Lower lending rates now
Jun 04, 2010WITH the JDX now implemented, the Jamaican dollar revaluing and the banking sector enjoying a benign period, it is perhaps time for the country's leading banks to begin lowering their base lending rates in an effort to bolster the economy and give wings to the productive sector.
The country's leading commercial banking entity, Scotiabank Jamaica, has heeded the call and last month announced that effective June 1, 2010, Scotiabank Jamaica will reduce its base lending rate by over 200 basis points to 17.75 per cent. This will be the bank's lowest base lending rate in five years, as well as the lowest lending rate among Jamaica's major commercial banks.
Commenting on Scotiabank's move to lower its base lending rate, Scotiabank Group's president and CEO Bruce Bowen said: "Following Jamaica's signing of the IMF Standby Facility and completion of the Jamaica Debt Exchange (JDX) in February, foreign exchange markets and security markets have stabilised, allowing for commercial lending rates to start reducing. As the country's largest and most successful financial services group we are once again taking the lead in lowering rates and making loans more affordable to our customers."
The Base Lending Rate is a base interest rate calculated by financial institutions according to a formula which takes into account their cost of funds and other administrative costs. The Prime Interest Rate, as opposed to the Base Lending Rate, is the interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers). The rate is almost always the same amongst major banks. Adjustments to the prime rate are made by banks usually at the same time, although the prime rate does not adjust on any regular basis.
At the Bank of Jamaica's last Quarterly Press Briefing, Caribbean Business Report posed the question to the Governor of the Central Bank, Brian Wynter, whether he was happy with the efforts of commercial banks to bring down interest rates in light of the implementation of the JDX.
Wynter said it was something that he would not address, but reminded those in attendance that the Bank of Jamaica is the supervisor of the country's financial institutions with a duty to ensure that their solid stability is not only maintained but actually improved.
"From that perspective one has to be very cautious about seeking to directly influence what are market interest rates. But there can be no doubt that lower interest rates will bring the growth we are looking for as a country. But there is another caveat. Let us just imagine there is an explosion of consumer lending which might feel good for a period, but if there is not an underpinning of productive investment in the private sector, then we must be cautious not to create the seeds of failure a little further down the pike.
"At the Bank of Jamaica we do not manage the interest rates of the commercial banks, but we are in constant dialogue with them. We are very interested in the level of rates that they are offering to their customers. Nevertheless, it would not be proper to interfere in how they go about determining their interest rates. It is in the banks' interest, as the Minister of Finance has pointed out, to have the kind of rate structure that encourages lending. This is an area where banks can expect to make profits going forward. I must add here that bank balance sheets do not change as quickly as a financial market transaction can change and so there is a process, and we at the BOJ are as interested as the public in that process and how it evolves. But I still maintain the question must be posed to the banks."
For the better part of two decades Jamaican financial institutions have been weaned on high interest rates on government paper and so they have not given the growing of their loans portfolio the precedence that should prevail. This mindset has existed for years but with the advent of the JDX, many will have to focus on other revenue lines. A cursory glance at the recent spate of financial results reveals in many instances a reduction in profits; no doubt brought on by the fall in interest rates on government paper. This should engender a more competitive spirit as finance houses go in search of more customers and try to keep them.
Many of Jamaica's business leaders have bemoaned the high interest regime which they regard as a contributory factor to the lack of growth of the productive sector and the reticence of budding entrepreneurs. In many cases the memory of FINSAC still lingers.
So how do business operators view the current landscape?
Managing director of Wisynco, William Mahfood says, "Generally the market right now is very competitive. Finance houses are now courting businesses and are willing to structure financing . There is now an appetite to lend with low-risk customers having a better chance of securing competitive financing. I would say that lending rates are beginning to trend down."
CEO of Boss Furniture and President of the Jamaica Manufacturers Association, Omar Azan: "Interest rates are trending down but not quick enough. The Bank of Jamaica is doing its part, but you don't see notices from the banks following the Central Bank's lead; and in this regard I think they should be pressured to do so. It not only helps the manufacturing sector but the entire economy when interest rates are low.
"A big concern is the high charges local institutions apply to customers. It seems that the JDX has taken away with one hand; but the banks want to make it up on the other hand with exorbitant charges. It's horrendous! Bankers should be going out and finding the business and building their loan portfolio rather than sitting back and relying on unconscionable charges. Car loans seem to be coming down but what about mortgages? They need to begin coming down and this in turn will help the construction sector and boost employment."
CEO of Caribbean International Network (CIN), Stephen Hill: "There is always a lag after the Central Bank drops rates. The banks now have to get rid of the higher interest rate repos they have on their books, but after six months they should have done so. I think you will see interest rates to corporate Jamaica falling appreciably over the next three months. Bringing down rates will bring significant benefits to the economy later this year. The restructuring of the debt was a good move and it will pay off."
CEO of Fitz-Ritson & Associates, Karen Fitz-Ritson: "The successful JDX initiative pulled interest rates down from 20% to a range of 10%-12% on investment instruments. To date we see T- Bills trading at an average of 9.98% (effective May 28), so the million dollar question is why have the lending rates not trended down also which would be a welcomed injection for businesses who have the capacity to expand to do so at a more cost effective fashion.
"There are several factors that need to be taken into consideration especially in light of our IMF agreement and that is the liquidity requirements of commercial banks and financial institutions with the BOJ. One also has to bear in mind the risk factors that impact on the reduction of interest rates and the costs of funds that the commercial banks and other loan facility institutions have on their books to be able to reduce interest rates in-line with the treasury bills. This is very critical.
"Inflation also plays a critical role and if the projected inflation rates for the fiscal year 2010/2011 as stated by the Bank of Jamaica hold true to 7.5%-9.5%, then one could look forward to a trending down of interest rates. In light of this new paradigm of doing business in the financial arena, it would behove institutions to react and respond in a timely manner as consumers have the option to do business anywhere in the world and this could be a reality for businesses who are net earners of foreign exchange or even more pallatable, raising equity from the capital markets.
"Proven Investments successfully did this last year and in addition BluePower Limited, so there are other options and venture capitalism will become more attractive. Business people will just have to weigh their options carefully. Individuals can always look at the traditional credit unions."
BY AL EDWARDS
Friday June 04, 2010