1. Caribbean Commercial Banking: Myths, Realities and the Way Forward by Ronald Ramkissoon Ph.D. Senior Economist, Republic Bank Ltd. 3 rd International Conference on Business, Banking and Finance, May 27-29, 2009 UWI, St Augustine, Trinidad

2. Outline Background to Paper Attempt to clear up misunderstandings Myths Realities Way Forward Conclusions

3. Caveats Paper done in 2007 World’s financial system has changed radically since then Major focus on banking system

4. 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?

5. T&T: Loan Portfolio Distribution (TT$m)

6. T&T: Loan Distribution (%) (Ave. 2002-2006)

7. Bank Household/Consumer Loans to Total Loans (1999-2004) CountryAverage % Trinidad and Tobago43.3 ECCU47.2 Caribbean40.0 Bahamas61.9

8. T&T: Distribution of Consumer Loans (Ave. 2004-2006)

9. Singapore1 St. Lucia27 Antigua & Barbuda33 St.Vincent & the Grenadines44 Jamaica50 Belize56 Trinidad and Tobago59 Dominica72 Grenada73 St. Kitts & Nevis85 Dominican Republic117 Suriname122 Guyana136 Haiti139 Democratic Republic of Congo175 Doing Business in the Caribbean (Ranking 2007)

10. Way Forward Address business environment Address capital market development etc.

11. 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

12. Caribbean Interest Rate Spreads (%) 1995-2004 199520002001200220032004 Barbados6.67.058.007.747.617.30 Bahamas9.067.777.237.228.117.47 Belize9.1010.8011.1010.009.308.80 Guyana9.9210.4010.9012.9813.2312.49 Jamaica30.7413.2011.8711.3812.6211.68 Suriname0.0013.6012.4012.9012.5011.40 Trinidad and Tobago 9.4610.509.128.648.346.74 Average OECS6.347.357.217.478.287.11 Average Caribbean 8.378.818.568.719.198.18

13. Deposit RateLending Rate Spread Antigua & Barbuda4.612.17.5 Dominica3.810.97.1 Grenada3.811.27.3 St.Kitts & Nevis4.311.16.8 St. Lucia4.512.98.4 St. Vincent & the Grenadines 4.311.37.0 Bahamas4.213.89.6 Barbados3.59.15.5 T&T5.813.77.9 Belize5.015.110.2 Jamaica10.021.111.1 Suriname11.424.312.9 Guyana6.416.410.0 ECCU4.211.67.3 Caribbean5.514.18.6 Caribbean Comparison- Bank Interest Rates (av.%) 1999-2004

14. Comparative Treasury Bill Rates 3 month(%)

15. 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

16. 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.”

17. Assets & ROA-Selected Banks (2003-2005) BankAssets (US$b)ROA Schrader’s-UK5.175.82 Singer & Friedlander-UK (failed) 4.862.16 Silicon Valley Bankshares- USA 4.971.75 Citigroup-USA (failed)1,414.01.89 T&T (aver.3 banks) 3.943.1 The Banker, 2004-2006

18. R.O.A. of Banks and Other Companies in T&T (ave.2003-2006) Major CompaniesROA% NGC20.9 Guardian Holdings6.2 Ansa McAl8.4 Neal and Massy Holdings12.7 National Enterprises Ltd.23.4 T&T Banks3.1

19. 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

20. 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!

21. 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.

22. T&T: Non-bank “Development” Loans to Total Loans 2004-2006

23. 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 longer- term 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

24. 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)

25. Thank You For Listening