Tweet
BOJ can set interest rates for banks... by law
BY AL EDWARDS
Friday, September 24, 2010
Recently commercial banks operating in Jamaica have come under fire for not lowering their interest rates significantly and for increasing fees and charges on services in an effort to extract more revenue from beleaguered customers. Last week Caribbean Business Report reported on the address by the Minister of Finance to the World Bank's Americas Conference at the Biltmore Hotel in Coral Gables, Miami, where he said that the banks were unconscionable for making a Return on Equity (ROE) of around 22 per cent, given the current environment.
"When you closely examine Jamaican banks' average return on equity, it is as high as 22 per cent. This is much higher than global and regional standards and is totally unconscionable. It is unreasonable for the banks to be extracting this from Jamaicans, bearing in mind the current economic environment and the continual trending down of inflation. We are set to end the year with a single-digit inflation figure but the banks seem not to take that into consideration," said Minister of Finance Audley Shaw.
For over a year the Bank of Jamaica (BOJ) has been reducing benchmark rates, sending a signal to the commercial banks to follow suit. They have been slow to do so, but over the last three months they have made efforts in this regard.
Some say these efforts have come a little late and rates are not coming down far enough to spur investment in the productive sector. It is still the case that car loans are at around 17.50 per cent per year with mortgages at around 13 per cent. These are deemed prohibitive and an impediment to fostering aggregate demand.Earlier this week, the minister for Industry, Investment and Commerce, Karl Samuda, speaking at the Interactive Exporters' Forum organised by the Jamaica Promotions Corporation (JAMPRO), said: "One of the greatest impediments of the development of our economy is the rate of interest that we have to pay the banks. Who could deny that not only do we have to pay high interest rates to banks, but the manner in which some members of the business community are treated by banks, it is becoming an onerous task to get a simple service offered by the banks."
Many of the banks may well argue that earlier this year they signed on to the Jamaica Debt Exchange (JDX) for the betterment of the country, sacrificing revenue from government paper. But having done so, they still have to report stellar profits to shareholders and their respective parent groups, hence they have to look to other sources to make up for the shortage from the interest income revenue stream. This, therefore, makes criticism unjust and unwarranted. Then there is the harsh macroeconomic climate and high operating costs that have to be factors when assessing expectations from earned revenue.
It can be said that the banks have to return to core business -- loans and deposits -- and that many Jamaican banks have forgotten or are unwilling to do so, having feasted at the buffet table of government paper at high interest rates. If they remain obstinate and unwilling to reduce interest rates like many banks are doing now, then perhaps they should be made to do so by an appropriate authority. The Bank of Jamaica Act 1960 may well prove germane here.
Section 33 (1) of the Bank of Jamaica Act 1960 reads: The Bank may, after consultation with the Minister and after giving 30 days' notice to commercial banks and such specified financial institutions as are affected by notice, prescribe:
(a) the maximum or minimum rate of interest discounts or other charges which such institutions or commercial banks may impose for specified types of loans, advances or other credit;
(b) the maximum or minimum rates of interest which such institutions or commercial banks may pay on deposits; and (c) the volume, terms and conditions of credit (including instalment credit) which may be extended through loans and advances or investments by such institutions or commercial banks so that such amounts shall not in respect of each commercial bank or financial institution be less than 95 per centum of the respective amounts of the loans and advances be that bank or financial institution outstanding at the date of the notice.
In effect, this means that Governor of the Bank of Jamaica Brian Wynter can consult with Minister of Finance Audley Shaw before determining appropriate interest rates for the commercial banks. The Bank of Jamaica Act may well prove to be the catalyst for the reduction of banking interest rates in this country and so play its part in spurring the productive sector. Whether the Governor of the BOJ will resort to this Act remains to be seen, but it may well spell a quantum leap in how banking is conducted in Jamaica.
As it stands, banks in Jamaica are not obliged to follow the Bank of Jamaica's lead in reducing interest rates and so autonomy largely resides with the commercial banks. That means they in turn can determine how the productive sector gets financed and how individuals make their way day to day. In other words they need not heed the signals sent out by the BOJ.
However, this is not the case in other jurisdictions. Only this week Sri Lanka's Central Bank requested that all banks in the country reduce their lending rates in parallel with its reduced market interest rates. A statement issued by the Central Bank said though it has eased its monetary policy stance by reducing the policy rates since February 2009, the country's banks are yet to show full downward adjustment in their rates.
"The banks' lending rates have also declined with a time lag, but are yet to show full downward adjustment," the Central Bank said.
Sri Lanka's Central Bank has requested the all banks take appropriate measures to reduce interest rates by the end of October 2010. Interest rates on housing loans are capped at 14 per cent per year while the Bank has set a ceiling of 24 per cent per year for interest rates on credit card advances. Interest rates on other loans and advances are required to be lowered by another one to two per cent per year.
According to Sri Lanka's ColomboPage, "The monetary authority says the current macroeconomic performance and stability warrant a reduction in the risk premium added to lending rates by the banks. The move would contract the gap between lending rates and deposits."
Another way to ensure competitive rates would be to introduce international banks into the Jamaican market place, for example, a bank like HSBC.
http://www.jamaicaobserver.com/busin...by-law_7991266
BY AL EDWARDS
Friday, September 24, 2010
Recently commercial banks operating in Jamaica have come under fire for not lowering their interest rates significantly and for increasing fees and charges on services in an effort to extract more revenue from beleaguered customers. Last week Caribbean Business Report reported on the address by the Minister of Finance to the World Bank's Americas Conference at the Biltmore Hotel in Coral Gables, Miami, where he said that the banks were unconscionable for making a Return on Equity (ROE) of around 22 per cent, given the current environment.
"When you closely examine Jamaican banks' average return on equity, it is as high as 22 per cent. This is much higher than global and regional standards and is totally unconscionable. It is unreasonable for the banks to be extracting this from Jamaicans, bearing in mind the current economic environment and the continual trending down of inflation. We are set to end the year with a single-digit inflation figure but the banks seem not to take that into consideration," said Minister of Finance Audley Shaw.
For over a year the Bank of Jamaica (BOJ) has been reducing benchmark rates, sending a signal to the commercial banks to follow suit. They have been slow to do so, but over the last three months they have made efforts in this regard.
Some say these efforts have come a little late and rates are not coming down far enough to spur investment in the productive sector. It is still the case that car loans are at around 17.50 per cent per year with mortgages at around 13 per cent. These are deemed prohibitive and an impediment to fostering aggregate demand.Earlier this week, the minister for Industry, Investment and Commerce, Karl Samuda, speaking at the Interactive Exporters' Forum organised by the Jamaica Promotions Corporation (JAMPRO), said: "One of the greatest impediments of the development of our economy is the rate of interest that we have to pay the banks. Who could deny that not only do we have to pay high interest rates to banks, but the manner in which some members of the business community are treated by banks, it is becoming an onerous task to get a simple service offered by the banks."
Many of the banks may well argue that earlier this year they signed on to the Jamaica Debt Exchange (JDX) for the betterment of the country, sacrificing revenue from government paper. But having done so, they still have to report stellar profits to shareholders and their respective parent groups, hence they have to look to other sources to make up for the shortage from the interest income revenue stream. This, therefore, makes criticism unjust and unwarranted. Then there is the harsh macroeconomic climate and high operating costs that have to be factors when assessing expectations from earned revenue.
It can be said that the banks have to return to core business -- loans and deposits -- and that many Jamaican banks have forgotten or are unwilling to do so, having feasted at the buffet table of government paper at high interest rates. If they remain obstinate and unwilling to reduce interest rates like many banks are doing now, then perhaps they should be made to do so by an appropriate authority. The Bank of Jamaica Act 1960 may well prove germane here.
Section 33 (1) of the Bank of Jamaica Act 1960 reads: The Bank may, after consultation with the Minister and after giving 30 days' notice to commercial banks and such specified financial institutions as are affected by notice, prescribe:
(a) the maximum or minimum rate of interest discounts or other charges which such institutions or commercial banks may impose for specified types of loans, advances or other credit;
(b) the maximum or minimum rates of interest which such institutions or commercial banks may pay on deposits; and (c) the volume, terms and conditions of credit (including instalment credit) which may be extended through loans and advances or investments by such institutions or commercial banks so that such amounts shall not in respect of each commercial bank or financial institution be less than 95 per centum of the respective amounts of the loans and advances be that bank or financial institution outstanding at the date of the notice.
In effect, this means that Governor of the Bank of Jamaica Brian Wynter can consult with Minister of Finance Audley Shaw before determining appropriate interest rates for the commercial banks. The Bank of Jamaica Act may well prove to be the catalyst for the reduction of banking interest rates in this country and so play its part in spurring the productive sector. Whether the Governor of the BOJ will resort to this Act remains to be seen, but it may well spell a quantum leap in how banking is conducted in Jamaica.
As it stands, banks in Jamaica are not obliged to follow the Bank of Jamaica's lead in reducing interest rates and so autonomy largely resides with the commercial banks. That means they in turn can determine how the productive sector gets financed and how individuals make their way day to day. In other words they need not heed the signals sent out by the BOJ.
However, this is not the case in other jurisdictions. Only this week Sri Lanka's Central Bank requested that all banks in the country reduce their lending rates in parallel with its reduced market interest rates. A statement issued by the Central Bank said though it has eased its monetary policy stance by reducing the policy rates since February 2009, the country's banks are yet to show full downward adjustment in their rates.
"The banks' lending rates have also declined with a time lag, but are yet to show full downward adjustment," the Central Bank said.
Sri Lanka's Central Bank has requested the all banks take appropriate measures to reduce interest rates by the end of October 2010. Interest rates on housing loans are capped at 14 per cent per year while the Bank has set a ceiling of 24 per cent per year for interest rates on credit card advances. Interest rates on other loans and advances are required to be lowered by another one to two per cent per year.
According to Sri Lanka's ColomboPage, "The monetary authority says the current macroeconomic performance and stability warrant a reduction in the risk premium added to lending rates by the banks. The move would contract the gap between lending rates and deposits."
Another way to ensure competitive rates would be to introduce international banks into the Jamaican market place, for example, a bank like HSBC.
http://www.jamaicaobserver.com/busin...by-law_7991266
Comment