The Jamaica Bankers' Association (JBA), which represents the six commercial banks in Jamaica, has issued a response to the JMA's and the JAS's call for lowering of interest rates and narrowing of interest rate spreads.
In their response, they have sought to cleverly confuse the reader by customising their analysis and skirting the realities that exist in the banking industry. We, the members of the productive sector, put the following points forward to further clarify the issues.
Based on a study released by the CD Howe Institute, Canada's leading independent, non-partisan, non-profit policy research institute, which analyses bank profits among a broad range of banks in the world, there is no one definition of interest rate spreads.
That study uses the difference between prime lending rates and time deposit rates, however, as a measure of interest rate spread and we have used a similar formula, viz., the difference between prime lending rate on Jamaican dollar and the deposit rates offered by banks in Jamaican dollars.
We use Jamaican dollars because this is the applicable currency for the small business sector and indeed it is our sovereign currency.
It is regrettable that the JBA has chosen to blend Jamaican dollar rates with U.S dollar rates because it suits their position and in a clear attempt to mislead. Furthermore, we compare the spread resulting from this formula with the spread in our neighbouring countries, using the same criteria.
This, we feel, gives the most accurate picture, and allows for accurate comparisons to be made. We are also guided by the CD Howe Institute's study in measuring banks profitability and efficiency levels.
What is the purpose of the commercial bank?
Banking institutions whether, they are commercial banks, primary dealers, building societies or credit unions, are supposed to be intermediaries of the financial flows in an economy.
But, some categories of banks enjoy privileges that others do not. Notable in this regard, is that commercial banks are allowed to hold deposit accounts on which they offer depositors as low as four per cent per annum when the 30-day risk-free repo is currently 13 per cent.
Primary dealers are not allowed to hold deposit accounts but instead mainly buy government securities and retail them to individuals and companies at spreads averaging as narrow as one per cent.
Based on the balance sheets of the commercial banks, however, what is evident today is that they are essentially acting as 'big primary dealers' with the additional privilege of being able to hold deposit accounts, thereby guaranteeing huge profits. We might therefore be forgiven if we were to conclude that this privilege is nothing more than a license to print money.
What do the people of Jamaica get in return for this privilege granted to the commercial banks?
The people are only being offered four per cent by the commercial banks, which enjoy extreme market power in an oligopolistic environment. The commercial banks then turn around and offer small business loans at 22 per cent per annum.
The equivalent small business in Trinidad borrows at approximately nine per cent p.a. and depositors in Trinidad and Tobago are offered two per cent. The situation in Jamaica is inequitable and unsustainable in the long run and as such should not be allowed to persist.
How efficient and how
profitable are the
commercial banks?
As argued above, commercial banks are substantially acting as big primary dealers with the bonus of taking cheap money from people. This privileged position guarantees extraordinary profits in some commercial banks with return on equity (ROE) of over 30 per cent as against an average of seven per cent as the international norm.
Moreover, these profits are being generated in an industry that is grossly inefficient when compared with international norms. The economy suffers because of this inefficiency and extraordinary profits.
This is the telling truth of the existence of market power. It allows the commercial banks with little effort, to simply place their deposits on government paper, taking no risk, while guaranteeing profits among the highest in the world. Thus it is clear that what obtains in banking in Jamaica is a sellers' market.
Would more commercial banks create a more competitive environment and, if so, how easy is it to become a commercial bank and gain entry into this market?
Prior to the banking sector crisis, there were 11 commercial banks in the market compared to the current number of six. The presence of additional active commercial banks should have the effect of creating greater competition and narrowing interest rate spreads.
Obtaining permission for new players to enter this market is currently difficult, as the regulatory approach since the banking sector crisis has been to encourage consolidation rather than expansion in the number of operators.
policy needs to be reviewed
However, with the significant strengthening of the central bank's regulatory capacity, this policy needs to be reviewed. National development demands the creation of a more competitive environment, within the context of a robust regulatory framework.
We feel strongly that in order for the economy to grow, and employment to grow, the productive sector must grow. Lower lending rates is a major factor to start this process. It cannot be that only the financial sector continues to grow exclusive of the productive sector. Both need to grow together.
The financial sector already dominates over 60 per cent of the profits generated on the Jamaica stock exchange, and has experienced tremendous growth each year for many years. It is now time that emphasis be placed on stimulating real growth in the economy by encouraging entrepreneurship and small businesses to start up and expand.
