‘Are banks ripping off consumers?’

Certainly, there is widepread public perception that this is the case.

In recent interviews conducted in six CARICOM countries, interviewees complained about the excessively high interest rates on loans, low deposit rates, and extortionate service charges, including excessively high charges for seemingly simple services like providing a bank statement. Moreover, some critics are convinced that banks collude to fix interest rates and service charges. Indeed, local bankers in one country accused the foreign bankers of fixing prices, and having done so for the last 50 years. While in TT most of the banks are locally owned, it is quite the opposite in the other countries. In all the countries surveyed, there is little or no difference in the interest rates offered or charges for services within the countries, though differences exist across countries. Yet, there are small and large banks, and presumably, the cost of services must differ, given economies of scale. Smaller banks need a wider spread than larger banks; yet, they all have equivalent spreads within the national economy. One could deduce that the profits accumulated by the large banks must be substantial, given that the small banks can survive on the spread. Certainly, consumers view this wide spread with grave suspicion, and in Jamaica, they tried to get the Fair Trading Commission (FTC) to make banks provide information to the public rationalising the spread. However, this comes under the purview of the Central Bank and the FTC did not intervene.

One banker, when interviewed was quite frank, and admitted that the wide spread is designed to maintain profitability, and that this could be done because banks dominate the financial sector. There are no other institutions or instruments to compete with them, such as bonds, and consumers prefer to use debt financing and large overdrafts, and not equity financing, since this would require them to relinquish some control over their businesses and reveal sensitive information. In this banker’s view, there is an unsophisticated culture amongst investors, not enough information on other instruments, and lack of confidence in the stock market. This gives banks muscle within the financial sector. Most bankers argued that they do not collude, but rather, adopt a follow-the-leader tactic, and that (in some countries) they only consult on broad issues related to the general market environment and the trend that may be needed. They do not fix prices, they insisted. In some countries, there were no Banker’s Associations. However, some islands are so small that it is inevitable that the bankers would know each other and meet frequently.

Bankers justified the fees and charges on several counts. For many, the reserve requirement of Central Bank was too high (as much as 24% in Belize, and 22% in TT at the time of the interview as opposed to 6% in OECS countries), and, together with the deposit insurance requirement in TT, this means that a large proportion of capital was not earning revenues. Banks need to make up for this by charging higher interest rates.  They also complained about the high cost of fees for legal services, and the impact this has on the final cost of money. Another cost factor that has to be considered, according to some bankers, is the high rate of loan delinquency. For instance, in the Bahamas, it is as high as 19% of accounts. St Lucian bankers face a particularly difficult problem in that, in addition to having a high delinquency rate, banks are constrained in their ability to have quick recourse to recover the funds. This is because a civil law code denies mortgage right of sale, so that banks cannot dispose of property in settlement expeditiously. Rather, the procedures could take up to five or six  years. Another cost-increasing factor is the systems that banks have had to put in place to comply with anti-terrorism/money laundering guidelines under the US Patriot Act. More security means more cost, and if the guidelines are not followed, the country could be blacklisted and hurt by a US backlash. Indeed, some bankers argued that, contrary to public perception, some services are performed at a loss.

Jamaican bankers claim that they are in a particularly precarious situation because of the instability of the currency. They need to protect against inflation, since depreciation of the currency has a bearing on cost. Further, it is reported that the government is keeping interest rates high in an attempt to curb capital flight. One can also question the high spread between the selling and buying rates of foreign currency, which could be as much as 9-10 points. However this spread fluctuates, depending on demand and supply: the availability of foreign currency, the level of reserves, the strategies Central Bank may adopt to tighten or release control on foreign exchange. In TT, the spread could be reduced if more competition is introduced by allowing other supplies of foreign currency, such as Cambios. However, one has to question the advisability of this for two reasons. Firstly, the government is the major earner of foreign currency, which is held by the Central Bank. Where will Cambios get their supply of currency? While there is an underground economy, one certainly does not want to encourage it.  In most economies, the private sector is the major earner of foreign currency. Secondly, Cambios could be more prone to speculation than banks, and could destabilise the exchange rate, something which we certainly do not want in TT

Despite the compelling reasons put forward by bankers to justify their rates, there must be room for improvement on the package being offered to customers, and banks must be willing to relinquish some profits in the interest of generating economic activity. One solution offered is consolidation of the banking sector (and this is already happening), leading to increased efficiency and less cost, more competition and lower rates. It is heartening to see that some banks in TT are making an attempt to restructure their fees in the consumer’s favour and to be more transparent. 

The views expressed in this column are not necessarily those of Guardian Life. You are invited to send your comments to guardianlife@ghl.co.tt