Fri | Jan 18, 2019

Banks living large on interest rates

Published:Monday | November 3, 2014 | 12:00 AM

Daraine Luton, Senior Staff Reporter

BANKS ARE making an 11 per cent spread on money they lend to the public.

John Robinson, deputy governor of the Bank of Jamaica, said in parliament on Wednesday that "spreads now, and have been for a very long time, remain very high.

"Average deposit rates are in the region of six per cent and average lending rates are 17 per cent," Robinson said at Parliament's Public Administration and Appropriations Committee, while adding that the high interest rates have been "quite stubborn".

Committee member Audley Shaw said the spreads must be brought down to "a more realistic level that is compliant with global standards". He said that within the banking sector, there is the appetite for high interest rates and the appetite for large spreads.

"Why is it that in the United States they are comfortable with a three per cent spread from the deposit rate to the lending rate and we are not comfortable unless we get into double digits at 11 per cent?" Shaw questioned.

He said that the government will have to take the bull by the horns and reduce the interest rates which are now being charged.

"I believe that we are going to have to have a paradigm change in the management of the financial sector. In the same way that I brought them kicking and screaming into single-digit mortgage rates, we are going to have to bring them kicking and screaming to accept lower spreads. We must find a formula to convince the financial sector that if we want the economy to grow and for wealth to be created, they have to be willing to accept lower spreads," Shaw said.

No strong competition

Robinson said the absence of strong competition is one of the chief reasons for bank interest rate spreads having been so large. He also said there is the need for better infrastructure which would make bankers more comfortable lending money, as it would allow that to better judge the risk they are taking.

Robinson also said that the reform of the macroeconomic environment will serve to reduce the competition from government, which normally drives rates up by its participation in the market.

"From the Bank of Jamaica side, the assurance of liquidity provision for banks allows them to extend credit with less risk of being caught short without having to call or scramble for more expensive funds," Robinson said.

He added: "Starting last year and enhancing it this year, we have implemented mechanisms that will allow banks to make commitments that will allow them to be assured, whenever they are called upon to pay these monies out, they can have access to liquidity at reasonable prices."

Another committee member, Fitz Jackson, said enabling growth in the economy is of paramount interest to the parliament.

"To the extent that we seek to realise the growth, it must be a collective focus of everybody to deal with that contributing factor - the cost of money," Jackson said.

Jackson, who has been fighting to have bank fees lowered, described as "mumbo jumbo", explanations put forward by financial institutions in justifying the cost of money they lend.