Financial sector can help reduce social problems - BOJ executive

While the financial sector provides services that assist both directly and indirectly in the growth and development of the economy, it can do more by providing services that will reduce social problems, according to head of the financial stability department at the Bank of Jamaica, Dr Leo-Rey Gordon.

Those services the financial sector now provides include the pooling and deployment of capital, as well as a reduction in risks through diversification and the transformation of capital maturity, he said.

"However, there is still more than can be done. The financial sector needs to play the vital role of helping to provide services that will reduce social problems," he added.

Gordon cited Muhammad Yunis, the Nobel Prize-winning economist and so-called father of microfinance, who claimed that if you lend the poor money in amounts which suit them, and teach them a few basic financial principles, then they will generally manage on their own.

He later related the story of a man he met who, during a conversation, said that "all mi need is a crate of egg and mi good". Noting that it would not last for more than a week, he said the man responded that the eggs were not for him to eat, but rather he planned to "go on the corner and flip that".

Gordon said for that man there is a market where someone goes and buys a slice of bread, a boiled egg and a cup of tea. "So, he says that if he can just get a crate of eggs he can supply it to the shop and then turn that over."

Yunis, who established Grameen Bank to provide small loans to help poor people in Bangladesh and across the developing world, operated under a specific philosophical belief that loans are better than charity to interrupt poverty, he said.

Referring to the aphorism, "Give a man a fish and you feed him for the day, teach him how to fish and you feed him for life," Gordon said with that basic business model, between 1985 and 1994 annual membership of Grameen Bank grew on average by 29 per cent and had loan recovery rates above 90 per cent.

"That had an effect on poverty reduction in Bangladesh," he told members of the Rotary Club of New Kingston while addressing them on the topic, the financial sector as a service industry on Friday. "That story of Yunis and Grameen Bank is just one example of how a banking sector can be used to change the lives of communities and nations."

He noted that notwithstanding the seemingly inequitable interest rate spreads on deposits and loans, or the existence of bank fees and taxes, it still remains, based on 2014 survey data, that in Jamaica only 11 per cent of adults have borrowed money from a financial institution, while only 25 per cent use a debit card.

Those statistics underline the unutilised potential of the service industry and it outlines some of the challenges, the tasks and opportunities that are within the financial sector, Gordon said.

Among those challenges is the low usage of electronic instruments and high reliance on cash, which he said "is still king" for day-to-day transactions.

Only 32 per cent of adults make electronic payments and 65 per cent of wage earners still get their pay in cash, he said.

Gordon suggested that such interaction with cash limits the ability to pool and deploy capital for economies of scale, as well as the ability to transform the maturity of savings and investments.

"A second challenge is that there is limited confidence in the financial industry," he said, pointing to a study done by the national financial inclusion council which shows that 51 per cent of adults reports having no confidence in the financial sector. "Half of the population in Jamaica says that the financial system does not serve their needs," he added.

mcpherse.thompson@gleanerjm.com