By Dyon A. Elliott
Studies show that state-owned financial institutions (SFIs) can strain private sector financial institutions, but the National Bank of Belize’s Chairman Senator Joy Grant says the Government has taken precise steps to minimize such risks.
Speaking as to whether or not the government has conducted any study to see how the banking sector will be affected, Grant explained that GOB has evaluated such concerns within as best of a time frame possible, considering the fact that the banking sector is largely volatile and circumstances can change relatively quickly.
“We have looked at that [the viability of competition between a national bank and private sector]…and we believe that at this time, because of the spread, that there’s an opportunity there for another bank to change that spread.”
According to the Central Bank’s recent Monthly Economic Report, the “spread” between weighted average interest rates on “New Loans and Deposits” averaged 7.10 percent as of May this year, with deposit rates averaging 2.99 percent and lending rates at approximately 10.09 percent.
The Central Bank showed that the interest rate on savings within that period 2.20 percent, while the standard lending rates for “new” residential construction averaged decreased to 8.38 percent.
The average interest rates for personal and commercial loans were 10.64 and 10.83, respectively.
The National Bank, Grant explained, will be competing with the commercial banks in an attempt to narrow the “spread”, and is, therefore, offering mortgages to “first-time” homeowners at 5.5 percent interest rates—more than 2.8 percent less than the private sector average for “new” loans.
Grant explained that it is that gulf between deposit and lending rates that provided the opportunity for the Barrow administration to introduce and launch the National Bank, in an attempt to bring the lending rates in Belize closer to the international average.
On Wednesday, an article in USA Today reported that the United States interest rates “on 30-year fixed mortgages fell to 4.73%, from a 2013 high of 4.80%.”
The high interest rates have largely been recognized as the primary reason there continues to be comparatively high liquidity in the banking sector.
The Central Bank reported: “Relatively weak growth in credit was a consistent factor in the accumulation of excess liquidity in the banking system during the review period…consequently, excess statutory holdings rose by 13.5% to $352 million. Holdings of excess cash also rose by 14% to $173.8 million.”
Rolling out of new services
Grant explained that the government intends to have the bank function as a full-fledged financial institution that accepts deposits, offers credit card services, and more; however, she assured Reporter that they will be measured in how they will expand the bank’s services beyond just mortgage lending.
“I and our board will also have to be looking at how first of all we roll out our services.
“If we feel that there is not enough space for a service to come on board, we won’t do it. We are going to be monitoring this on an ongoing basis.
“And also we will be in close contact with the Central Bank of Belize, because they will have essential information to share with the National Bank,” she said.
Are subsidized banks doomed to failure?
Speaking on the criticism that national banks are inclined to fail because of their traditionally heavy subsidized nature, Grant explained that she and her team have done extensive research within the region and are bench marking off of SFIs that have been successful, while observing the pitfalls of those that have failed.
“There are two things that adversely affect national banks: political interference and people’s perception that because it’s a national bank they will not have to adhere to strict financial conditions.
“That will not be the case here…it has to be ran professionally,” she said.
Grant added that she has made it clear that the bank has to make money. “This cannot be subsidized…I need to make enough to cover expenses.”
She explained that the only difference between the National Bank of Belize and the commercial banks is that because they do not need to maximize profits, they could ensure that more Belizeans gain access to credit.
Regarding political interference, she said that she is confident in the make-up of the bank’s board of directors and she is convinced that the addition of the president of the National Trade Union Congress of Belize will preclude the possibility of political interference.
Prime Minister Dean Barrow, speaking at the bank’s opening on Monday, described the NTUCB’s representative on the bank’s board of directors as a “ready-made whistleblower”.
While it is yet to be seen how the National Bank will perform, a May 2013 article from Oxford Analytica, entitled “Development banks face governance challenge globally”, concluded that the “provision of subsidized credit by DB [development banks] could distort competition.”
The article further states that while sustainability of SFIs are a concern because of other fiscal pressures on government that can strain such banks, coupled with the fact that national banks don’t have profit maximization as a primary goal, they can operate as well as national banking sector averages on returns on assets.
“Pressures to generate resources that sustain their activities mean that corporate governance reforms at DBs will continue. The focus will be on attracting high-quality management, increasing risk management capabilities, improving transparency and reporting, as well as adhering to supervision and regulation like private sector financial institutions.”
Oxford Analytica also addressed the high risk of politicization of the lending process.
It described “some degree of political interference” as being “inevitable.” With that fact in mind, it recommended several steps to mitigate the degree of interference.
Oxford Analytica said that governments should legally separate boards of directors and bank management.
It also stated governments should work on “increasing the number of independent directors; clearly defining the role of shareholders; ensuring compliance with policy objectives; improving monitoring of performance, supervising; and regulating DBs in the same way as other financial institutions.”