Cabinet committee calls for more competition in finance sector

Lower reserve requirements and more competition in the banking sector are among the recommendations made by the Cabinet-appointed committee to review the financial sector. The committee’s report was laid in Parliament on Tuesday as a Green Paper. The committee, created in March last year, made general and sector-specific recommendations. Some of the general recommendations were that the legislative framework should be upgraded and that more emphasis should be placed on accounting standards for tighter regulation.

The committee also called for the development of a national competition policy, along with the creation of a Competition Bureau to protect against monopolistic practices. The committee said reserve requirements for commercial banks should be lowered to “prudential” levels to remove the distortion between banks and non-banks. The reserve requirement was lowered three points to 18 percent in 2001, with the promise of further reductions. The committee also said interest rate spreads are too high. “The magnitude of interest rate spreads remains an issue of some concern although spreads have narrowed somewhat, compared to the era preceeding currency liberalisation,” the committee stated.

The report adds that spreads are comparatively higher than those in economies of similar size. The committee recommended the establishment of an independent credit rating agency and automated credit rating bureau to improve assesment of risk. In terms of the capital market, the committee recommended a review and upgrade of the Securities Industry Act (1995) and improving standards for corporate governance.

Another recommendation was to encourage more equity-based financing, as opposed to debt financing, to boost the use of capital markets. The committee identified the shortfall in supervisors to oversee the insurance sector as one of the major weaknesses in the system. The shortfall has led to a four-year lag between current year and the last published report of the Supervisor of Insurance. Another concern was the low capital requirement of $3 million which has led to oversaturation in the sector with less efficient service providers. “Further, a lack of minimum solvency levels has led to a perpetuation of the problem by making it easy for loss-making insurers to remain in business,” the committee stated.