Perth Estate Phase 1A units built by the National Housing Trust (NHT). Audley Rodriques suggests that the NHT be used to expand the affordable housing stock. (Photo: Gregory Bennett)
I have long worried about the instability of Jamaica’s predatory and anti-development financial sector. The banks have hurt us in the past, they are the cause of much of our distress now, and I fear they will ruin us in the future.
Recently, I took another look at the Bank of Jamaica (BOJ) 2021 Annual Report and there were quite a few things that I found concerning about the state of the financial sector. The interconnectedness of the banks, their dominance, the omnipresence of their influence and power, their resistance to regulation and supervision, and the risk of widespread contagion, in the event of distress, raise serious concerns.
With everything going on in the global economy and in Jamaica, I was not reassured by the BOJ’s assertion that risks to the financial sector were moderate and that the sector “has remained broadly robust until to be considered”. [or other] shocks”.
According to the BOJ, bank assets have increased (by 13.6% or $275.3 billion in 2021) mainly due to increased investments, cash and bank balances. While consumer lending has increased, demand for business lending has declined, and lending for productive purposes has declined. Real economic growth therefore remains anemic. However, bank profits soared.
Moreover, the growth in bank assets largely reflected an increase in foreign currency assets. This growth, in turn, was due primarily to the acquisition of foreign currency securities and increased foreign currency cash balances, as well as the depreciation of the Jamaican dollar. Or in other words, depositors are increasingly placing their money in forex accounts. The banks are in turn making a killing by facilitating the “flight to safety”, speculating against the Jamaican dollar. Meanwhile, net international reserves are being depleted in a futile and potentially disastrous attempt to defend the Jamaican dollar against the depredations of scammers, arbitrage traders and margin collectors.
As for investments, banks, overwhelmed with cash, stored excess cash – which the BOJ’s easy money policy had facilitated – in low-risk assets such as foreign government securities and securities. of the GOJ. And, to further increase profits, provided loans to other financial institutions – with little or nothing to productive, growth-generating, job-creating, export-producing and thrifty micro, small and medium-sized enterprises (MSMEs) in imports, or for agriculture, or for renewable energies. Luxury accommodation? That they make. Need a new car? Their doors are wide open. Distribution? Go check them out.
Recent studies have shown that high house prices, of the kind common in Jamaica’s overheated luxury real estate market, can inflict severe damage on the economy by crowding out productive investment, attracting and undermining using best management skills and misallocating capital. Super inflated house prices, contrary to what we were told, did not “inflate” the economy.
Cash and bank balances increased by 19.8% ($73.7 billion) in 2021, compared to growth of 23.5% ($70.7 billion) in 2020, with very little to no change. everything, deployed for productive purposes.
As business lending declined and personal loan growth increased in an economy constrained by size, banks, in order to increase returns, expanded their presence in overseas markets. That’s what the BOJ said. Lending to overseas residents increased by 36.7% ($30.1 billion) in 2021. And as banks expanded overseas, the stock of non-performing loans (NPL) increased from 12.6% ($3.7 billion) to $33.0 billion at the end of 2021. Also, the ratio of non-performing loans to total loans increased. The increase in delinquencies in 2021 were: overseas residents ($1.8 billion); businesses ($1.3 billion); and individuals ($0.6 billion).
Bank profits are huge and rising in an economy mired in stagflation, with mounting hardship, a deteriorating quality of life and fleeing educated young people. Pre-tax profits for banks in 2021 totaled $47.0 billion, 85% higher than the $25.4 billion recorded in 2020. This was mainly due, according to the BOJ, to a rebound in certain flows of non-interest income (in particular dividends and commission income). on loans).
We know that lost ground must be recovered, but why rush? The pre-tax profit margin for 2021 increased to 21.5% while the banking sector’s return on equity climbed to 16.6%; it was 9.2% in 2020. However, the net interest margin of banks decreased slightly from 5.9% in 2020 to 5.4%, due to reduced loan growth, l increase in the stock of non-performing assets and the larger share of low-yielding assets such as cash balances and low-risk securities, as we have seen.
The sharp improvement in banks’ earnings performance in 2021 was largely due to an increase in non-interest income which climbed 35.1% ($27.3 billion), counteracting the contraction of 11, 7% ($10.3 billion) recorded the previous year. Banks have increased their reliance on income from dividends, foreign exchange arbitrage and the reversal of loan loss provisions in profit or loss. Banks, the BOJ reported, also saw an increase in revenue from fees and other charges on credit cards, with some banks resuming the application of fees and charges to customers they had temporarily waived, after pressure , in 2020. In addition, consumers have increased their reliance on credit cards. short-term unsecured debt to meet financing needs.
In proportion to the slow rate of loan growth and increased investment in lower risk assets, fees on loans and investment activities as a proportion of non-interest income decreased to 23.5% at the end of 2021, compared to 25.4% at the end of 2020, which represents the lowest proportion in the last five years.
What is there to do? Well, here are some suggestions. Interest rate policy guided, by an adapted BOJ, to direct resources towards productive uses and strengthen ecological resilience; using the National Housing Trust to expand the stock of affordable housing, thus deflating the housing bubble; impose restrictions and increase taxes on the ownership of several properties; revision of the property tax system to better take into account the improved property value; setting limits on the proportion of banks’ portfolios available for lending to households; targeted cancellation and restructuring of household debt; and a special tax on bank super profits.
Needless to say, this would require courage and leadership.
Ambassador Emeritus Audley Rodriques is Jamaica’s former senior envoy to South Africa, Kuwait and Venezuela.