A pragmatic policy to lower borrowing rates

Joseph M. Matalon, Guest Writer

Interest rates, at least the rates at which the Government is able to borrow, are just 40 per cent of what they were only a year and a half ago and are at the lowest levels in a quarter of a century.

This is a remarkable achievement by policymakers and a wide range of stakeholders who deserve credit for the Jamaica Debt Exchange, the International Monetary Fund programme and a commitment to fiscal discipline - at least so far.

Nevertheless, the interest rates that matter most to Jamaican businesses, large and small, are not the rates at which the Government can borrow, but the rates at which they can access financing to grow their businesses. These borrowing rates have seen only very modest reductions.

The disparity between benchmark rates and actual borrowing rates has sparked outrage on the part of many borrowers and drawn the ire of the Ministry of Finance.

We have a pragmatic policy recommendation to lower borrowing rates quickly that we feel borrowers, the Government and banks should all support.

Eliminate some fees

We believe that stamp duties and registration fees incurred by borrowers when switching loans from one financial institution to another should be eliminated.

In a free market, prices decrease and service levels improve as a result of competitive forces, not decree.

Banking is not immune to this reality. A critical component to lowering borrowing rates is to increase competition without compromising the stability of the financial system.

Currently, the costs of switching a loan from one financial institution to another can be as high as 2 per cent of the loan balance, counting only fees imposed by the Government.

As a result, even if borrowers are able to secure significantly cheaper financing from another source, it seldom makes economic sense for borrowers to switch, especially since these transaction costs must be paid up front.

The result is that competition for loans takes place only once: at the time of lending, and not throughout the life of the loan.

We believe that eliminating stamp duties and registration fees on switching a loan from one financial institution to another would be an important step towards lowering borrowing rates for Jamaican businesses.

It would also have virtually no cost to the Government. Since borrowers almost never refinance with other banks, the Government does not collect significant revenues from imposing these costs. Conversely, they don't stand to lose significant revenue if they are abolished. Furthermore, we believe that these reforms can be enacted by ministerial order, therefore avoiding a lengthy legislative process.

Banks will benefit

Finally, we believe our proposal is good for the banks, too. While it is intended to increase competition, we do not foresee that it will have a dramatic financial impact on banks' profits. Refinancing will still entail legal costs and an arduous process of paperwork (more on that in an upcoming note).

Furthermore, supporting this proposal would be a mild concession relative to the more dramatic proposals gaining traction in the national discourse such as more regulation, higher taxes and capping rates, which we believe would not only be worse for banks, but are misguided policy initiatives in general.

Banks point out that high spreads are partly a function of the high cost of doing business in Jamaica.

We agree, and believe that this policy proposal is in keeping with the principle of lowering costs for a wide range of Jamaican businesses.

Our proposal is not about rates, it's about growth and jobs. There are many factors that stimulate growth and employment.

While borrowing rates are not a panacea, they are a critical component.

We believe that by lowering the actual rates at which businesses can borrow, and reducing the costs they incur in doing simple transactions, businesses will make more investments, spark more economic activity and hire more people.

We are hopeful that our proposal can offer a common-sense and practical way forward that the Government, the banks and borrowers can all support.

Joseph M. Matalon is president of the Private Sector Organisation of Jamaica.