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Banks make interest rates killing

Published:Friday | October 31, 2014 | 12:00 AM

Daraine Luton, Senior Staff Reporter

BANKS ARE making an 11 per cent spread on money they lend to the public. John Robinson, deputy governor of the Bank of Jamaica, said in Parliament on Wednesday that "spreads now, and have been for a very long time, remain very high".

"Average deposit rates are in the region of six per cent and average lending rates is 17 per cent," Robinson said at Parliament's Public Administration and Appropriations Committee, where he described the spreads as "quite stubborn".

Committee member Audley Shaw said the spreads must be brought down to "a more realistic level that is compliant with global standards".

"Why is it that in the United States they are comfortable with a deposit spread from the deposit rate to the lending rate and we are not comfortable unless we get into double digit at 11 per cent?" Shaw questioned.

He said the Government will have to take the bull by the horns and reduce the interest rates which are now being charged.

"I believe that we are going to have a paradigm change in the management of the financial sector. In the same way that I brought them kicking and screaming into single digit mortgage rates, we are going to have to bring them kicking and screaming to accept lower spreads. We must find a formula to convince the financial sector that if we want the economy to grow and for wealth to be created they have to be willing to accept lower spreads," Shaw said.

Robinson said the absence of strong competition is one of the chief reasons that bank interest rate spreads have been so large. He also said there is the need for better infrastructure which would make bankers more comfortable lending money as it would allow that to better judge the risk they are taking.

Robinson also said the reform of the macroeconomic environment will serve to reduce the competition from Government, which normally drives rates up by its participation in the market.

"From the Bank of Jamaica side, the assurance of liquidity provision for banks allows them to extend credit with less risk of being caught short without having to call or scramble for more expensive funds," Robinson said.

He added: "Starting last year and enhancing it this year, we have implemented mechanisms that will allow banks to make commitments that will allow them to be assured, whenever they are called upon to pay these monies out, they can have access to liquidity at reasonable prices."