Apr 2015 Financial News

ECONOMIC VIEWPOINT: Effect of adjusted interest rates to be seen (Barbados)

Apr 27, 2015

WHILE he spoke on behalf of CIBC First Caribbean International Bank, CEO, Rik Parkhill, said enough to add more to the raging debate about the present state of banking in the Caribbean and the more recently, the subject of the adjustments to interest rates across the region.
In the Eastern Caribbean Currency Area (ECCA) the minimum deposit interest rate was lowered from three per cent to two per cent. In Barbados the Central Bank took a decision not to set those rates again, with that function now falling to commercial banks and to finance houses.
The CBB said that in taking this decision Barbados joins Trinidad and Tobago and Jamaica, in no longer having responsibility for setting the rates.
Mr. Parkhill was quizzed at length on the subject and on related matters. He said that Barbados and the OECS were the two places in the Caribbean that maintained minimum savings rate. Commenting on the decisions by Barbados and the ECCA, Parkhill said: “I think you will see a corresponding drop in lending rates as well and it will help the performance of the bank in terms of allocating its liquidity, and will help the performance of the economy as well.”
In the ECCA area the consensus seems to be that the rate cut will benefit the commercial banks and not so much the borrowers and in particular businesses.One politician there said businesses have been hardpressed to the point of even repaying their loans.
The performance of Caribbean economies has had a negative impact on the banks.
Except for Guyana, Suriname, and Belize whose economies have been registering growth rates in excess of three per cent (Guyana has been growing at five per cent), the economies of the other states including the mighty Trinidad and Tobago, have not been firing on all cylinders. Growth rates are averaging one per cent to 1.5 per cent, and some cases there has been no growth at all.

This has impacted negatively on the commercial banks resulting in lower profitability, and an increase in non-performing loans. When coupled with falling loan demand, increased deposits and the subsequent build up of already high liquidity, the situation becomes worrying.

Profitability at commercial banks are driven by lending for a variety of purposes, resulting in interest incomes to the banks. Such services as the sale of foreign exchange, drafts and other transfers, investments in government paper, and charges for fees also rake in income to the banks. Apart from expenditure on staff, premises, and taxes, the banks have to fork out interest on funds deposited with them.
This is the interest expense. In an environment when a lot is not happening in the area of lending and there is the build up of liquidity, the interest expense could get out of hand vis-a-vis the interest income.
Faced with this scenario the banks are determined that they have to cutback. The Canadian banks have announced plans to cutback.

For years the banks operating in Barbados had been clamouring for an end to the minimum savings rate. In return they were suggesting, as reported in the Banking Industry Highlights which covered their performance, that permission should be granted for them to invest surplus funds in areas where they can have better returns. That permission was not granted. 

But not many have agreed with the decision to lower the rates on savings.

Writing in the December 2014 Newsletter of the Caribbean Centre for Money and Finance (CCMF), Professor Compton Bourne said that reductions in deposit rates of interest can have dis-incentive effects on savings in commercial banks.

Professor Bourne who is Executive Director of the CCMF, said that such action can also cause a shift to competitors within the national economy and overseas.

“There would be a transfer of income away from depositors to owners of capital which would increase income inequality because owners of bank capital, although numerically smaller than owners of bank deposits, are higher income individuals,” said Professor Bourne who is also a former President of the Caribbean Development Bank.

 He said too that another perhaps less palatable suggestion sometimes made is for banks to temporarily invest some of their excess funds in foreign financial markets where interest rates might be attractive and where there may be greater capital safety than currently obtains in the domestic credit market.
On the eve of the announcement by the CBB about its shift in policy, Anthony Pilgrim of the Barbados Cooperative and Credit Union Limited, said that the policy could create opportunities for credit unions. This means people who witnessed a cut in interest rates on their savings, could shift their money to the credit unions, similar to the point raised by Professor Bourne.
The CBB Governor has said that Government’s savings bonds could be an alternative form of investment for Barbadians who may be affected by the interest rate change.
The Draft Estimates of Revenue and Expenditure highlight that this fiscal year the Barbados Government will be bringing bonds worth $20 million to the market. In the past these have been fully subscribed.
Both Mr. Parkhill and Ian De Souza of Republic Bank spoke about economic improvements in Barbados. Does this hold the key to the banks improving their performance, and depsitors not being unduly affected? Perhaps.

Source:
By Jewel Brathwaite
Barbados Advocate
Monday April 27, 2015

http://www.barbadosadvocate.com/newsitem.asp?more=business&NewsID=43040