Wilberne Persaud, Financial Gleaner Columnist

Persaud

New York's commercial banking was once characterised as the '3-6-3 business': borrow at three per cent, lend at six per cent, be on the golf course by 3:00 p.m.

Borrow cheap at the low overnight rate - which is what depositors get - and lend dear, at the long term rate. Unkind humour or faithful description?

Banks incur costs buying, creating and selling money-rents, computers, software, telecommuni-cations, staff, security, stationery, etc., all financed from this 3.0 per cent spread. Seems reasonable.

But what if the spread exceeded 20 per cent? Would this be excessive?

Of 132 countries the World Bank studied, Jamaica's 1998 interest rate spread in the region of 22 per cent, ranked seventh highest in the world. At the same time, Barbados, Guyana and Trinidad and Tobago experienced spreads from seven to eight per cent.

Banks argued the spread was big for a variety of reasons. For instance, the liquidity reserve requirement, around 48 per cent of deposit liabilities, was double the figure in Guyana and Trinidad and Tobago.

Different perspective

Jamaican banks had to forego making loans, earning interest on fully 48 per cent of deposit liabilities. Bigger spreads go a long way towards compensating for this handicap.

Recently, the issue has re-surfaced from a different perspective. If monetary policy attempts to reduce interest rates to encourage investment but the banking system does not, the policy is frustrated. So, commercial banks are stubbornly resisting Bank of Jamaica policy to the detriment of economic growth and the society's progress as a whole. Could this really be true?

Are there competing opinions, 'explanations'? But of course. Here's a partial list. Let me declare upfront: my list derives from absolutely non-scientific sampling. It is culled from perhaps disgruntled customers in banking halls, informal chats with (mainly young) businessmen and women, answers to questions posed to non-randomly selected university students that included civil servants and customs officers on leave, housewives and workers whom I happen either to know or, otherwise come into contact with.

Responses were gathered more than a year ago without reference to any specific time frame. Respondents' ages ranged from about 18 to close to 70 years old.

No effort was made to do screening of any sort, or to determine if any of them ever had a loan. The only explanation I ever gave, if the meaning of 'spread' was puzzling, was to say it was the difference between what banks paid people for their passbook savings and what they charged for loans or overdrafts.

There was a fairly wide range of responses. I didn't tabulate these or seek to rank them in any way, but the most popular opinion/reason seemed to be that banks charged the big spread simply because they could, they don't care about poor people and nobody is there to stop them.

Other reasons

The bank spread on loans continues to run at around 16 per cent. The World Bank in 1998 determined that Jamaica ranked seventh in the world for high spreads. - File

Beyond that, the other reasons advanced are listed in no particular order below:

Staff and remuneration levels are too high;

Security costs are outrageous;

Risk assessment procedures are poor or non-existent, hence Peter pays for Paul;

Procedures are outmoded, time and resource-consuming, therefore too costly;

Banking system is really a monopoly, competition does not exist-banks collude;

Government regulation is too stringent;

Government taxes on the banks are too high;

There is no credit rating agency;

Too many people 'run way' with the banks' money.

Here are 12 elements of opinion really. I claim no knowledge whatsoever on how they were formed. Any one person could have held more than one or several of these opinions for that matter. I should also declare that the reported words are not exactly those of the respondents. I took the liberty of translating their words into as clear meanings as I could, maintaining specific words - for instance, 'run way' and 'outrageous' - but editing for meaning. I may thus have introduced even further bias into the exercise.

What does this 'hodge-podge' tell us? Well, the first thing we might recognise is that even though each of the 'causes' may appear to be independent, they are really interconnected. Let's think of high spreads as symptoms. These causes might be viewed as diagnostic.

How strong is each of these, if at all valid? For starters, if there were credit rating agencies banks would have a large part of their job done for them. They could focus on other variables.

Risk assessment

Costs seem to be on people's minds. Four of 12 responses focus on costs, that is one third or 33 per cent. And government comes in for some blame. But for me, the striking one, apart from the initial view of customer as sitting duck, is risk assessment.

It may be that Peter is paying for Paul. The interest rate is a price. Once there is competition, price is one variable that can be brought into battle. But it seems our banks do not use price competition to any significant degree. Rather, the appeal of the big wins - car, $1 million jackpot or upmarket holiday package - is preferred.

It would be interesting to find out if banks significantly expand business based on these campaigns and what unit cost per new or 'expanded' customer these campaigns deliver. But perhaps more importantly, if there were discriminatory interest rates, in effect pricing by market segment, whether there would be greater efficiency.

Would the borrower with the best project/least risk find a superior deal?

Yet, even if this were done, would it negate the need for an institution fulfilling the role of venture capitalist?

wilbe65@yahoo.com