Shaw says Banks Failure to Reduce Interest Rates is Glaring

Minister of Finance and the Public Service, Hon. Audley Shaw, says that while the reluctance of commercial banks to reduce interest rates is nothing new, the situation is most glaring this time around.
Reiterating his concern about the unwillingness of the financial institutions to adjust lending rates, despite the new interest rate environment, Mr. Shaw said the practice has been crippling the country’s ability to flourish.
The Minister said that there is no debate as to whether the economy has been stabilized, as the macroeconomic fundamentals are all pointing in the right direction. However, there are concerns about the reluctance to adjust lending rates, despite interest rates on Government paper and Bank of Jamaica deposit instruments reaching a 33-year low on.
“The pass-through of low interest rates on Government debt to rates in financial institutions since the successful debt swap has been cause for concern. This reluctance on the part of commercial banks to adjust rates is not a new phenomenon, but this time round, the situation is most glaring,” he said.
Mr. Shaw was speaking Thursday (September 9) at the 11th Annual Shirley Playfair Lecture at the Jamaica Pegasus Hotel, New Kingston.
He said that lending rates need to become more attractive in the new interest rate environment.
“There was a reduction of 1.6 per cent in the stock of private sector credit in commercial banks during the period January to June 2010. This represented the first time in seven years that there was a contraction in credit during the first half of a calendar year,” he argued.
He said the decline in the loan stock was solely reflected in a decline of 9.3 per cent in foreign currency loans and was primarily in the productive sector in manufacturing and tourism.
“We only have to think about the implication of this on our export sector, if the trend continues,” he said.
He said many developing economies have recognised that initiatives geared at lowering interest margins are crucial to stimulating growth in the wider economy. However, the accomplishment of these objectives depends, to a large extent, on the degree of competitiveness within the banking system.
“Research at the Bank of Jamaica has explored the degree of competition in the Jamaican banking sector. All studies have advocated the need for policies geared at stimulating competition, as findings have shown that there is need for greater competitiveness in the sector,” he remarked.
He said research at the Bank of Jamaica has shown that while there is no evidence of collusive behaviour among major banks, the ‘stickiness’ in lowering lending rates could be explained by the structure of the financial sector.
“Recent studies suggest that the industry in Jamaica became more concentrated after the financial crisis in the mid-1990s, and with the significant fall-out, there has been a decline in competition among the banks,” he added.
The Minister felt that greater competition would lead to banks pricing their products more competitively, reduce stickiness in lending rates and lowering interest margins to more sustainable levels.