Banks need a growth strategy

Aubyn Hill, Financial Gleaner Columnist

During the past few months I have written about many subjects concerning the economy, and one of my consistent themes is that the Government of Jamaica (GOJ) must become facilitator-in-chief for a Jamaican economic growth plan.

The Jamaican Government cannot be 'the' or even 'an' engine of growth.

Most of us would be happy if the GOJ simply conveys to the nation that it understands the role economic growth must play in getting us out of our economic mess, and that it is taking action to make the government bureaucracy more cost-effective and efficient.

If the Government is to be the main coordinator of economic growth, then the private sector must the engine driving the expected growth.

Too often, we pretend that a group of elected politicians are the only ones responsible for economic success. Politicians consistently give the GOJ a large role in the economy and so they are under a large burden of accountability to which we must hold them tighter and tighter.

But the private sector needs to step up to function in the new growth economy.

Today, I will be using the banks to represent the private sector.

We keep saying, rightly, that the GOJ is overmanned, inefficient, costly and loss-making. The banks are certainly very profitable but their services are costly and in many instances they could be much more efficient.

Banks occupy a very privileged position in our economy and society. They are licensed to take deposits from clients and have the power to aid in the multiplier effect of money in the country.

In the published 2012 financial results for our two biggest banks, Scotiabank held J$160.9 billion in deposits from the public. NCB led by a nose at J$162.9 billion.

Jamaican persons, businesses and government entities have trusted these two big financial groups with about J$320 billion of their savings or extra cash.

When they are the repository of such a large bundle of savings in an economy of our size, banks shoulder special responsibility.

DAY OF RECKONING

It is fair to say that the last two decades have been an unusual time for the Jamaican economy. It is useless to cry over what has happened. Better to understand it, not hide from it, learn the lessons and move on.

GOJ policies in the 1990s, driven largely by the banking sector collapse, led to extraordinarily high interest rates.

I was on a radio programme recently and the other guest said that with interest rates at 70 per cent and more, it was some of the easiest money he ever made. I missed those moneymaking days since I was living far away overseas.

With those kinds of exorbitant rates at which the Government paid lending institutions, commercial businesses and persons, few were encouraged to start businesses - except possibly in the financial services - or even stay in the normal productive sector.

In a real sense, the GOJ's high interest rates told most entrepreneurs that they would be foolish to engage in 'real work'. Worse, it practically forced people to earn cash from a profli-gate and relentlessly borrowing Government, then turn around and spend it on imports, which this poor country pretended it could afford.

The day of reckoning has arrived. We as a country cannot borrow any more unless we submit to some painful economic and, no doubt, social strictures.

On its 2012 balance sheet, NCB had about J$210 billion invested in securities and a loan portfolio of J$112 billion; Scotiabank had GOJ securities of J$90 billion and a loan book of J$122.5 billion.

I suspect these banks will have to change their approach to lending to the 'real and productive economy' versus loading up on government paper as they and others did in the past. The realities of JDX and NDX - the latter reducing interest rates by as much as 5.25 per cent - must force savers and institutions to diversify into productive activities which can bring better returns. This will not be easy.

Banks have been weaned on relatively easy earnings from government paper and, in some cases, have lost the will, talent and skills to work with and encourage growth in the productive sectors.

BACKERS OF ENTERPRISE

Although the local and international economic climate is difficult and even treacherous, there are opportunities which entrepreneurs will unearth and which lenders will be able to finance after careful evaluation.

I am not thinking only of the importing business. Maybe the coffee, coconut water and kernel, ginger, cocoa and yellow yam farmers and processors will finally have some bankers calling on them and even helping them to find technical resources and help to grow, process and export their crops and value-added products.

So, too, may help come to the education and training sector to treat it as the business it is. The renewable-energy sector may finally get more than a photo-op passing glance.

Both of these are growth industries where enterprising bankers could turn their attention to identify and develop good lending opportunities.

Banks will have to change their approach. For too long, the high GOJ interest rates have allowed lending institutions to lend money at rates as low as nine per cent over eight years to buyers of the ultimate consumer import - a car - and disregard producers of products for the local and export markets.

The risk of the productive class was viewed as too high. That viewpoint will now have to change.

Banks will have to retrain their credit people to develop commercial sense and not just unrealistic technical skills. Like the GOJ, some of our local banks are overmanned and will have to retrench some employees and become more efficient.

Retrenching well-trained people can be a good thing. The Icelandic president lauded such a move at the Davos Forum in January involving former bank employees who helped to revive other sectors of the economy when the big three Icelandic banks were forced into deep cutbacks after the 2008 financial meltdown.

Aubyn Hill is the CEO of Corporate Strategies Limited and was an international banker for more than 25 years. Email writerhill@gmail.com; Twitter: @HillAubyn; Facebook: facebook.com/Corporate.Strategies