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Amendments to NBS Act forced through the National Assembly – conclusion

Sunday, August 1st, 2010

Today I conclude my examination of the amendments to the New Building Society Limited Act passed by the National Assembly two Thursdays ago despite the arguments from the opposition members and the pleas from the members of the Society for consultations to take place. With the government’s overall majority in the National Assembly, passage became a formality.

In terms of building societies, Guyana is a unique animal. It does not have a generic Building Society Act like the UK, Jamaica and Trinidad. This country’s sole building society enjoys a huge monopoly and because the NBS is a creature of parliament, the government exerts over it an unchallenged and powerful influence. The government can amend the NBS Act at will, without any consultation with the members or the directorate of the Society. On the occasion of the NBS Amendment Bill 2010, the government indecently ignored the members and is proceeding to implement unilateral changes to the laws under which the members of the Society are forced to operate. It is hard to see how the changes will enhance governance and transparency in the Society, but we will wait and see.

I will continue my clause-by-clause examination of the amendments before looking at some of the general principles governing building societies’ legislation.

Clause 6
Several members have pointed out on more than occasion that the Society has been in breach of section 7 of the act which in its proviso restricts the amount of borrowings outstanding, whether by way of deposit or loan, to two-thirds of the amounts lent on mortgage. What the amendment does is allow for the two-thirds to be varied by the Bank of Guyana, conceivably to more than 100%. That would be reckless and against all the principles of financial structuring of a building society. Perhaps the architects of the amendment were more concerned about correcting a misunderstanding that has persisted over decades, and in the process, it seems that the object of the original provision was lost.

A building society has to ensure that of its total assets, there must be sufficient liquidity to enable it to meet its liabilities as they fall due. If a disproportionate amount is kept in mortgages and other long-term assets, it would be in danger of being unable to liquidate a sufficient amount to meet demands as they fell due. A building society is not like a limited liability company where there is a share capital which can only be withdrawn in narrow circumstances.

New Buildings Society
A fine balance therefore has to be maintained between short-term and long-term assets depending on the range and scale of the society’s business and the character and composition of its assets and liabilities. The UK legislation seeks to draw the line by providing that the assets held by the society to enable it to meet its liabilities as they arise should not exceed 33⅓% of its total assets and must be composed of assets of an authorised character, and no others (emphasis mine).

Unfortunately, in its haste to pass legislation, these fundamental considerations were completely overlooked. In the longer term, this could have serious repercussions for the NBS.

Clause 9
When I first saw the proposed amendment (a) to amend section 11 of the act, I thought it was either an editing or drafting mistake. Section 11 of the original act vested in the Board the management and affairs of the business of the Society. Deleting the word “management” and replacing it with the word “policies,” we have the position that the policies of the Society are vested in the board. That is as absurd as it gets, but clearly Minister Irfaan Ali did recognise that policies are not vested but are formulated by the Board and that yes, the management is vested in them for which proper discharge they are responsible. He would have saved us the comical justification if only he had familiarized himself with the corresponding provision in the Companies Act, 1991.

Section 59 of that act holds the director responsible for directing the management of the business and affairs of the company. Section 96 of the act imposes on the company’s directors, obligations to act honestly and in good faith with a view to the best interest of the company and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

The NBS is a financial institution and one would expect its directors to have higher standards of obligations than those of the directors of the run-of-the-mill company. Sadly, the danger is that with existing mechanisms in place, the Society will have to wait a very long time before it is served by independent-minded directors.

Clause 10
This clause virtually abolishes the right of members to requisition a special meeting in the Society. Ever since the formation of the NBS in 1940, 10% of the membership or 50 members, whichever is less, could have requisitioned a special meeting, stating the object for which the meeting is being requisitioned. Under the amendment, such a meeting can only be called by 10% of the entire membership, currently estimated at 100,000 members, which means it would require 10,000 members to sign a requisition for such a meeting.

The government side made much of the fact that the size of the membership has grown since 1940 and the change is therefore justified by circumstances. They also argued that 10% is the percentage required for the requisitioning of a special meeting under the Companies Act. Such arguments are not only wrong but also ignore the importance of minority protection. Let us deal with the first argument. In the UK where some building societies have as many as a million members, 100 members can requisition a special meeting.

The Minister of Finance in arguing the case referred to section 135 of the Companies Act 1991 and was correct as far as the 10% was concerned. He did not, however, point out that in the case of the Companies Act it is 10% of the share capital. This is so fundamental that the Minister should have been more forthcoming with the facts. It is wrong and disingenuous to compare the Companies Act – which is explicitly excluded from application to the NBS – with the NBS Act. A more reasonable comparison would have been with the Co-operative Society Act Cap.88:01 since the NBS is a mutual, co-operative society formed under statute. Under the Co-operative Society Act twenty-five persons may requisition a special meeting.

Clause 14: Repeal of section 19 of the Principal Act
One of the most infamous amendments was the deletion of section 19 of the principal act which allowed 100 persons to apply to the minister to appoint an accountant or actuary to inspect the books or an inspector to examine into and report on the affairs of the Society. That right is now being completely removed. No one argued that because the NBS would now come under the Bank of Guyana the provision was superfluous. But since they were drawing comparisons with the Companies Act, they may have wished to consider that Section 496 of the Companies Act allows for an application by one person for the appointment of an Inspector. Or that section 506 allows for a single shareholder or debenture holder, or the Registrar to apply to the court for an investigation order.

Sections 496 and 506 apply to all companies including those financial institutions supervised by the Bank of Guyana under the Financial Institutions Act, so there really was no justification for the removal of section 19.

Clause 20: exclusion from taxes, reserve requirements
By virtue of clause 20, the NBS will not be subject to a reserve requirement. My understanding is that the basis for this exemption is that such a requirement would have carried up the cost of funds, an argument equally applicable to all financial institutions. Again I think this is short sighted and ill informed, since the reserve requirement helps to meet any suspected run on the financial institution and is the next best security for depositors. While exemptions from taxes are justified in the case of mutual entities, to give the NBS such carte blanche exemption from the reserve requirement applicable to deposit-taking financial institutions is to court bad management.

Conclusion
There was a need for the NBS Act to be modernised and amended and to enhance governance in the NBS. The existing rules which allow the directors to entrench themselves by the abuse of proxies, no age/term limits for directors, pensions paid to directors, and general corporate governance weaknesses would be considered inappropriate and unacceptable in the 21st century and dangerous in a financial institution. But these ills are not addressed. More importantly, it was necessary to silence the minority.

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Amendments to NBS Act forced through the National Assembly

Sunday, July 25th, 2010

Introduction
That the Government used its majority in the National Assembly to push through major amendments to the New Building Society Act was not surprising. That Messrs Winston Murray and Khemraj Ramjattan so persuasively argued the case for the PPP/C to reflect on the implications of a piece of legislation was commendable.

That a debate on a technical bill could descend into real gutter remarks was I am told, not unusual. What was disappointing and regrettable was the attitude of those on the government side, the little or no research reflected in their presentations and their failure to understand, or total disregard of, the co-operative nature of the NBS or what corporate governance means.

That the Governor of the central bank and one of his staff were in the Chamber suggests that they were invited by the Government. None of the directors of the NBS including its CEO made any appearance during the entire four or so hours it took before the vote.

Yet, even in the absence of an invitation, it would have been both necessary and helpful for the directors to attend the debate on what is, to date, one of the most fundamental changes to the Act under which they operate.

Their non-attendance did not surprise, as the directors have consistently belittled the contribution and views of their own members. They did not seem to be interested in the views of the legislators either.

Harlots and hypocrites
The exchanges in the National Assembly were peppered with negatives like “harlot”, “bullies”, “instigators” and “hypocrites” instead of capital adequacy, loan provisioning, corporate governance and minority protection. Those who referred to the Companies Act to support their case were at the same time economical about the provisions of the Act which they selectively chose some sections from while ignoring others. Their response to the suggestion that good governance, as does the Companies Act, seeks to protect the interest of the minority was that “the will of the majority must prevail.”

The self-styled NBS Concerned Members used almost every possible means and opportunity to engage the decision-makers and to advise caution. Once I received a copy of the Bill, I tried calling the Chairman of the Board Dr. Nanda Gopaul. His secretary wanted to know the reason for the call. I explained to her that I was calling on behalf of the members of the NBS and wanted to speak with him urgently on the proposed amendments. I never heard from her again. My attempt to contact by telephone former Chairman Moen McDoom, S.C. was similarly ignored while PPP/C General Secretary Donald Ramotar treated our correspondence with equal discourtesy.

The Secretary/Director of the NBS refused to meet with Cyril Walker and me when we took a requisition to him signed by scores of members for the calling of a special meeting. We tried to lobby the parliamentarians as they went into the National Assembly. Prime Minister Sam Hinds said we were too late. He seemed unaware of the fact that at the time of the debate, the Bill had not yet been published in the Official Gazette, as is required under the Standing Orders. Notwithstanding that this may not be part of the parliamentary procedures, I believe that the Speaker should have taken a stand on that basis.

Bullies and cowards
I also believe that the Speaker should have intervened when Minister Nadir who was labouring to make a constructive and informed contribution to the debate took the opportunity to attack “the accountant, attorney-at-law and social commentator” for trying to bully the NBS’s board. In an aside, the learned Attorney General typically rejoined “not social commentator, instigator”.

Many would say that it is they who were the bullies and cowards for attacking without naming a person knowing that the person could not reply there. It was a disgusting demonstration of the abuse of power which has come to characterise our national politics.
It did not strike the government benches as odd that they took offence at the factual identification of Drs. Prem Misir and Gobind Ganga, and Mr. Paul Bhim as directors of the Bank of Guyana but applauded when members of the NBS were repeatedly being described as “bullies’ and a “tiny minority”.

The party prevails
During the break one member of the ruling party volunteered to Mr. Walker and me that he recognised the validity of some of the opposition concerns and would recommend that the Bill be taken to a Select Committee. And one leading member of the government admitted that the amendments as drafted might be inappropriate to a building society. But when the time came to stand up and be counted, those views were forgotten.

The fact that members had used legal and proper means to have the amendments considered at a meeting of the NBS, and the strong and constructive arguments by the opposition, mattered for nothing.

So in the end, subject to presidential assent and publication in the Official Gazette the bill that brings the New Building Society under the Financial Institutions Act will also remove several rights which members of the Society have enjoyed for seventy years.
There may be some complications. What the members did by their requisition was to ask that there be prior consultation on proposed changes which fundamentally reduce their rights as members.

Effectively, they are asking that if there are to be changes to the rules under which they joined the NBS in the first place, and if the goal post on the field on which they have been playing, are to be moved, then at least they should be consulted.
Would the President now try to pre-empt the holding of the meeting by assenting to and publishing the Act, giving the directors an excuse that the requisition has been overtaken by events? And if he does, the Concerned Members would have to consider their own response.

The Bill
In their requisition the members drew to the attention of the Board that they have always advocated bringing the Society under the supervisory control of the Bank of Guyana. In welcoming this proposal they also noted that they supported the amendments introduced by at least twelve of the clauses in the Bill.

They did however express “serious concerns” with certain other proposals which they highlighted and discussed in their requisition. Here are some of the more significant concerns.

Clause 5 (2)
The members noted that having regard to the nature of the Society’s business, great care ought to be taken in the wholesale application of all the provisions and guidelines of the FIA. The Financial Institutions Act 1995 was designed for banking and other financial business, not co-operatives, credit unions and similar organisations. In Jamaica for example, while the Bank of Jamaica regulates all financial institutions including cooperative societies and building societies, in the case of building societies, they do so under specific legislation. The same is also true of Trinidad and Tobago.

Jamaica recognises the special and unique characteristics of building societies and has separate primary and subsidiary legislation governing such societies. So that in that country, there is The Building Societies Act, 1897 which was last amended in 2004 and there are The Bank of Jamaica (Building Societies) Regulations, 1995 (amended 2005) and The Building Societies (Licences) Regulations, 1995.

This is also true of Trinidad and Tobago and the UK where there is a Buildings Society Act under which building societies are formed and regulated.

We different
The approach taken in Guyana is to treat the NBS as an entrenched monopoly. Does this mean that if another group wanted to set up a building society it must do so by asking for it to be set up by legislation? Corporate law has moved away from charter companies and there is a generic companies act that sets out the legal framework for the incorporation of companies.

Members are concerned that there had been no statement from the directors on whether they had been consulted by the government and on the impact on the Society of the FIA and its several Supervision Guidelines. Members expressed the view that the operations of the NBS could adversely affect the Society. In this regard the Board may have wished to consult with the Bank of Guyana and the other entities subject to Supervision Guideline No 5 – Loan Portfolio Review, Classification, Provisioning and Other related Requirements as to its effect. And Supervision Guideline No 4 – Capital Adequacy Ratio would be similarly relevant.

It does not appear that transitional arrangements allowed in the new clause 7 A apply to loan provisioning and this could impact on the Society’s mode of operations and results for the current and future years.

To be continued

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New Building Society in breach of its own Act

Sunday, April 25th, 2010

Introduction
The annual general meeting (AGM) of the New Building Society (NBS) returned to Georgetown after a two-year sojourn in Berbice. Unfortunately neither the press nor the directors of the Society made any report on the meeting which had its own moments of interest. Today’s column will try to fill that void. Once again the NBS Concerned Members were present, vocal and prominent. There were from the Office of the President big fishes, including letter writer Dr Randy Persaud, and small fishes. There were also some prominent figures who, like Dr Persaud, perform political functions and work in the public service. But it soon became apparent that while it is always good to have adequate members’ attendance, quality matters more than numbers, except when a vote is called and proxies can be pulled out.

Business Page two weeks ago had reviewed the 2009 financial performance and the balance sheet. While the financial statements were a major item on the agenda of the meeting, it is not necessary to discuss them here again.

Comical
Shortly after the meeting was called to order, Mr Cyril Walker, Secretary of the Concerned Members group questioned why the Society had not responded to a request from long-serving member for a copy of the minutes of the last AGM. Chairman Eileen Gopaul ruled him out of order, and that was that. This was not the first time that the indefatigable Ms Cox has suffered the indignity of her request for a copy of the minutes of a members’ meeting being ignored.

The meeting then moved to the report of the auditors. Apparently it did not strike the board and its Finance Committee headed by former Commissioner of Police Mr Floyd McDonald that the firm presenting the audit report – Maurice Solomon and Company – was not the same firm – Solomon and Parmesar – that the members had appointed on the board’s recommendation after the previous auditors had declined re-appointment after decades as the Society’s auditors. It would be hard to imagine a more comical situation in a regulated financial business controlling close to $40 billion in public funds.

Challenged on the matter, Chairman Gopaul spoke for about three minutes without making any logical, let alone, sense. As I write, I now realise how unmemorable that response was. The issue was more than a technical change of name as Dr Gopaul seemed to think. During 2009, the appointed firm had split down the middle with the departure of partner Harry Parmesar, FCCA, taking with him several key staff members. What the Audit Committee should have done was carry out a due diligence to satisfy itself that the firm had retained sufficient expertise and experience to undertake such a major audit. With no financial expertise among the directors, maybe they never thought about it. As Ramon Gaskin pointed out, there should have been some note to this effect in the report of the directors.

Corporate arrogance
The directors had proudly boasted that the results were the best ever for the Society, describing these as a 97% increase over 2008. While the Concerned Members suggested that the comparison was misleading, and the line for line increase was 9.6%, they did not dispute the actual profit in 2009. Instead, they proposed a rebate to specified classes of borrowers and adjustment to the borrowing rates, a common practice some years ago. The Society is a mutual organisation so the profits in practice belong to the members and like any corporate entity, the members are paid a dividend. The Chairman did not allow for this to be put to the members but promised that the directors would “look at it.”

Contributing to the profit comparison was a gain on exchange losses on UK investment in 2009 compared with a $200 million loss in 2008. Called to explain why a 2009 decision of the members that the UK investments be repatriated, Dr Gopaul asserted that it was not a decision but “a discussion.” He is possibly the only person whose recollection would have led him to that interpretation, but again members are powerless in the face of this corporate arrogance. So it seems the investments stand, waiting for the usual swings that have characterised the pound sterling for the better part of the last decade.

No estoppel in tax evasion
Two other corporate governance issues attracted much attention. Concerned Members argued that whatever may have been the practice in the past, there should be no pension scheme for directors, to which the Chairman asked, apparently rhetorically, whether directors were not workers. The only problem is that workers are subject to contracts of employment and their employment is subject to an age limit. The directors may also note that there is no contractual relationship and that the same body – the members – that voted pensions can also vote to end the scheme. This is a governance issue, not a dubious claim of worker rights.

The second was in relation to remuneration. The practice of the NBS has been to split the remuneration between fees and travelling – the one being taxable and the other presumed non-taxable. Dr Gopaul’s first response was that directors use their own vehicles to do NBS business and the second was that that the practice came from the days of “Ram” which prompted Gaskin to reply that there is no estoppel in tax evasion.

Statutory breach
There was a sustained exchange between this columnist and the Chairman and the Society’s CEO that exposed how little the bosses understand the New Building Society Act under which the Society operates. I asked Dr Gopaul for the statutory reference and further explanation for his statement in the annual report that the Society was “racing near to the lending limit.” I pleaded with him that the Society had already exceeded that limit and offered to move a motion for an amendment that would have begun the regularization process. Dr Gopaul would have none of it, pointing out that his own board, its auditors and the Bank of Guyana were all convinced that they were right and I was wrong.

I have since confirmed my interpretation with a source in the Bank of Guyana and am more convinced than ever, that the NBS at December 31, 2009 had breached the lending limit prescribed by section 7 of the NBS Act by $3.8 billion, as follows:

Application of the proviso to section 7 (d) of the New Building Society Act to the financial statements for the year ended 31 December 2009:

Despite being described in the annual report as an “uninformed little group of mischief makers and pseudo intellectuals,” Concerned Members take no pleasure in being proved right when the NBS is found to be in breach of its own Act. We believe however that the tardiness of the Minister of Finance in introducing legislation to bring the NBS under the regulatory oversight of the Bank of Guyana would have saved the NBS from this embarrassment.

Expel the…
If lack of understanding of its own Act by the board was not bad enough, their support for an amendment to the rules that would permit the NBS to expel a member at any time shows how mischievous or misinformed the board members are when it comes to serious issues. Originally, rule 13 only allowed the NBS to decline “to admit or continue a member” within one month of the payment of the entrance fee. That time restriction was removed on a motion under Any Other Business, fourteen days notice having been given.

Immediately after the motion was read by the new member, the Chairman sought to put it to a vote, which was objected to by the Concerned Members who asked for a discussion. The motion was supported by all the directors, and overwhelmingly by the floor. The member who moved the motion is an attorney-at-law working at the Office of the President and is a daughter of a PPP/C member of parliament. Afterwards, I met and spoke with her outside of the meeting, in the presence of another top PPP person. She did not even understand what she had done. What was worse was that the board on which sits a Senior Counsel, did not know either.

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On the Line: 2009 Annual Reports of the Guyana Bank for Trade and Industry and the New Building Society

Sunday, April 11th, 2010

Introduction
Business Page today interrupts its series on the state-owned Guyana Sugar Corporation to present an overview of the annual reports and accounts of two of the country’s financial institutions which will soon be holding their annual members’ general meetings at which the presentation of the annual reports is a major agenda item. One of these is the commercial bank, the Guyana Bank of Trade and Industry which is a licensed financial institution regulated by the Bank of Guyana under the Financial Institutions Act. The other is the New Building Society Limited, which carries on a financial business but which the Bank of Guyana claims does not fall within the act and which, despite several commitments by the Bank of Guyana and the government, remains unregulated. As a result, the bank is subject to the Single Borrowers Limit and other “strong financial regulations,” as described by no less than the Minster of Finance himself, while the NBS is not.

This is not the only note of contrast. One has to look no further than the Chairman’s reports by Mr Robin Stoby SC and Dr Nanda Gopaul of the two institutions respectively to see how they reflect the backgrounds, styles and personalities of the individuals. Both of them had good reason to be satisfied about the results of their entities. But while Mr Stoby was professional and measured, even enthusiastic at times, Dr Gopaul showed how difficult it is for him to adjust his political style to dealing with the commercial world.

He had no qualms about castigating members of the NBS as an “uninformed little group of mischief makers and pseudo intellectuals”; or about praising Housing Minister Irfaan Alli who now risks sanction by the Privileges Committee of the National Assembly for misleading the National Assembly; or making claims about the economy that are at best questionable. While Dr Gopaul claims that the Guyana currency has appreciated during the year, the GBTI Annual Report – and you would expect the bank to know – reported that the Guyana dollar market exchange rate was $202.75 compared with $201.75 during 2008. He also said that the fiscal deficit was at its lowest in 10 years. Perhaps he has been wrongly advised by his Finance Committee comprising former Commissioner of Police Mr Floyd McDonald and trade unionist Mr Kenneth Joseph.

It also goes beyond the two chairmen. The directors of GBTI are all experienced, private sector persons, while those of the NBS with one exception are all connected, directly or indirectly with the ruling party. This necessarily flows through to the quality of governance which has been a major and continuing issue at the NBS, particularly in relation to proxy voting, pensions for directors, and a modern code of corporate governance.

GBTI
The annual report of the GBTI which will be holding its meeting on Monday, April 19, 2010 shows the bank continuing a remarkable run in which since 2006, net income before taxes has increased by 25.8% in 2009, 14.8% in 2008 and 23.9% in 2007, making for a cumulative increase since 2006 of 78.8%. Because of the tax effect, after-tax profits have increased cumulatively over the same period by 95.9%.

The Beharry family holds a 61% controlling interest with the remainder of the shares spread among hundreds of members, but the actual number and any other significant concentrations are not disclosed in the annual report.

Earnings per share for the year were 24.8% in 2009, marginally up from the 23.5% in 2008. With the company’s shares trading at $140, the P/E ratio, a popular investment measure, has improved slightly, to 5.6, making the security one of the most attractive in the domestic market. One area of significance is the increase in the effective rate of taxation which for 2009 is 29.7%, compared with an effective rate of 16.0% in 2008. The corporation tax charge for the year is 26.2%, compared with 13.6% in 2008. Readers are aware that the nominal rate of corporation tax on banks, commercial and telecommunication companies is 45%. As a result of the higher effective rate of tax, the Return on Average Assets and Average Equity have both declined, albeit marginally.

The interest earned on the average of net loan balances declined from 13.4% to 13.1% while the average interest paid on deposits was 2.2%, compared with 2.6% in 2008. This apparently low interest rate is in some significant measure due to the high level of non-interest bearing demand deposits which averaged more than $10 billion during the year. The bank continues to earn significant amounts from foreign exchange transactions with Exchange Trading Gains increasing from $664M or 18.4% of total income in 2008 to $733 million or 19.1% in 2009. As this column noted last year, the gains on foreign exchange alone cover the total staff costs of $612.6 million, which is a decrease from the previous year.

The continuing good run allows Chairman Robin Stoby to announce for yet another year, “the highest dividend payout in absolute terms in the bank’s long history.” At $7.5 per share, total dividends in 2009 will represent 30.3% of the year’s distributable profits, compared with 25.5% in 2008 and 25.1% in 2007. By comparison, the dividend payout ratio of Republic Bank Guyana Limited for 2009 was 41.2%.

Highlights

The bank’s deposits increased in line with the growth in deposits of the financial sector, thus allowing it to retain a 21% market share of deposits. Its market share of loans however declined from 22% to 20.3%. The bank’s financial condition remains very strong and shareholders’ funds have increased from $4.7 billion to $5.7 billion.

Mainly due to what is described as capital work-in-progress of $4.1 billion, the value of property, plant and equipment has increased from $3.8 billion to $5.6 billion. In addition to the new head office, the bank is also building a new branch at Diamond on the East Bank of Demerara. At the sod-turning in 2008 the bank had announced the cost of the new head office building at $2.6 billion. Unless there are some other capital developments that have not been announced, it seems that there has been a significant cost overrun on the head office. The financial statements also reveal that the bank had actually exceeded the Single Borrower Limit by its investment in Government of Trinidad and Tobago Sovereign Bonds, although it fails to disclose the amount of the excess.

As they receive the report of the continued successful performance of the bank, shareholders are likely to overlook these matters, as well as the sudden departure of the bank’s CEO in October 2009. The meeting should be quite a quiet affair.

The New Building Society
After a break of two years when the directors took the annual meeting to Berbice, the annual general meeting of the NBS will return to the Pegasus Hotel next Saturday at 1.30 pm. The directors will report a profit of $588 million, describing it as an increase of 97% following a write-off in 2008 of a $200 million exchange loss on its sterling investment. According to the audited Statement of Income the profit for the preceding year was $487 million, so that the increase in profit for the current year is 9.6%.

Highlights

As is evident, the increase in net income before exchange difference was 9.63% but after taking account of an exchange gain in 2009 compared with an exchange loss in 2008, the change in net income is 97.2%. Just for the benefit of the financially minded, the accounting treatment of the gain is not in accordance with the rules of accounting.

Total assets of the NBS increased by 6.6% compared with 9.3% of the GBTI while its investors’ balances – largely equivalent to depositors’ balances – increased by 5.8%, compared with GBTI 11.9%. Despite this, and due to its tax exempt status, no reserve requirement and more discretionary provisioning rules, the NBS pays higher rates of interest on deposits and yet charges lower rates on its loans.

There is no doubt that the investments in the Berbice Bridge Company Inc are attractive, even for a tax-exempt entity. The issue has been concentration. Having acquired $1,520,000 of such investments from CLICO in 2009, the total of $1,870,000 represents 34.9% of the reserves at the end of the year. As a prudential rule, the Financial Institutions Act limits any single investment by financial institutions to 25% of their capital base.

The Society’s pension fund recorded unfunded obligations of $21.8M compared to a surplus of $21.5M, a significant turnaround of over 200%. No mention is made of the cause of this decline. Accounting rules have allowed a significant larger obligation to be presented in the financial statements.

The last time the NBS had a meeting at the Pegasus, there was quite a furore. It is unlikely that history will repeat itself.

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The audited financial statements and annual reports were used to analyse NBS

Thursday, October 8th, 2009

I am pleased to see some new names surfacing in the discussion of topical issues. It suggests that there may yet be persons out there prepared to engage seriously in these issues even if sometimes without a sufficient knowledge or understanding of the facts. I therefore consider it useful to address some of the more salient matters raised by Mr Salim Khan in his letter in the Stabroek News of October 6, 2009 ‘Assessments from critics of NBS are counterproductive.’

1. Mr Khan claims I have a peeve about the NBS, having served as a director of the Society. I grant him an unchallenged right to psychoanalyse my writings and personality.

2. Mr Khan recommended that the facts be checked, although there is no evidence that he himself did so. Not only do I always use the audited financial statements and annual reports of the Society for my periodic analysis but before the most recent Business Page, I wrote the Society’s Director Secretary for a copy of the half-year 2009 financials. He is yet to acknowledge my request. Would Mr Khan please help?

3. With NBS being the only Building Society in the country, Mr Khan may wish to tell readers which industry in which country he is referring to in claiming that “NBS’s financial position is as sound as any in the industry.”

4. Can Mr Khan explain what he means in his letter by a “simplistic portfolio of loans” and whether he thinks that the board was wrong to support the members’ motion at the 69th AGM for a Board Loans Sub-Committee?

5. Is Mr Khan aware that commercial banks are subject to two rules on provisioning against doubtful loans – IAS 39 and Bank of Guyana Supervision Guideline 5, the latter of which does not apply to NBS?

6. If Mr Khan would care to read my reviews of the commercial banks’ annual reports posted at chrisram.net, he would immediately realise that their interest spread is a criticism that I invariably make. Having said that, I wonder if Mr Khan knows the following:

a. That unlike the regulated financial and banking businesses, the NBS does not maintain a non-interest bearing statutory deposit with the Bank of Guyana. If they did, it would easily mean on the basis of NBS’s 2008 financial statements setting aside more than $3 billion dollars as non-income earning assets. By not doing so, NBS can earn, at the average rate of interest it earned on mortgages in 2008, income of $275 million not available to the commercial banks.

b. That the NBS is exempt from corporation taxes and consequently for every $100 net income earned by the Society, the commercial banks paying corporation tax at the rate of 45% would have to earn $180.

c. For those commercial banks approved for lending for low income housing, the ceiling is $3 million per loan while in the case of the NBS it is $12 million.

d. That the NBS pays no property tax which on its 2008 net asset position would amount to approximately $40 million annually.

e. That legislatively, NBS with its emphasis on mortgages and prescribed limits, is precluded from the risks of commercial lending faced by the commercial banks.

7. When stacked up against those realities, it is surprising that the NBS does not report higher surpluses than it currently does.

The reason in my view is the result of the inefficiencies of the monopolistic privileges enjoyed by the NBS under statute, politicised, ineffective and self-serving governance and a board and management that lack the range of skills that a modern financial institution needs in a competitive environment.

8. Mr Khan is the only person I know who speaks as a keen observer but who considers directing business to the competition a virtue. As far as I am aware, the only business the NBS ever directed to competing lending institutions was for temporary, bridge financing during the period when the security for loans was being perfected.

Thereafter, the NBS would grant the loan including such amount as to liquidate the bridge-financing.

I trust that I have clarified and addressed Mr Khan’s issues and look forward to his extending me reciprocal courtesies. I trust too that others, including the directors of the NBS, who make similarly uninformed comments and claims, would be guided accordingly.

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