FRANKSON: There needs to be a more aggressive reduction so that the productive sector can benefit from more competitive rates.
Ashford W. Meikle, Staff Reporter
THE PRESIDENT of the Jamaica Manufacturers Association (JMA), Doreen Frankson, is calling on the financial sector to reduce its interest rate spread so that the manufacturing sector may borrow at competitive rate. (Interest rate spread refers to the difference between what a bank pays its customers on their deposits and the bank's lending rates.)
"It has been argued that since 1995, the spreads have been declining. However, I don't think these have been declining at the right pace. There needs to be a much more aggressive reduction of the spreads so that the productive sector ... small businesses and farmers can benefit from more competitive rates for commercial credit," she told Sunday Business recently
The JMA head noted, "Central to the reduction of interest rate in this country is a reduction of the interest rate spread of commercial banks."
The Bank of Jamaica (BoJ) has, over the past year, reduced its rate on instruments some 14 times, but commercial banks have not moved accordingly.
For example, in January 2004, the average rate paid by banks on savings accounts was 7.24 per cent while the lending rate averaged 25.6 per cent. A year later, the average lending rate is 24.89 while the average rate on savings stands at 6.48 per cent.
DIFFICULT TO BORROW
It is this 18 per cent spread which analysts argue make it difficult for small Jamaican businesses to borrow money.
Noted businessman and board member of the BoJ, Chris Bicknell, wrote recently: "The cost of capital (bank lending rates) in Jamaica is globally uncompetitive, and is unreasonably high when compared with deposit rates. The effect of this is that our entrepreneurs and business-minded persons are being discouraged from participating in the real sectors of the economy."
According to Ms. Frankson, "Several manufacturers [have] told us that at the existing interest rates, they just cannot borrow for any major projects."
Those who did expand, "took the prudent decision to finance their projects from equity instead of placing themselves at the mercy of our local commercial banks," she disclosed.
In Barbados, the lending rate is 7.6 per cent while in Trinidad the rate is 8.7 per cent.
'WE NEED A BREAK'
Ms. Frankson argued that, "This perpetual problem of high interest rates must change and change now if we are to 'power up' the productive sector."
With characteristic candour, the business executive stressed, "If we are to expand output, the small business sector, which provides the major portion of employment in any country, must be able to secure low-cost financing that will make their business plans feasible."
She emphasised that "We need a break. Farmers need competitive funding to feed ourselves as a nation."
'DRY WEATHER FRIENDSHIP
But while she was forceful in her criticism of the banking sector, Ms. Frankson did acknowledge that one bank had offered a loan package at single digit rates.
But, she rued that "A number of members did not qualify for this scheme because of some of the conditionalities attached."
According to Ms. Frankson, the financial sector had an obligation to the country.
Without mincing words, she declared "This dry weather friendship cannot continue,"
The JMA head reminded that "During the financial crisis of the 1990s, every one of us was called on to rescue [the financial sector] at the expense of the hospitals, roads and schools."
