In the shadow of FINSAC - How the financial system exploits customers

Garnet Roper, GUEST COLUMNIST

AS A public theologian, I read two texts, the text of Holy Scripture and the text of life's experiences. I see my task as interpreting each in the light of the other and bringing to bear the one upon the other. About 35 years ago while I served as an inner-city pastor in downtown Kingston, one afternoon, a young man I knew from the community came to see me. He was distraught and told me that he had just slashed all four tyres on the motor vehicle that belonged to the CEO of a major business operation near to where the young man lived.

He explained to me that he had been for years a chain snatcher. He said that, one day, he and a partner in crime committed a robbery in the city-centre area. The police chased them until they came near to where my office, the church, was. His friend went one way and he another. He hid on the roof of a building while his friend was cornered in the parking lot across the road. He witnessed the police shoot and kill his friend with a single bullet to his forehead.

He said that, when he came down from where he was hiding, he made up his mind to give up his life of crime. He got a job at Georgie Girl Shoes Store in Half-Way Tree. He kept that job and from it he learnt shoemaking. He said that he joined the bank at the corner of Law Street and Duke Street and he had saved up to that point the grand sum of J$200 in his savings account. The reason that was important is that he had learnt that you are entitled to borrow three times the amount you have saved. So he saw some shoe laces on sale for $600. So he had gone to the bank to borrow the $600.

The bank told him that if he found someone to act as guarantor for the loan they would lend him the money. He had gone to the CEO, whom he said was the only person he knew with a bank account, to ask him to stand surety. The CEO knew him to be disreputable and refused. So he slashed the tyres. With the help of someone in the bank, I acted as the guarantor. The young man got the loan, repaid the loan, borrowed a bigger loan, opened a shoemaking establishment which, in the space of 24 months, became the leading employer of young people, making slippers, handbags and other leather products in that part of the city. He kept borrowing until he no longer needed to borrow.

unwilling to lend

I tell this story to make a point that there is no commercial bank in Jamaica in 2013 that has any circumstances in which such a loan could be made. The only way someone like that could get a loan from a bank is if an employee of that bank made a personal loan to such a person. In order to indicate the reason this is a grave indictment, I point to two things: the first is to Jamaica's Gini Co-efficient, which measures relative income inequality. In 2010, the top 20 per cent of Jamaica's population earned 51 per cent of total incomes, and the lowest 20 per cent (the poorest quintile) earned five per cent of total income. The top 10 per cent earned 35 per cent of incomes and the bottom 10 per cent earned 2.4 per cent of all incomes. On the other hand, 53 per cent of all employed labour in Jamaica, according to the most recent surveys, is employed by the informal economy.

This means that it is people like the disreputable young man whose narrative is outlined above that are responsible for real growth in employment. The second factor to be noted is that the Jamaican economy is now in downward spiral, being led by the devaluation of the Jamaican dollar. The new target is J$125 to one US dollar. It is not a matter of if, it is a matter of when we get to that new abysmal threshold. There is only one thing that can give the Jamaican economy a ghost of a chance of slowing or reversing that downward spiral; it is a robust productive and entrepreneurial sector enjoying generous and unmitigated support by the financial sector. It is in this key area of need that the Jamaican economy is most profoundly wanting.

The culture and nature of the existing financial sector are not inclined to offer the credit and support on which the expansion and the expansion of production in the Jamaican economy are to be grounded. This is so because of two reasons: the first is an overcompensation for what may be called the FINSAC years. During the period prior, leading up to the FINSAC, the oversimplified narrative suggests that there was the profligate offer of credit, the result of which is that it cost the Jamaican State dearly to bail out the financial sector and rebuild a more highly regulated financial sector. It appears, however, that the pendulum has swung too far in the opposite direction. The financial sector has moved from ostensible profligate credit to a culture of 'no'. It has built a substantial cadre of technicians, reposed in ziggurats, whose job is to tell customers no. The only credit that is offered these days is to those who do not need credit. In the last 10 years, credit to the informal first, and then to the productive sector second, have been four and 11 per cent, respectively. Even the Development Bank of Jamaica (DBJ) grants 70 per cent of all loans to the government sector. The offer of credit by the DBJ is at best tepid and anaemic. This is untenable. The devaluation cycle does not work, because it leaves the people behind. Taking a chance on the people by funding their ideas, their ambition and their business proposal is the only hope of the society. The great societies all make space for their people, there is no other way. This includes making credit available to tertiary students, a key development instrument, and making credit available to SMEs.

SECOND REASON

The second reason for the conservatism and the no-risk policy on the part of the financial sector is pernicious and self-indulgent if not also completely unjust. It is because banks have been allowed to prosper by charging their customers exorbitant fees. I offer an example from the Jamaica Urban Transit Company (JUTC). In order to deposit cash into its account in the bank, the JUTC pays the commercial bank J$3.90 for every $1,000 dollars in cash it deposits into its account. This means that the bus company pays the equivalent of 20 per cent of a concession fare (which is J$20 for schoolchildren, the disabled and seniors) to commercial banks, just to deposit that J$20 into the bank. It receives no other service for this fee. So the JUTC's decision to go cashless is not merely in order to reduce fare box leakage and to improve the efficiency and cost efficiency of its accounting system, it is profoundly to put a breaker on the exploitation by banks of their customers. So long as the financial system has the option of indulging itself on exorbitant fees at the expense of its customers, it can build the culture of 'no'.

I offer the following three suggestions to the minister of finance to stimulate the expansion of credit on which an expansion in the productive capacity of the country inevitably relies. The first is that the minister should re-examine a proposal that to my certain knowledge has been with the Ministry of Finance for some time. It is to offer the backing of government guarantees for start-up businesses that borrow in their first year of operation, to the extent of 50 per cent of the total credit offered. If start-ups that employ people fail, they usually do so in the first year of operation. There is a model used by the United Kingdom (UK) about which the minister could advise himself. The UK government pays 100 per cent of the loan for businesses that fail within the first year. It would make a difference. A finite sum could be identified, possibly from a bilateral partner, to be used to indemnify 50 per cent of the risk involved in making credit available to this sector.

REGULATE FEES

A second suggestion is that the Bank of Jamaica (BOJ) ought to regulate fees charged by commercial banks. It ought not to be left to banks to profit to the extent they are at the customers' expense. Banks claim that their modus operandi is in the interest of customers. This is less and less the case. A customer investing J$5m in 2009, the first year of JDX in 2009, had US$58,000 with an exchange rate of J$86 to one US dollar. That same J$5m in 2013, with an exchange rate of J$101 to one US dollar, that has remained with the same bank, is worth US$49,000 in 2013. How has the bank helped? Banking ought to be providing the customer with more than merely warehousing services. As it is, fees are charged the customer to the benefit of the bank but with no real added value to the customer. The BOJ needs to pay more careful attention and stimulate the banks to offer services on which they make a just return. Banks ought to be required to make loans in order to be able to stay in business.

Third, I think that Minister of Finance Dr Peter Philips ought to consider licensing the Chinese to open credit windows in Jamaica. My understanding is that China has more than US$1 trillion available to provide credit through financial houses. What this would do is to provide resources for the further development and expansion of the indigenous, productive and entrepreneurial sector of the Jamaican economy.

Rev Garnet Roper PhD, is president of the Jamaica Theological Seminary and chairman of the Jamaica Urban Transit Company board. Send comments to columns@gleanerjm.com.