Bahamas Commercial Banks Losing Money
24/03/2004
Lending restrictions imposed two and a half years ago by the Central Bank are suppressing government revenue and hurting profits of commercial banks, according to a Cabinet Minister and a group of bankers.
But the Central Bank appears unlikely to raise those limits anytime soon.
State Minister for Finance James Smith recently blamed disappointing government revenue collections on the restrictions.
He told the Bahama Journal that, "If there is no credit growth, then clearly there is no appreciable growth in imports and consequently we have less in terms of customs duties."
In September 2001, the Central Bank placed the lending restrictions on banks to protect the foreign reserves from being depleted. For the entire system as a whole, the restrictions limit the total lending to $3.7 billion.
Essentially, banks are restricted from lending more than what they are collecting in loan payments.
Central Bank Governor Julian Francis is set to meet with his Monetary Policy Committee Wednesday and wished not to comment on the continued effects of the limits. The Committee, which meets once a month, is expected to review the present policy.
Governor Francis told the Bahama Journal in an earlier interview that, "If the banks became overly aggressive and were imprudent in their lending activity, then the Central Bank limit would come into play.
"And those limits are in place to protect the external reserves during a time of relatively slow economic activity when our economy is not generating the level of foreign currency which it would normally generate if the economic activity were stronger."
Mr. Francis also explained that if there is more to borrow, it costs less to borrow so more people tend to get loans, which is why the Central Bank restrictions are so important.
He has said that the Bank continues to review this policy and would only make adjustments if they were in the best interest of the overall economy.
The Governor reportedly told a meeting of commercial bankers two weeks ago that he is not now prepared to raise or eliminate the ceiling.
The restrictions continue to create a high level of liquidity in the system and commercial bankers continue to press the Governor to relax his position.
According to John Rolle, deputy manager of research at the Central Bank, the surplus stands at around $200 million.
One banker told the Journal Tuesday that, "Everybody (commercial banks) has a whole lot of money."
He said, "What it's going to do is drive deposit rates down. If you're selling shoes and you have a store full of shoes and the Central Bank or some other body stops you from selling the shoes, the question is, are you going to order anymore shoes? The answer is no. Why should the banks continue to take deposits if they have no avenue to lend the money out? The government has already said it is hurting them and it is hurting the consumer."
Foreign reserves, meanwhile, remain at a healthy $550 million.
But Mr. Rolle said while the reverses have been increasing in recent months, "the growth in reserves that we've seen is a bit deceptive."
"Some of that growth continues to occur because we are very restrictive on the credit side," he said. "At the same time, the growth is reflecting the fact that there is a gradual firming in the momentum of tourism and we certainly hope that it will accelerate now that we enter the most important part of the tourist season."
Mr. Rolle said to remove the restrictions would be to presuppose that there are strong inflows coming into the economy that would support increased demand for imports.
"Increased demand for imports is going to be one of the results of removing the ceiling," he explained.
Mr. Rolle added, "When we talk about seeing improvements in the economy, we also know that when the improvements start to occur, it will also be evident in the government's position. The majority of the imports in this country are not financed by credit. They are financed by the general level of economic activity. So as the general level of economic activity picks up so will imports and the government will see a return from that avenue."
