With the U.S.-led war in Iraq in full swing, local commercial banks will have to tolerate lower profits as Central Bank officials maintain lending restrictions imposed on September 5, 2001.
Those restrictions limit bank lending activity to total loans granted and committed up to that point which for the system was approximately $4.2 billion.
While collectively, the banks continue to be approximately $100 million below this ceiling, some of those institutions are at their limit and therefore have been agitating to have the overall limit increased or to have the limit removed all together.
But Central Bank Governor Julian Francis, who has been closely monitoring developments in the Middle East, told the Bahama Journal last night that it would be imprudent for banking institutions to significantly increase their lending activity at a time when the economy is experiencing no growth.
“The banks are motivated largely by profit and they don’t often see the big picture,” Mr. Francis said. “They don’t have all the information that we have about the economy in any event, but even if they do, they tend to be a bit more aggressive, a bit more optimistic about the short term and there is a danger for the banks doing that.
“If they are lending to persons who really cannot handle a higher level of borrowing, it means that the loans that the banks make are not as good as they should be and the bank itself is going to come under some difficulty at some point. Because at some point, those people are going to have to say to the bank ‘look, we’re sorry that we can’t pay.'”
Governor Francis indicated that the existing level of excess liquidity in the banking system is approximately $120 million, which is close to the maximum level experienced in recent years.
“When you say you have high levels of liquidity in the system, one thing which that means is that there is a lot of money available for people to use, for people to borrow, but because of the restrictions, the banks are not able to lend that money to the public right now,” he said. “It remains in the system for right now.”
He said while the credit restrictions are in place, there would be a tendency for liquidity to remain at these levels, which means that the commercial banks are having to maintain a far higher level of cash available for lending than they normally would. In the short term, Mr. Francis said this would have the affect of reducing profits in the commercial banking sector.
“The economy for the time being is not growing and it would not be a good idea for the banks to lend more money when the economy is not growing because it would be pure credit,” he said. “It would not be based on higher incomes or better earnings coming into the economy and it is a bad thing for banks to do that.”
It was the opinion of the governor that given the precariousness of lending at this time, it may be in the medium and longer-term interests of the banks to accept lower profits for the moment.
Banks collectively take in about $500 million in loan repayments annually. That money can be re-borrowed, meaning that lending in the commercial banking sector has not come to a complete halt.
But unlike in robust economic times, more and more Bahamians are finding it difficult to obtain loans, while some banks are seeing fewer loan applications.
Commonwealth Bank Chairman Timothy Donaldson said loan demands could be off for any number of reasons.
“One could be that the public is aware that the banks have a lending cap which has been imposed by the Central Bank,” Mr. Donaldson said, “or it could be that people, recognizing that the economy is weak, are being more prudent about borrowing and committing themselves in times of economic uncertainty.”
Mr. Donaldson, a former governor of the Central Bank, said that one way to prevent profit losses is to exercise strict control of expenditure.
He said that difficult economic times are not only affecting the banks, but the economy as a whole.
Mr. Donaldson said the reality is that some banking institutions have put in place cost-saving measures that would buffer them against any potential loss of income.
“We’ve been living with this for two years and have been preparing,” he said.
By Candia Dames, The Bahama Journal
