Friday, March 18, 2011

Rethinking the Role of Development Banks in Guyana


(Published in Stabroek Business on March 18, 2011)

Last week I wrote about the high interest rate spreads, excess liquidity and the unduly expensive credit that private commercial banks offer to Guyana’s private sector businesses. These credit rates are even more potentially onerous to certain types of businesses perceived as high risk and can be insurmountably prohibitive for those who have little or nothing to offer as collateral or asset-backed security.  This situation creates a condition where many first-time entrepreneurs, small businesses, urban and rural poor residents, and those with untested and risky innovative business ideas remain unable to see their dreams materialise because they lack feasible access to business credit lines.

One way to reverse and address this condition is to reintroduce development banks into Guyana’s financial services infrastructure.  These banks can address capably some of the concerns regarding social equity that high interest rates create as well as support the growth of new and diversified business sectors, which traditionally carry high risks at startup.

Development banks have proliferated around the world in many developed and developing economies.  As a matter of fact, it would be difficult to find a country or geographical region without a development bank. At the national level, these banks can be found in Canada, China, India, and Britain, to name a few countries. At the multilateral and regional level, there are the Caribbean Development Bank, the African Development Bank, the Asian Development Bank, and the European Bank for Reconstruction and Development as prominent examples. This then begs the question that if these banks are good for major and emerging economic powers and are essential at a regional economy level, it would follow that Guyana would benefit from the development bank’s active presence in its own financial services network.

A little more than 20 years ago, Guyana’s financial system was populated with development finance institutions and small enterprise development agencies owned and controlled by the government. There were the Guyana National Cooperative Bank (GNCB), Guyana Cooperative Agricultural and Industrial Development Bank (GAIBANK), Guyana Cooperative Mortgage Finance Bank (GCMFB), the Guyana Bank for Trade and Industry (GBTI) and the National Bank for Industry and Commerce (NBIC). The latter two have since been completely privatised while the others were dissolved. Many of these banks were poorly managed – with corrupt practices being the norm – and many were saddled with enormous non-functioning loan portfolios.

Another reason why we abandoned our development banks was a result of the neo-liberal “Washington Consensus” prescriptions handed down by the international financial organizations (IFIs) when Guyana secured financing under the Economic Recovery Programme (ERP) in the late 1980s.  Neo-liberal economic reforms assume that governments are inept and inefficient in running commercial enterprises and that less government ownership and control of productive business enterprises is the ideal economic prescription.  This thinking, along with the IFI’s imposition, led to a wave of nationalisation in the late 1980s that continued well into the 1990s.

In general, privatisation has had a significantly positive impact on individual privatised banks and, by extension, on the banking sector as a whole. The growth in the banking sector’s size as measured by assets and liabilities has been phenomenal. Moreover, it opened unprecedented opportunities for banks to diversify their services for customer service and product innovation. Many banks introduced efficient delivery channels, such as Automated Teller Machines (ATMs), debit and credit cards, night deposit boxes and Internet and electronic banking, just to name a few.

However, privatisation also has failed to enhance competition in the banking sector. Only two new banks – Citizens and Demerara – entered the industry within the last two decades. The sum effect is an oligopolistic market where a mere handful of banks dominate. These commercial banks have been inherently conservative and risk averse, both deterrents to the potential growth in many vital sectors of Guyana’s economy. Therefore, the corrective influence would be found in development finance institutions. While some private development financial institutions have emerged, most still are focused on profitability objectives rather than broader, more integrative national economic and social development goals.

When persons hear of development banks in Guyana, they tend to think of a wholly government run and owned institution. However, there is no single or homogenous approach to how these banks are organised and structured. I propose that we follow the public-private partnership (PPP) model where the decision making board of directors and the capital investment required are shared by government and the private sector. Then, the daily administration of these institutions would be left to competent and highly qualified professionals, who would be responsible to all stakeholders and  whose positions would not be compromised unnecessarily by potential political changes in government that occur with election cycles. Furthermore, development bank regulation should come under the Bank of Guyana along with an independent auditing system that ensures generally standardised rules and procedures, expectations of accountability and good governance practices.

With proper planning and internal management mechanisms in place, national development banks can play a highly useful role in Guyana’s programme for sustainable economic development. 

Friday, March 11, 2011

Commercial Bank Interest Rate Spreads (IRS) Are Legitimate Cause for Worry


(Published in Stabroek News on March11, 2011)

Guyana’s commercial banks are enjoying particularly strong success in the current economy with excellent bank liquidity positions and very substantial profit margins, a reality recently reinforced by Mr. John Tracey, CEO of the Guyana Bank for Trade and Industry (GBTI), at an event to launch the Global Trade Finance Program.   

Indeed, the financial and physical evidence everywhere shows just how well Guyana’s banks emerged virtually unscathed by the recent global financial crises and the credit market crunch. The magnificent and grand architectural structures that are home to corporate headquarters for these financial giants dominate the urban landscape as monuments to their strong positions. The government likewise has collected its fair share of tax revenues from this thriving industry. Banks also have expanded by opening branches to all areas of the country, the most recent being the GBTI and Republic bank facilities in the Diamond, East Bank area.

There is no doubt about the vibrancy of the nation’s banking industry but there is another side which must be widely acknowledged – the perniciously high interest rates on commercial investments and interest rate spread (IRS) as represented by the difference between the average interest rate earned on loans and the average interest rate paid on deposits. A recent check at five commercial banks – GBTI, Republic Bank, Demerara Bank, Scotia Bank, and Citizens Bank – reveals that the average interest earned on deposits amounted to 2.7 percent.

The average interest on commercial loans is difficult to determine because of its discretionary nature, which changes on a case-by-case basis. However, having personal experience in dealing with banks and conferring with my colleagues in the private sector, the average rate for strongly performing companies is around 12 percent. Meanwhile, the average rate for new businesses and high-risk projects hovers around 19 percent.

Numerous industry-based studies have shown that a high IRS signals a lack of market competition, limited potential for deepening the roots of the financial investment sector, the existence of perceived market risks, scarcer options for bankable projects, and regulatory constraints. Moreover, persistently high interest spreads can compromise investment and growth by way of low levels of savings, borrowing and investment.

In Guyana, banks operate in a restricted oligopolistic market with each holding similar banking offerings and rates. As a result, banks have enormous capabilities to maximise profits (lowering current after-tax profit margin targets would help reduce the IRS) and limit incentives for adopting unique or innovative policies to gain competitive market share. In the absence of any secondary market for government bonds and other securities – coupled with an undeveloped stock market – the public is left with no option but to keep their savings as bank deposits even despite the low interest rates being paid on those deposits.

In contrast, because of more aggressive competition, banks in other international financial markets are compelled to achieve higher levels of efficiency and operate profitably at lower interest-rate spreads (IRS). Imagine savings rates of four or five percent, mortgage rates below six percent and lending rates to large companies and small businesses below 10 per cent? In such conditions, the impact upon Guyana’s economy would nourish GDP growth as businesses expand and flourish in all of the nation’s key industry sectors.

The high IRS levels are unjustifiable because the intermediation costs, defined loosely as all the administration and operational costs incurred while offering its services, are not exorbitant and are usually accounted for through prohibitive fees and charges on all services; an anathema that almost every businessperson dealing with the banks can attest to. If the intermediation costs are high, then the banks are operating inefficiently and should review their operations.

As the incentive to lower IRS in an oligopolistic market is negligible, the intervention of Guyana’s central bank appears to be the only realistic option for reconciling this issue.  There should be a mechanism for more effective coordination between the Central Bank and commercial banks regarding interest rate and credit policies to ensure that the needs of the business sector and consumers for lower rates and access to credit are met. Only then can long-term sustainable economic investment be assured.

Realistically, no one should resent the commercial-banking sector members for seeking a fair return on their invested capital. However, resolving the problems of these high interest rate spreads will prove critical as narrower spreads could carry measurable economic benefits for all stakeholders in Guyana’s economy.

Friday, March 4, 2011

Sport Associations and Business Sponsorship


(Published in Stabroek News on March 04, '11)

Something is wrong with the way our sporting organisations operate and function. Nowhere is this more evident than with the shameful situation being played out with the Demerara Cricket Board (DCB). Accusations and injunctions from DCB leading officials are being bowled more than cricket competitions. This follows on the heels of the gruesome acid attack last year on Mr. Pretipaul Jaigobin, then assistant treasurer of the Guyana Cricket Board (GCB). Subsequent to that, this newspaper reported on June 26, 2010 that GCB members believed the treasurer should stand down because of financial irregularities and failure to submit reports for projects executed on behalf of the organisation. 

Similarly, in the basketball fraternity, it was reported on February 17, 2011 that Mr. Trevor Rose, former president of the Georgetown Amateur Basketball Association (GABA) admitted that no financial statement for the organisation was ever produced during his one-year term as president. Indeed, this is a sterling indictment on the GABA and Mr. Rose himself.

Another relatively recent incident that comes to mind was the embarrassing situation involving players of the Golden Jaguars national football team who had called for the resignation of the Guyana Football Federation’s (GFF) president after making accusations of poor training standards, inadequate training equipment, the inferior state of encampment while overseas, monies owing to players and consistent disorganisation during international tours.  This was followed by an urgent call for accountability and resignation of the organisation’s head by Mr. Donald Duff, Stabroek News’ senior reporter (SN, August 03, 2008).

These incidents are not mere aberrations or outliers in Guyana’s sporting community. While some clubs appear to have their houses in order, these examples clearly show that guarantee cannot be vouched for uniformly in the whole array of sporting organisations.

These irregularities will go unabated and continue because sponsors, especially in the private sector, continue to fund activities and events for these organisations. Why would these organizations work to improve their operations when they have reliable income from sponsors who, in most cases, do not expect nor require any accountability? It is baffling to think about the millions of dollars being spent by some companies to sponsor events for these organisations, knowing that there will be no expectation of a follow-up report accounting for how these donations were allocated and spent. It is inconceivable to think that such blind faith could be extended to a sporting organisation that may already have a history of financial abuse and irregularity.

Similarly, we have some of our media houses abdicating their duties and responsibilities as press watchdogs and failing to investigate and expose some of the irregularities and governance problems facing these organisations. Only in the case of football – and in particular the GFF – has some reasonable attempt been made at investigative journalism. More needs to be done in this area and expanded to all sports associations.

Furthermore, the Ministry of Culture, Youth, and Sport has complained frequently in the past about some clubs not having proper governance and accountability systems in place. The Ministry has adopted the position of not funding such associations until shortcomings have been corrected. This position is commendable but the Ministry should go even further and commission a study to investigate all sports associations in the country with the aim and intention of assessing the internal structure, governance, capability and effectiveness of each one. This should be supplemented with a regulatory and ranking system that measures organisational accountability and transparency. In addition, such findings should be made available to the public for review so that potential sponsors and contributors will be able to make better and more informed decisions about whether to support a particular club.

Sports play an important role in the community and when these wrongdoings are left unchecked, the real losers are the athletes involved, the spectators, and the country as a whole. It is time that the private sector demands more accountability and the government initiates a comprehensive review of the ways in which sporting organisations conduct their operations.