Bruce Golding | The continuing debate on bank charges

The discussion on the fees charged for banking services requires a data-driven analysis in order to make an intelligent assessment of the pending increases that have been announced by our two dominant commercial banks.

Banks earn their income from three primary sources: net interest on loans disbursed, service charges, and investments and foreign currency trading. An examination of the latest financial statements of our two largest banks – National Commercial Bank and Scotiabank – provides a breakdown of their sources of income (See table at right).

Net interest income is easy to understand; it is the difference between interest earned and interest paid. Net non-interest income is a bit fuzzy. It is the figure derived after deducting “fee and income expenses”. In the case of Scotiabank, these expenses amounted to more than 50 per cent of the revenue from fees and commissions. It is not clear why these costs are not included in its operating expenses.

What is clear is that the share of revenue from fees and commissions is rising. It has practically doubled since 1999 when, according to a Bank of Jamaica report published in 2010, it stood at 12 per cent. What is also clear is that the reliance of the banks on income derived from loans is falling. It is now at 50 per cent – far below the world average of 61 per cent as published by The Global Economy.

HOST OF FACTORS

The ratio among the three income streams is determined by a host of factors. Income from interest on loans is affected by macroeconomic variables – interest rates, liquidity, inflation, fiscal performance, debt management, etc – which determine the extent to which people are inclined to invest and are able to access bank loans to do so. Banks are supposed to be the primary source of loan funding, serving as an intermediary between savers and investors. Interest income is also supposed to be the primary source of income for the banks. An economy with a gloomy forecast will deter investors, reduce the demand for loans and the interest income earned by the banks.

However, the inclination of the banks to issue loans is an important factor. Jamaican banks have been ultra-conservative and highly risk averse, particularly since the meltdown of the 1990s. The recent lament by Mr Gassan Azan, a creditworthy borrower, about his inability to secure bank financing for his ambitious agricultural project at Bernard Lodge illustrates the risk timidity of our commercial banks. Had he sought a car loan, or multiples thereof, he could have completed the transaction in 24 hours.

The cost of technology is another factor. We relish the convenience of being able to pay our bills online from our account, and to get cash and make deposits at the nearest ATM. But the technology that supports that and keeps it going 24/7 doesn’t come cheap. The banks have to pay for it and they have to recover that cost.

The fact is, however, that our banks have grown lazy. For more than two decades they were able to operate cosily, deriving most of their interest income from government paper. That source has diminished considerably, but they have not disturbed their slumber to find the imagination and creativity that are as much the hallmarks of good banking as is financial prudence.

Another factor that is hardly mentioned in the debate is the cost of compliance with the stipulations of the Bank of Jamaica. International practices with which our banks have to comply in order to maintain intermediate and reciprocal relationships, especially those intended to deter money laundering, can be onerous and costly.

In my view, the Bank of Jamaica, no doubt smitten by the banking collapse in the 1990s, has been far more stringent than it needs to be. Try opening an account at a commercial bank, or even transferring your account from one bank to another, and see the hoops through which you must jump, no matter how good your credit rating is. Our banks are quite happy to proffer Bank of Jamaica requirements as the excuse for their appalling lack of agility. They also offer it as an excuse for their interest rate spreads. In the case of NCB, the ratio of interest income to interest expenses is three to one.

LACK OF COMPETITION

In a market economy, the price of goods and services is supposed to be determined by competition. We can hardly claim to have competition in the commercial banking sector. The appearance of collaboration in the announcement of imminent increases in bank charges by our two major commercial banks, which control more than 60 per cent of the market, suggests cartelization.

The lack of competition is exacerbated by the fact that, increasingly, members of the public are obliged to have a bank account where the fees are imposed. Public-sector workers are no longer paid by cash or cheque, but by transmission to their bank accounts. Many private-sector companies insist on making payments directly to bank accounts. Commercial banks, therefore, enjoy an increasingly captive market that is ‘gougable’.

Faced with the same issue of rising bank charges in Barbados, Prime Minister Mia Mottley is contemplating legislation to regulate these charges. There are regulations in various jurisdictions requiring banks to provide timely information and adequate notice of changes in their fee structure. There are more stringent regulations regarding the management of credit cards, which are essentially unsecured loans, but I have been unable to find any country where banks are restricted in the charges they impose for their services.

The wider implications of such a move would need to be carefully considered, not the least of which is the option that the banks have to increase interest rates to recoup income lost by such restrictions, but which, in the process, discourages investment.

Bruce Golding is a former prime minister of Jamaica. Email feedback to columns@gleanerjm.com.

NCB Scotiabank

Net Interest Income $48.6 B (50%) $19.0 B (50%)

Net Non-Interest Income $22.5 B (23%) $7.2 B (19%)

Investments & Foreign

Currency Trading $27.0 B (27%) $12.0 B (31%)

Total Income $98.1 B $38.2 B