamas and substantially higher than the other two neighbours' levels of about 135 per cent.

Return on assets down

The Jamaica financial sector data indicates that the return on assets over the last three years (2.4 per cent in 2012, 2.0 per cent in 2013 and 2.1 per cent in 2014) trailed the eight-year average of 2.8 per cent. Additionally, the pre-tax profit margin dipped from 26.7 per cent to 21.2 per cent in the 2015 third quarter year to date.

The executive board of the IMF completed the 10th review of Jamaica's economic performance a week ago, enabling the Government to purchase an additional amount equivalent to SDR 28.32 million (about US$39.3 million).

In May 2013, the island entered into a four-year extended fund facility with the IMF.

"The authorities continue

to have an impressive track record of strong programme implementation under the

EFF. Macroeconomic stability continues to strengthen, vulnerabilities have reduced substantially, and structural reforms have progressed well," stated Min Zhu, IMF deputy managing director and acting chair.