Mon | Oct 14, 2019

Jan Keil | Jamaica needs co-operative banks

Published:Friday | December 7, 2018 | 12:00 AM
Jan Keil
Victoria Mutual Building Society headquarters in Half-Way Tree, St Andrew on Wednesday, December 5, 2018.
JN Bank headquarters in Half-Way Tree, St Andrew on Wednesday, December 5, 2018.

Last week, I provided evidence of a lack of competition in the Jamaican banking sector. As one possible remedy, I praised the issuance of a commercial banking licence to Jamaican National, JN, and recommended the issuance of another licence to Victoria Mutual Building Society, VMBS.

Both of these institutions are owned by members. Their goal is to supply members with good banking services, at low costs and according to their needs.

This business model is proven to be extremely successful around the world and is very different for National Commercial Bank, Scotiabank and others that are majority-owned by wealthy investors or large international corporations. They must sell customers as much as they can at the highest possible price.

The best way to illustrate this effect is to look at the bread-and-butter business of banks - the interest spread or difference between what they pay their customers on savings (usually not so much) and what they take from them on their loans (usually more).

Central bank numbers indicate that privately owned commercial banks have been paying on average less than one per cent on savings accounts in the past, while charging on average more than 16 per cent on loans. JN and VMBS pay their customers more on their savings and charge much less on their loans (on average not more than nine per cent).

The average interest spread of privately owned banks is almost double that of co-operative institutions. This is not because of differences in risk. In fact, the share of non-performing loans is 35 per cent higher for JN and VMBS.

This means two things: JN and VMBS could actually justify charging more, not less, on their loans; and they are much more willing to provide loans to riskier customers who would be rejected at NCB or Scotiabank. The inferior terms of privately owned banks can also not be explained by cost differences. JN and VMBS are smaller and not part of large international corporations, meaning that they should have lower costs than the long-standing banks.

If Jamaican businesses are to benefit from financial co-operatives, the regulator must issue a commercial banking licence to VMBS. And, if it helps JN and VMBS to increase competitiveness and drive down charges even further, the regulator should allow co-operation, joint operations, or a merger.

If this creates a strong rival taking advantage of scale and competing successfully against the large private banks, this may actually increase, not decrease, the degree of competitive intensity in the banking sector.

In Germany, for example, all independent co-operative credit institutions are part of the same organisational structure, without undermining high competitive intensity in the banking sector.

A second promising policy option to consider is facilitating a transition of Jamaican credit unions to a system of credit co-operatives.

Financial sectors in many European economies are dominated by these institutions. Most follow the 'Raiffeisen' model that is protected as part of the UNESCO World Heritage list for its success. Such banks are usually extremely small and owned by members, similar to Jamaican credit unions and building societies. Organised on the local level, they do not enjoy any type of tax or regulatory advantages, and are integrated into federations with their own central institutions dealing with commercial banks, capital markets, large corporations and central banks.

Co-operatives engage in full-blown commercial banking, and they finance most investments of small and medium enterprises. Due to their different 'fabric' in terms of ownership, corporate governance, and culture, they are extremely fierce competitors of both regular private commercial banks and public savings institutions.

Jamaican credit unions should be allowed and encouraged to broaden their membership base. Commercial lending could be handled through the federation if a base co-operative is not comfortable with this type of business.

With banking licences for both JN and VMBS, and possibly some cooperation down the road, and with a Raiffeisen-style credit co-operative system consisting of credit unions, Jamaica would have two different banking co-operative systems like, for example, Italy and other countries in continental Europe.

They would compete with each other and with private banks.

Private households using banking services can currently take advantage of better prices by switching to JN, VMBS or a credit union. In order to develop this country, businesses also need access to co-operative financial services.

Today, private commercial banks hardly finance any type of real investments in domestic enterprises.

Lending to Jamaican manufacturers accounts for 1.3 per cent of total loans and debt instruments at NCB. A high-ranking manager of this institution reminded us at a UWI event that his responsibility is to maximise profits for shareholders, not to support economic development of their nation and community.

He was right. They don't. But credit co-operatives and building societies do have this higher goal. In order to fulfil it, to develop the country, the communities, the businesses, and to grow employment, these financial organisations must have full commercial banking licences.

No doubt the Jamaican economy could benefit enormously from empowered financial co-operatives. If our private banks are not interested in financing productive investments in this country, let others do it.

- Jan Keil is lecturer/assistant professor in the Department of Economics, University of the West Indies, Mona.