The Central Bank of The Bahamas has lifted restriction on three years of pent up demand for money. In 2003 the Central Bank reported that for the quarter ended December 2003, domestic banks ﾓrecorded a more sizeable reduction in profits.ﾒ
According to the Central Bank Quarterly Economic Review, (March 2004) domestic bank profits were down 21.1 percent from $34.3 million to $27.1 million. The drop was considerably greater than the corresponding period in 2002 when the loss was a mere $1.6 million or 4.5 percent.
In its report the Central Bank had observed that ﾓcapacity under the credit ceiling imposed by the Central Bank in September 2001 was nearly exhaustedﾅﾒ During the curb on borrowing, which has seen reserves balloon to an all time high of $650 million, 2003 saw a reduction in personal loans of $14.5 million. By the first quarter 2004, a the Central Bank said there was ﾓcomparative upturn of 1.0 percent in private sector credit lead by a ﾓ2.3 percent rebound in personal loans.ﾒ ﾠ
Central Bank economist John A. Rolle told the Business Journal that contrary to what might be expected, the bank was not expecting any appreciable rise in interest rates.
ﾓWhen liquidity is used up rates go up because there are more persons demanding money than is available,ﾒ Mr. Rolle explained. ﾓBut that isnﾴt the case. A lot of liquidity takes pressure of the rates. So we are not expecting to see any increases in interest rates as a result of removing the restriction.ﾒ
Mr. Rolle said if there were changes to the interest rates the trends would not become evident for another 12 months.
ﾓOver the next 6 months is a traditional period with her demand for money, particularly in December,ﾒ Mr. Rolle said. ﾓOne would have to wait for 12 months before being able to see interest rate trends arising from removing the restriction from bank lending.ﾒ
He acknowledged that there would be pressure on the banks to lend but warned that consumers should not expect that removal of the restriction means that the banks would relax their credit worthiness criteria.
ﾓThe public should not see this as meaning they could just go into the bank and get a loan,ﾒ he said. ﾓThe banks will still determine whether the person can repay the loan. The banks will be the ones to determine how much credit is provided and who qualifies.ﾒ
Ross McDonald, Chairman of the Clearing Banks, the body representing the domestic banking sector, told the Business Journal in a telephone interview, that it was ﾓtoo early to say what impact Central Bankﾴs move would have on interest rates.ﾒ
The career banker and vice president of the Royal Bank of Canada Group, Mr. McDonald said that the banks were ﾓall pleased that the lending cap had been removed.ﾒ
While admitting that the cap did have some impact on the banksﾴ performance, Mr. McDonald said it was difficult to say to what extent the cap had affected domestic banksﾴ performance.
ﾓItﾴs a chicken and egg,ﾒ he said. ﾓUndoubtedly it had an effect but demand was also down.ﾒ
He said one could not say what either factor had contributed separately but that together they had affected the sectorﾴs profitability.
Mr. McDonald praised the Central Bank in its role of overseeing and maintaining the stability of the system.
ﾓThe Central Bank role is to monitor the stability of the system and we support it,ﾒ he said, adding ﾓonly time will tell what will happen.ﾒ
ﾓThe impact of the move would require some time to evaluate. he said. ﾓAs a group
Noting that consumers borrow in cycles Mr. Rolle said it could well be that the banks are more optimistic than householders. Referring to the substantial reduction in private sector credit during 2003, Mr. Rolle said one factor that would affect the demand for credit and thus influence rates, is whether households are willing to assume the same level of debt they had before.
ﾓDemand for money goes in cycles and response to lifting the restriction will be determined in part by where most households are in their cycle,ﾒ Mr. Rolle explained. ﾓWe make major purchases every few years.ﾒ
From past performance it is possible that the domestic banks will increase advertising particularly to their preferred customers, to stimulate demand for loans. In the period leading up to the imposition of restrictions the banks competed fiercely among themselves for the mortgage market. Competition between the banks saw mortgage rates decline from 10 and 9 percent to just over 8 percent.
The domestic banks will also be looking for ways to regain profit levels lost during 2002 and 2003.
In light of the pressure on domestic banks to improve their profitability, the Central Bank in its release announcing the lifting of restrictions cautioned the banks to practice restraint.
ﾓNew credit should be provided only after careful review of customersﾴ existing levels of indebtedness, their ability to repay increased obligations and the extent of borrowersﾴ to provide direct equity contributions to supplement loan financing,ﾒ the release stated.
Similarly the release called on banks to ﾓexercise responsibility in their marketing campaigns.ﾒ
Presumably the regulators are concerned that in their exuberance to recapture lost ground the banks may be tempted to put the welcome mat without paying too much attention to the credentials of those stepping across their threshold.
C. E. Huggins, The Bahama Journal
