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.