Avia Collinder, Business Writer
Their confidence hit by recession and uncertain about the future, Jamaican firms and individuals were more frugal about borrowing in 2010, reversing the growth trend for debt of recent years despite aggressive advertising by banks to entice them to borrow for everything from cars to homes.
Indeed, $346.9 billion in loans financial institutions carried on their books for the first nine months of 2010 - the latest period for which comprehensive data is available - was down one per cent, compared to the near 25 per cent growth of 2008 and the 11.3 per cent uptick the following year.
Commercial banks, whose portfolios account for around three-quarter per cent of all loans carried by Jamaican financial institutions, performed twice as badly as the sector as a whole. Their combined loan portfolio, at $252.2 billion last September, was two per cent down compared to the corresponding period a year earlier.
However, in 2009, the banks had 10.3 per cent more loans on their books than they did in 2008, which itself was a 26.8 per cent increase on 2007.
"A number of factors (accounted for a decline in loan portfolios), the primary one being the low levels of business and consumer confidence resulting from the general economic recession," said Bruce Bowen, the president and CEO of Scotiabank Jamaica, the island's second largest commercial bank by assets, but the one with the biggest loan portfolio.
Scotiabank has $85.5 billion in loans on its books, compared to $87.5 billion being held by Michael Lee Chin's National Commercial Bank (NCB).
Like the rest of the world, Jamaica's economy was thumped heavily by the subprime mortgage crash of 2008 and the global recession that it triggered.
The island's alumina refining sector collapsed, while the critical tourism sector grew soft, with hotels having to discount heavily to attract tourists. The nearly US$2 billion a year - equivalent to what is earned from tourism - that Jamaicans abroad send home, also slowed down.
These problems were compounded by the collapse of a number of Ponzi schemes that left their 'investors' out of pocket for hundreds of millions of dollars and the need by the Government, under the direction of the International Monetary Fund (IMF), to cut back spend to narrow a wide fiscal deficit.
The upshot: the economy recorded three years of negative growth and is only now showing signs of emerging from the recession.
In the environment of gloom, Jamaicans apparently became wary of committing to loans despite spiffy campaigns by banks and a downward drift in interest rates, but not at the pace that the island's finance minister, Audley Shaw, believes is warranted by the decline in the central bank's signal rates since the Government rescheduled over $700 billion in domestic debt a year ago. Bank of Jamaica rates have seen a marked decline from as high as 24 per cent a year ago to 7.25 per cent over 30 days.
In the case of NCB, rates fell from 21.7 per cent to a special window of 15.8 per cent.
"It is true that a recession tends to give rise to a reduction in loans, akin to the reasons that current incomes are generally lower or constrained and also that future incomes are less certain," explained Courtney Williams, a fiscal-policy expert in the foreign ministry.
"Hence, one becomes more risk averse and less likely to undertake borrowing, given uncertainty of future job and income stream," Williams added.
In fact, while personal loans on the books of commercial banks remained flat last year ($90.6 billion against $90.8 billion in 2009), its share of total loans increased by 2.3 percentage points, to 37.7 per cent, indicating slippage elsewhere in their portfolios.
The Government accounts for some of this borrowing restraint. The $30.1 billion for which it tapped banks in the first nine months of 2010 was 11 per cent down on 2009.
The non-commercial bank financial institutions that are regulated by the Bank of Jamaica also say the value of their portfolios declined by 13.4 per cent for their third drop in a row.
attractive loan offers
But banks, whose profits remained robust last year despite their wariness of consumers, say they are fighting back.
"We also continue to make attractive loan offers to large commercial entities with feasible investment projects on the horizon," said Scotiabank's Bowen. "We've also developed some attractive programmes to stimulate growth on the small-business and retail-lending side."
Meanwhile, asked to comment on the stagnant trend in loans since September 28, head of the Jamaica Bankers' Association, Minna Israel, said: "The slowdown in loans since 2008 has been largely reflective of the less than favourable local economic activity associated with the advent of the global economic recession. This, coupled with higher oil and commodity prices and slower growth in remittances and other foreign direct inflows has limited Jamaica's productive capacity, specifically in the real (productive) sector."
Israel also said that limited productive capacity translates into fewer investments in the productive sector and hence, less demand for bank loans by investors. The slowdown in loans, she noted, is also due to higher levels of delinquency in banks' loan portfolios arising from the loss of jobs and earning power by many clients since 2008. Strategies being considered to revive the sector include a significant reduction in interest rates.
"As the local and international environment becomes buoyant again, stimulating demand for loan products, persons are now more willing to undertake new business ventures. In addition to this, banks have been creating financial products that are geared towards the productive sectors which are attractively priced.
Bankers have also become even more accommodating of their customers' requirements and are providing financial counselling and advice where necessary.
The success of these and other initiatives is of course dependent on the GOJ's ability to implement reform programmes: maintain fiscal/monetary discipline; implement the credit bureau legislation; create an enabling legal and regulatory environment; and continue the efforts to reduce our crime rate. The resulting increase in business and consumer confidence should facilitate a private sector- led growth."