ChrisRam.net

Introduction
Today I return to and conclude the topic started on December 16, 2012 to mark the 20 year anniversary of Business Page. I chose the banking sector to mark the occasion because that sector was in the inaugural column, and I thought it would be useful to see how the sector had performed over the two decades. Twenty years ago the Government played a big role in the banking and financial sectors in Guyana. It owned and operated the Guyana National Co-operative Bank (GNCB) and also had major interests in the National Bank of Industry and Commerce (NBIC) and the Guyana Bank for Trade and Industry (GBTI). The only other commercial banks operating in Guyana twenty years ago were the Bank of Baroda Ltd, an Indian-owned multinational, and a branch of the Canadian-owned Bank of Nova Scotia. Other players in the financial sector were the Guyana Co-operative Agricultural Development Bank (GAIBANK) and the Guyana Co-operative Mortgage Finance Bank (GCFS), both wholly-owned Government entities, and the New Building Society Limited.

Twenty years later the government is completely out of commercial banking, GNCB and GAIBANK are no more in existence or operational while two new domestic banks are closing in on their own twenty years of operation. In other words, there is only one additional operator in the commercial banking sector and no new international bank in the twenty years since 1992. The ownership structure is one of concentration and control with one of the international banks (Scotiabank) still operating as a branch and the other (Baroda) a wholly owned subsidiary. RBL, GBTI and Citizens Bank are all subsidiaries with a majority shareholder, while DBL’s ownership structure is somewhat more complex, with its annual report disclosing that there is no shareholder whose interest exceeds 5% but whose annual general meeting, among the commercial banks, is probably attended by the least number of members.

In the tables in today’s column we see that those banks have all done extremely well, surpassing the growth in the economy many times over. Let us take profits before tax. From nothing the Demerara Bank Limited and Citizens Bank Inc. recorded pre-tax profits in 2011 of $1,279 million and $1,389 million respectively; the National Bank of Industry and Commerce which was renamed the Republic Bank (Guyana) Limited and acquired the operations, liabilities and certain assets of the GNCB has seen its pre-tax profits increase from $335 million in 1991 to $3,175 million in 2011, an increase of 847% while the GBTI which reported pre-tax profits of $571 million in 1991 saw those profits rising to $1,961 million in 2011, an increase of 243%. The performance of the Bank of Nova Scotia was no doubt equally impressive although under then prevailing laws that branch was not required to report on the performance of its domestic operations.

While the growth of the economy, inflation and the scale of their services would have contributed to the increased profitability of the banks, they would inevitably have benefited from the barriers to entry in the sector with the government very reluctant to grant further banking licences. There is no study of which I am aware into the operations of the sector to examine the effects on the economy, beyond some fierce competition for market share, which the concentration of ownership can facilitate.

This kind of research which goes well beyond a newspaper column, is what one should expect from the Bank of Guyana and the University of Guyana, and it would be helpful for a better understanding of the sector and the formulation of policy initiatives if such a study, or indeed studies were undertaken.

What is clear, however, is that while in the years immediately following 1992, it was almost obligatory for the Minister of Finance to comment critically on the high spread between the rates of interest charged on loans and advances and those paid on deposits, that no longer happens. Moreover with a number of the banks taking up membership of the Private Sector Commission the question of spreads seems completely off the table.

The following two tables show some indicators in the landscape in which the commercial banks have operated. Inflation has declined dramatically; the banks’ prime lending rate has been halved while the rate of interest paid on savings accounts has fallen much more steeply. Meanwhile and counter-intuitively the exchange rate of the Guyana dollar to the United States dollar has fallen from $122.75 to $203.75.

Table 1

Source: Bank of Guyana publications

Some aggregate numbers
The banks have become bigger, much bigger. Measured in Guyana dollars, their assets have increased by 1,218%; deposits by an even larger 1,338%, loans and advances by 1,780%. The comparable US dollar percentages are 694%, 766% and 1,033%. As noted above and shown in Table 4, growth has translated to handsome profits.

Commercial Banks

Table 2

Source: Bank of Guyana publications

Market share
While concerns may be expressed about the conduct of the commercial banks in a wider sense, there is no doubt in my mind that there is intense competition for loans and advances to customers.

There appears to be far too restrictive policy on making loans to non-resident companies which almost invariably have to bring money into the country on the mistaken ground of crowding out rather than borrowing from the local banking sector. At December 31, 2011 loans and advances by the commercial banks were less than 50% of their deposits which many consider are not growing as fast as they can because of interest rates that deter rather than encourage savings.

The banks however face some countervailing challenges when it comes to the economy. Some of the main players in some of the fastest growing sectors such as gold, construction, the narco-sector (which has earned special mention), the still huge underground economy and the Chinese and Brazilians, seem more interested in shipping money out of Guyana rather than borrowing from the commercial banks.

As a result of the restrictive lending rules and the nature of key sectors of the economy, market share in the banking sector, and more especially in their hugely profitable lending operations, is vital to profitability. This is how the banks stood in (2011), the last date at which figures are available. These numbers are more than just instructive.

Table 3

Other Income & Salary Ratios

Table 4: 1991 and 2011 comparatives for NBIC/RBL & GBTI and 2011 for Citizens Bank (Guyana) Inc. (CBI), Demerara Bank Limited (DBL) & Bank of Baroda (BOB).

One area of concern about the banks are the charges they impose on what might appear to be their miscellaneous services such as foreign exchange operations, letters of credit, returned cheques, copies of statements, etc. Interestingly, while in the case of NBIC/RBL, the percentage which such other income bears to its other income and net interest income has increased from 22% in 1991 to 27% in 2011, in the case of GBTI that percentage has fallen from 27% to 24%. Comparable percentages for the other banks are Citizens Bank 25%, Demerara Bank 28% and Bank of Baroda 33%.

Another interesting statistic is that in every bank, the salary and related costs are more than covered by other income alone, maybe strengthening the argument for more favourable interest rates, subject to the usual rules applying to risk levels.

The future
The picture for the banking sector looks rosy.

The sector will continue to be driven by technology and the banking licence – which has no carrying value on the balance sheet – will continue to be the most valuable asset, a licence to make money. While some entities will pursue the bricks and mortar strategy at least one other will see that as not the smartest approach to banking in an increasingly technologically driven environment.

Technology will play an even greater role in the sector as mobile money takes root and measures to strengthen controls and prevent increasingly clever and daring frauds continue.

But then the future is never certain. While money laundering will continue to play a significant role in the economy, with the non-bank cambios prominent, the commercial banks’ risk will not be helped by the tepid supervision of money laundering. This is likely to increase as the distributive trade continues its evolution.

There is no new legislation on the horizon and the principal regulator of the sector will continue to pursue conservative, non-interventionist policies.

Without some kind of revolutionary thinking and approaches neither the consumer nor the labour movement will exert any influence on the sector.

Correction, addition and appreciation
In last week’s column I stated as the year in which the Government of Guyana took over the assets, liabilities and operations of the Royal Bank of Canada as 1994. In fact the year was 1984. And I omitted to note that the percentage of the shares in the Guyana Bank for Trade and Industry Limited (GBTI) held and sold in 1994 by the Government of Guyana to the Beharry Group was 30% at a price of G$15 per share.

Finally, to the readers of this column warm wishes for a merry Christmas and 2013.

Introduction
Last week I noted how the regulatory and statutory landscape for banking has changed over the past twenty years. The changes have been more than evolutionary, affecting both the operations of the banks as well as the environment in which they operate. Shortly before 1992, the Hoyte administration had removed practically all exchange controls and had made trading on foreign currency with the introduction of the non-bank cambios with several paper controls but little meaningful supervision and enforcement, not unlike the money laundering that takes place openly in the country.

For more than a decade this column has drawn attention to the operations of these non-bank cambios arguing their usefulness and the objectives which they were expected to serve had ceased to exist. More than twenty years later, these non-bank cambios are seen as a fixture of the foreign currency landscape.

It was no surprise to me that Republic Bank noted as a concern of the earlier decades the question of security. In August 2006 the Rose Hall branches of RBL and Demerara Bank were victims of one of the most daring robberies in the history of banking in Guyana, traumatising the staff of the banks for a considerable time thereafter. I recall going up to Rose Hall immediately after the robbery to collect staff members of Ram & McRae who had to lock themselves in a washroom of RBL during the episode. They were still visibly shaken.

Wherever located, banks are now protected by armed guards and high quality electronic cameras monitoring all their perimeters and every movement by customers and staff. In fact so paranoid have the banks become that they no longer allow the use of mobile telephones in the banks, something that is still permitted in the USA.

Death of the consumer movement and advocacy
Part of the landscape then was a fairly active consumer movement and a willingness by the government to challenge the banks on what were considered exorbitant charges, unreasonable spreads between their buying and selling prices for foreign currencies, and the spread between their cost of funds and the rates of interest they charge on lending those funds. In those days, Ministers of Finance Asgar Ally and later Bharrat Jagdeo would rail about the interest spreads on funds. Now there is no consumer movement to challenge the plethora of charges imposed unilaterally by the banks while the government seems willing to extend every conceivable tax shelter to the commercial banks, even where they do not ask for such concessions.

In other words in respect of taxes the government has become the banks‘ major lobbyists and no longer analyses let alone questions the operations of the banks. In fact sometimes the relationship between the banks – or at least one of them – is so close as to allow what this column considered an improper foreign exchange transaction in a particular case.

I recall some years ago then President Jagdeo expressing surprise and alarm when I drew his attention to the effective rates of taxes paid by some of the banks. Yet, nothing has been done.

The banks’ best friends
Banking is indeed a regulated business but it is also a closed business with the government refusing to allow new entrants and allowing existing players to operate more like price-fixing cartels than genuine competitors. By the very regulations, the sector is largely protected from the vicissitudes and developments around the world, prompting Mr Jagdeo to refer, with some hyperbole, to a ring-fencing of the economy. Any detailed study of the history of the two entrants to the sector since 1992 will almost certainly show that the investors had recovered their capital within a few years, protected by a tax system that allows dividends to be paid tax-free and any capital gains arising from the disposal of shares in those companies to be exempt from taxes. On the other hand, the government sees no problem with charging at the rate of 20% the capital gains on the sale by a retired worker of her only house.

Bricks and mortar
Let us now compare the operations of the commercial banks twenty years ago and what now prevails. Rather than just accept, or rather than rely on, the words of the bank managers who provided some very useful insights into their operations in 1991 and 1992, I also went back to the financial statements and annual reports of two of our major players as well as of the Bank of Guyana for those years. In 1992 commercial banking was mainly about bricks and mortar – the customer wishing to transact any business would present herself to the bank, whether to make a deposit, withdraw money or negotiate for a loan. And more to the point, the banks had their branches mainly in the cities and towns and customers would have to travel some distance to do their business.

In fact the annual report of GBTI shows that it was not until 1992 that that Bank opened its Regent Street branch in the heart of the city. It seems fair to say that the bricks and mortar concept still largely drives commercial banking in Guyana both among the pre-1992 banks as well as those that came after. GBTI now has some nine branches and a new multi-billion head office adorning the Kingston skyline – almost all since 1992.

Republic Bank too has seen an explosion in the number of branches and the construction of a new head office since 1992. Like GBTI, Republic Bank also has nine branches. Demerara Bank has its head office and main branch in Camp Street Georgetown and five branches, including one in Essequibo and two in Berbice. Like Demerara Bank, Citizens Bank has its head office and main branch in Camp Street Georgetown and three branches.

Lethem in Region 9 is currently served only by GBTI but one should expect that others will follow to exploit the opportunities offered by the Brazil-Lethem trade link. Bartica, now more than just the gateway to the interior is served by both the Bank of Nova Scotia and Citizens Bank. Corriverton and Diamond on the Georgetown-Timehri corridor are both served by three of the commercial banks and by the New Building Society, the country’s only real building society. None of the banks disclose the profitability of their branches or have indicated the rate of return they expect in order to establish a branch, but the traffic flowing through many of these branches indicates that the driving factor might be less the volume of business than to keep up with the competition.

Changes, changes
If we were to form conclusions purely from the banks’ annual reports, we might think that the range of services has remained fairly unchanged since 1992. The balance sheets of the banks twenty years ago disclosed deposits in the form of savings, current and fixed deposits; lending in the form of loans and advances, mortgages and overdrafts; and investments mainly in government securities. The income statements reflected these items in the form of interest paid and received; investment income and other income mainly from foreign exchange transactions.

The survey and empirical evidence indicate however that the banks have moved away from a focus primarily on asset-based core lending and deposit products and now provide a suite of products and services designed to meet “specific market’s needs.” One bank indicated that its products and services have been enhanced to cater directly to segments such as commercial and small business versus retail.

The customer wanting to withdraw money does not have to rush to the bank before it closes, often before lunch, but now has a choice of Automatic Teller Machines available twenty-four hours per day seven days per week. Twenty years later it is normal for banks to offer internet banking, debit cards, local dollar credit cards and international credit cards. Customers of Scotiabank have seen their passbooks replaced by ABM cards and the PIN.

Technology and law
Many of the changes, while driven by customer expectations and a desire for instant everything, were made possible by changes in technology and telephony. Twenty years ago the Chairman of GBTI included as a highlight under the caption Computerisation “extensive research … towards upgrading our Management Information Systems” and the expectation that “the network to be fully operational by the end of 1993.” In 2012, technology rules.

Dramatic changes have also been witnessed in terms of statutory obligations in which even routine company functions like the paying of a dividend has to be sanctioned by the Bank of Guyana which also requires more and more frequent reports; new rules of accounting so that in 1991 notes to the financial statements of NBIC ran to a mere four pages compared with forty-four pages twenty years later. In fact even the auditor’s report has seen its own growth, increasing from five lines twenty years ago to twenty-one pages currently.

To be continued