Ashford W. Meikle, Business Reporter

The Bank of Jamaica, regulator of commercial banks. - File

Despite the stated commitments of both the Ministry of Finance and the central bank to reduce interest rates, Financial Gleaner checks indicate that commercial banks still prefer to chase after paper investments - parking their assets in GOJ, public bodies, local, and foreign securities rather than loans.

Bank of Jamaica statistics indicate that, up to September 2006, roughly 39 per cent, or $169 billion of the assets base of Jamaica's six commercial banks was placed in paper instruments compared to a loan stock of $141 million, representing 33 per cent of assets.

Of the paper investments, 35 per cent, or $146 billion, was entirely in GOJ securities. In contrast, in Trinidad and Tobago, commercial banks and non-finance institutions had a loan stock of $38.4 billion compared to investments of $20 billion.

Twice, in the past two weeks, the Minister of Finance, Dr. Omar Davies, speaking at two separate functions, implored the banks to refocus on productive lending and shy away from creating paper wealth.

"It is important for banks to realise that they have to go beyond holding government paper and start looking at being real banks. You cannot have such a high percentage of assets simply in government paper," said Davies.

He encouraged banks to become more proactive and aggressive by getting out into the field to seek new business.

"We now need to see banks go out there to find clients because the Ministry of Finance is not going to be your number one client in perpetuity. You will have to go out there and find real clients with real projects, and that is where your growth is going to come from."

Ironically, the finance minister has been harshly criticised in the past for the fiscal policy which he has pursued. Critics have argued that high interest rates have been driven by the fiscal indiscipline on the part of the Government and this contributed significantly to Jamaica's anaemic economic performance over the past dozen years.

But, interest rates are today in the low double-digit figures and last year the BOJ reduced rates on its open markets operations on three occasions to historically low levels.

Last year the annual rate on 180-day instruments averaged 12 per cent, compared to 22.9 per cent in 2003/4 while the rate on 30-day instruments was 11.7 per cent, compared to 15 per cent in 2003/2004.

But, it appears that Jamaican banks - whose loan rates remain high, averaging 21.9 per cent in December - have been slow to realign their asset mix, notwithstanding the gradual reduction in interest rates.

Very little has changed

In fact, very little has changed over the past four years although it is true that the banks have increased, proportionally, their loan stock.

For example, in September 2002 the banks placed almost $93 billion, or 35 per cent, of their assets in government paper, while only $63 billion, or 24 per cent of their assets, consisted of issued debt.

However, when assessed individually, Jamaican banks performed poorly, especially when compared to their T&T counterparts. For example, almost half of RBTT's $TT 40 billion assets ($443 billion) is concentrated in loans, compared to the 33 per cent, TT$13 billion ($141 billion) invested in securities.

Locally, National Commercial Bank - the country's largest bank measured in total assets $223 billion, had roughly 42 per cent ($67 billion) of its assets parked in government paper compared to it loan portfolio of $42 billion, representing 27 per cent of its asset base.

Looked at over a five year period, the allocation has been marginal since, in 2002, about 19 per cent of its assets consisted of loans compared to 51 per cent which was in GOJ and other private sector securities.

NCB, which two years ago received a US$30 million loan from the International Finance Corporation and which its chairman Michael Lee Chin said would be used to grow its loan portfolio, actually saw a decline in the percentage of its loan assets in 2006 - 26.5 per cent compared to 27 per cent in 2005.

In fact, while there has been a decrease in the amount it allocates to loans, NCB actually increased its investments in government paper — $65 billion in 2006 compared to $53 billion in 2005.

The Bank of Nova Scotia, NCB's main competitor, actually has close to 40 per cent of its asset base in Government paper according to the 2006 figures.

Jamaica's most profitable bank, Scotiabank - which had net profit of $6.8 billion for its 2006 financial year - loaned out almost $56 billion, compared to the $46 billion invested in government paper, representing 31 per cent of its asset base.

But while its asset base is marginally less compared to NCB, Scotiabank controls roughly 40 per cent of the total loan stock, compared to NCB's 29 per cent.

FirstCaribbean International Bank had the least concentration of its assets in government paper, 7.5 per cent ($2.4 billion), and the highest percentage allocation in loans, 61 per cent or almost $20 billion.