Fri | Nov 17, 2017

Editorial | Banks not the villains

Published:Thursday | September 14, 2017 | 12:07 AM

Audley Shaw, the finance minister, believes that the interest rates Jamaican banks charge their customer are excessive. He wants them lowered and has placed the obligation solely on bankers, without, it seems, calculating how government policy affects these charges.

Last month, having raised US$869 million on the international debt market at between five and 6.45 per cent, Mr Shaw suggested that local financial institutions follow suit with their loans. "We are doing our part," he said in announcing the outcome of his bond offer. "...Our lending institutions need to step up to the plate and move more aggressively to single-digit interest rates."

He struck the theme again this week at the signing with the Inter-American Development Bank (IDB) of a US$20-million loan to the Development Bank of Jamaica (DBJ). The money is to be loaned to firms, with commercial banks as the intermediaries. The Government, the minister made clear, has instructed the DBJ that its mark-up on the money can be no higher than one-and-a-half per cent. The private financial intermediaries would be advised that "as part of our collective mission, they must mark up no more than three per cent".

With interest on commercial credit at around 12 per cent on average, Mr Shaw, not surprisingly, has support for his complaints about banks, including from influential voices such as the Jamaica Manufacturers' Association. Indeed, this newspaper, too, would welcome lower interest rates. We, however, are not for finding scapegoats.

Contrary to the prevailing and politically useful narrative, the interest rates Jamaican borrowers pay are not the whimsical concoctions of greedy bankers, extracting profit at the expense of everyone else. For while banks may be able to squeeze a bit more efficiency in their operations, given Mr Shaw's and his central bank governor, Brian Winter's authority over tax and reserve policy, they have greater leverage at this time to lower the cost of money.

For instance, non-finance firms in Jamaica are liable, on the face of it, for income tax rate of 25 per cent. The rate for banks is 33.3 per cent.

But the nominal 25 per cent rate for non-financial companies overstates what they really pay. They are entitled to the employment tax credit (ETC), or a claw-back statutory contributions, such as to the National Housing Trust, the training agency HEART and the National Insurance Scheme. The upshot: their effective income tax rate is around 17 per cent, or approximately half of what banks pay.

 

STRUGGLING TO STABILISE

 

Further, in 2012, when then finance minister Peter Phillips was struggling to stabilise the fiscal accounts ahead of an agreement with the IMF, he imposed a tax of 0.2 per cent on the assets of banks. That tax, he promised, would last three years. Dr Phillips did, indeed, lower it to 0.14 per cent six months later. But in 2014, he raised beyond the original level, to 0.25 per cent. Mr Shaw has kept it in place.

There are other factors in the control of the Government that also impact the financial efficiency of banks and hence their bottom lines, and ultimately, their interest rates. For example, banks are required to park in the central bank 12 per cent and 14 per cent, respectively, of their Jamaican and foreign exchange deposits. This is money unavailable for conducting business and on which they receive no interest. Additionally, banks are owed billions of dollars by the Government in refundable withholding taxes. This is money that is unavailable for investment. All of this increases the average cost of their deposits.

It is hardly surprising, in the circumstances, that despite their seemingly big nominal returns, the ratios of Jamaican banks are not particularly impressive. Take the two largest, National Commercial Bank and Bank of Nova Scotia, with assets in 2016 of J$608 billion and J$477.4 billion, respectively. The return on assets was 2.55 per cent and 2.37 per cent, respectively. It is quite noticeable that foreign banks are not rushing to invest in Jamaica and that those already here don't seem eager to expand.

Against this background, it is important for Mr Shaw to say when banks will operate on the same taxation plane as other companies, rather than being subject to a discriminatory taxation regime. If that happens, he'd find it easier to engage in a full-throated debate on interest-rate spreads.