Give credit unions FCB shares

Economist and UWI Lecturer, Dr Dhanayshar Mahabir has suggested that government sell its shares in First Citizens Bank (FCB) to some of the larger credit unions in the country that may have an interest in the bank. This way, he said government can keep the bank close to the “small people.” Mahabir has joined the growing chorus of dissenting voices against the proposed merger of FCB and the Unit Trust Corporation (UTC). In fact, he sees no merit in it. In an interview with Business Day, Dr Mahabir said the reason for his opposition is strictly an economic one. He said neither FCB nor UTC complement each other. “They perform separate and distinct functions. The UTC basically sells mutual funds and FCB is a commercial bank. Just because they exist in the financial sector does not mean that they are similar in how they operate.” Prime Minister Patrick Manning last Thursday announced that government is considering a “serious suggestion” that the UTC be merged with the FCB. He said government was trying to streamline the corporate arrangements before deciding whether the company should go public or be merged with FCB.

Mahabir thinks Government should consider other options. He said, for instance, government can seek a joint venture with a foreign bank to partner with FCB. “A foreign bank will bring foreign business to FCB. I do not wish to see FCB disappear like CIBC.” “I think the Prime Minister should consider all other options to expand the bank.” On Mahabir’s suggestions, FCB CEO Larry Howai said “no comment.” There are valuable economies of scope to be gained if the credit union sector invests in the bank, Mahabir said. The credit unions, he said,  can use FCB as their banker instead of going to other banks, noting that  FCB will be strengthened by gaining share capital injection. FCB, he said, can be used to “complement the services of the credit unions.”

He said government should consider this alternative and conduct a feasibility study into such a venture since both the credit union and FCB can be strengthened. This, he said, is a more plausible marriage than the proposed FCB/UTC merger. Dr Mahabir explained that FCB makes loans available to the government, individuals and corporations based on its own lending criteria and these loans can be either non-performing or performing. He said the UTC does not give loans, it merely accepts the injection of funds and purchases government securities, stocks and bonds and money market instruments for its different product offerings. “The risk involved is therefore lower for the UTC than commercial banks because it invests in securities which are safe investments.”

He noted that there  is also a legal reason why the UTC cannot be merged with FCB. He explained that the UTC operates under the UTC Act which gives clear directions to its board on what it can and cannot do, “so the board of directors are constrained in their activities by legislation.”
Dr Mahabir said FCB is guided by the Central Bank Act of 1993 which allows the bank to operate in a banking environment and a plethora of other services like ATM banking among others. He said any combination of the two organisations will not result in a stronger organisation because “they are different and we are going to get an improper fit.” “When firms merge, it is supposed to benefit both firms and bring something to the union. The output of the partnership is supposed to exceed what each organisation is doing right now individually. In other words it is supposed to result in economies of scope.” Dr Mahabir said government has not provided any details as to how this was going to be accomplished.

The UWI economist said he has no problem with government wanting to expand FCB to make it more competitive, however, he said it must be done in a sensible manner. He said it is his view that FCB is much too small to function as an equal competitor with the three larger banks in TT. With this in mind, he said government has to expand and strengthen FCB in order to make it an equal competitor. Dr Mahabir also thanked Manning for putting  the idea out for public comment before any solid decision was made on the matter. “I think that the PM was right to make the statement and put it out for public comment. That is good governance.” He said it is always good to seek public opinion since these kinds of issues cannot be handled in a high handed fashion. He said it is now up to Manning to make the right decision based on public opinion and economic reality. “I think the PM should just leave the proposed merger in the realm of talk,” he said, “since it will cause damage to a very strong, home grown, indigenous organisation which is the foundation of retirement funds for many people.