Caribbean Commercial
Banking: Myths, Realities
and the Way Forward
by
Ronald Ramkissoon Ph.D.
Senior Economist, Republic Bank Ltd.
3rd International Conference on Business, Banking and
Finance, May 27-29, 2009 UWI, St Augustine, Trinidad
Outline
 Background to Paper

Attempt to clear up misunderstandings
 Myths
 Realities
 Way Forward
 Conclusions
Caveats
 Paper done in 2007
 World’s financial system has changed
radically since then
 Major focus on banking system
Myth #1: Banks Lend More for
Consumption
 Data proves otherwise
 Is consumption lending bad?

Note urging of advanced economies
 Is the problem re- “productive” loans, on the
supply side or on the demand side?
 Is the Caribbean open for business?
T&T: Loan Portfolio Distribution
(TT$m)
18,000
16,000
14,000
12,000
10,000
8,000
13,769
15,404
13,026
11,794
11,216
9,096
8,380
6,764
6,000
4,000
2,000
0
2003
Private Sector
2004
2005
Consumer Loans
2006
T&T: Loan Distribution (%)
(Ave. 2002-2006)
60
50.18
50
40.26
40
30
20
11.85
10
0
Consumer Loans
Private Sector Loans
Gov't Loans
Bank Household/Consumer Loans to
Total Loans (1999-2004)
Country
Average %
Trinidad and Tobago
43.3
ECCU
47.2
Caribbean
40.0
Bahamas
61.9
T&T: Distribution of Consumer Loans
(Ave. 2004-2006)
Bridging Finance
1%
Real Estate
Mortgage Loans
22%
Land & Real
Estate
10%
Home
Improvement
8%
Motor Vehicles
11%
Domestic
Appliances
1%
Other Purposes
20%
Financial Assets
6%
Misc. Personal
Services
3%
Consolidation Debt
6%
Ref inancing
8%
Travel
1%
Insurance
1%
Education
2%
Doing Business in the Caribbean
(Ranking 2007)
Singapore
1
St. Lucia
27
Antigua & Barbuda
33
St.Vincent & the Grenadines
44
Jamaica
50
Belize
56
Trinidad and Tobago
59
Dominica
72
Grenada
73
St. Kitts & Nevis
85
Dominican Republic
117
Suriname
122
Guyana
136
Haiti
139
Democratic Republic of Congo
175
Way Forward
 Address business environment
 Address capital market development etc.
Myth #2:Bank Spreads are Too High
 Spreads are highest for more risky performers. The




reverse is also true.
On the deposit side deposit rates are higher in
Jamaica and Suriname compared to Barbados-no
surprise here
Lending rates are higher in the same countries with
higher deposit rates
Risk free rates are higher in developing countries
If deposit and loan rates are consistent then spreads
must be
Caribbean Interest Rate Spreads (%)
1995-2004
1995
2000
2001
2002
2003
2004
Barbados
6.6
7.05
8.00
7.74
7.61
7.30
Bahamas
9.06
7.77
7.23
7.22
8.11
7.47
Belize
9.10
10.80
11.10
10.00
9.30
8.80
Guyana
9.92
10.40
10.90
12.98
13.23
12.49
Jamaica
30.74
13.20
11.87
11.38
12.62
11.68
Suriname
0.00
13.60
12.40
12.90
12.50
11.40
Trinidad and
Tobago
9.46
10.50
9.12
8.64
8.34
6.74
Average OECS
6.34
7.35
7.21
7.47
8.28
7.11
Average
Caribbean
8.37
8.81
8.56
8.71
9.19
8.18
Caribbean Comparison- Bank Interest
Rates (av.%) 1999-2004
Deposit Rate
Lending Rate
Spread
Antigua & Barbuda
4.6
12.1
7.5
Dominica
3.8
10.9
7.1
Grenada
3.8
11.2
7.3
St.Kitts & Nevis
4.3
11.1
6.8
St. Lucia
4.5
12.9
8.4
St. Vincent & the
Grenadines
4.3
11.3
7.0
Bahamas
4.2
13.8
9.6
Barbados
3.5
9.1
5.5
T&T
5.8
13.7
7.9
Belize
5.0
15.1
10.2
Jamaica
10.0
21.1
11.1
Suriname
11.4
24.3
12.9
Guyana
6.4
16.4
10.0
ECCU
4.2
11.6
7.3
Caribbean
5.5
14.1
8.6
Comparative Treasury Bill Rates
3 month(%)
7
6 .0 8
6
5
4
4 .8 5
4 .8
4 .8
4 .76
4 .8 6
%
3 .2 1
3
2
1
1.3 7
1.6 2
1.0 0
0
2002
2003
US Treasury Bill Rate
2004
2005
2006
TT Treasury Bill Rate
Way Forward
 Reduce/mitigate risks in Caribbean countries
 Be careful about the level of reserve
requirements- these represent costs which
are reflected in deposit rates
Myth #3: Bank Profits are too High
 Absolute dollar values are not as meaningful
 ROA’s in the Caribbean are generally on par with
those in other jurisdictions
 Banks in more risky environments with higher
intermediation costs should have higher profits
 “…banks stand a better chance of surviving the
vagaries of banking and risk mitigation if their
margins are larger than is the case in more
developed environments where banking structure is
presumably superior and shocks are likely to be
weaker.”
Assets & ROA-Selected Banks
(2003-2005)
Bank
Assets (US$b)
ROA
Schrader’s-UK
5.17
5.82
Singer & Friedlander-UK
(failed)
4.86
2.16
Silicon Valley BanksharesUSA
4.97
1.75
Citigroup-USA (failed)
1,414.0
1.89
T&T
(aver.3 banks)
3.94
3.1
The Banker, 2004-2006
R.O.A. of Banks and Other Companies
in T&T (ave.2003-2006)
Major Companies
ROA%
NGC
20.9
Guardian Holdings
6.2
Ansa McAl
8.4
Neal and Massy Holdings
12.7
National Enterprises Ltd.
23.4
T&T Banks
3.1
Myth #4: Banks do not Compete
 T&T banking system comprises Central Bank, 5
foreign-owned banks, 1 government-owned bank and
1 privately-owned local bank
 A wide range of non-banks
 Caribbean has always been host to a range of
international banks
 Way forward: continue to ensure competition

Be aware that there is something as “unhealthy
competition” i.e. non-bank institutions that compete
with banks without being properly regulated
Myth #5: Banks do not Take Enough
Risks
 That banks look for “opportunities of lowest
risks” in the economy is positive not negative
 Banks should not be encouraged to take risks
for which there balance sheets are not suited
 Central banking regulation typically plays an
important role here
 Indeed higher risks typically generate higher
returns which is one of the criticisms!
Myth # 6: Banks not Interested in
Extending “Development Loans”
 Be careful about what might be defined as
“development” loans
 Such longer term loans tend to be made by
the longer term lending arm of banks i.e.
merchant banks etc.
T&T: Non-bank “Development”
Loans to Total Loans 2004-2006
80
78
76
74
72
70
68
66
64
62
60
77.25
66.96
Trust & Mortgage Finance Companies
Finance Companies and Merchant Banks
Conclusions
 Caribbean commercial banks plead “not guilty” to the




charges
Banks ought not to be asked to do what they are not
equipped to do
To the extent that there is a gap for additional longerterm funding, cheaper funding and venture capital
funding more remains to be done.
“When your neighbour’s house is on fire….”
While Caribbean banks have remained largely
unscathed by the global financial meltdown we
nevertheless have work to do
Conclusions
 Make improvement to the Caribbean
business environment the # 1 priority by


Addressing limitations of the business
environment (demand side)
Developing/providing the appropriate financial
institutions/products (supply side)
Thank You For Listening