In a move that was widely welcomed in the local banking sector, the Central Bank of The Bahamas on Monday lifted the restriction on domestic banks’ Bahamian dollar lending, explaining that the decision was based on the improved outlook for the Bahamian economy.
The restriction had been in effect since September 20, 2001.
Central Bank officials noted in an official press statement that they paid particular attention to better projections for tourism and foreign investments, which are expected to provide stronger support for domestic consumption and imports.
ﾓThe Central Bank will continue to monitor domestic economic trends, to ensure that credit expansion is consistent with economic growth,ﾒ the release said. ﾓIn the future, the Bank will place greater emphasis on achieving minimum levels of external reserves relative to the deposit liabilities of the banking system, and adjust its credit polices as appropriate to accomplish this.ﾒ
Now, lending institutions are expected to pay particular attention to the ﾓcreditworthinessﾒ of borrowers, according to officials.
According to the Central Bank, new credit should be provided only after careful review of customers’ existing levels of indebtedness, their ability to repay increased obligations, and the extent of borrowers’ ability to provide direct equity contributions to supplement loan financing.
In a carefully crafted message to local banks, banking regulators also said they should be encouraged to exercise responsibility in their marketing campaigns, in view of the risk of inviting members of the public to undertake levels of borrowing which are beyond their ability to repay.
The Central Bank has advised, with immediate effect, the adoption of certain guidelines, including limiting the existing or resulting total debt service ratio and requiring a minimum equity contribution of 15% on all personal loans, with the exception of those secured with mortgage indemnity insurance.
ﾓIn its prudential oversight of the system, the Central Bank will continue to closely monitor lending to households, loan repayment delinquencies and asset quality, and may impose additional credit inhibiting measures on individual financial institutions should circumstances so require,ﾒ the bank said.
Last month, the Governor of the Central Bank Julian Francis told a Grand Bahama audience that with the level of foreign reserves climbing steadily the situation makes a good case for easing tight controls on lending that have been in place for nearly three years.
He was asked by the Journal whether the current level of reserves justify a lifting of the restrictions.
ﾓNot in and of itself,ﾒ he said at that time, ﾓbut it does suggest that we might be at the point where we should be looking carefully at that and we areﾅWe are currently in the process of looking at that with a view to whether and when we should make a move.ﾒ
When he made his budget communication to Parliament in May, Prime Minister Perry Christie suggested that now may be the time for the Central Bank to lift the cap on lending to help spur economic activity.
The government hopes that an expansion in credit would lead to more imports and stronger revenue collections.
When the Bank imposed the restrictions in September 2001, Governor Francis noted that the measures were necessary to help prevent the foreign reserves from being depleted.
Those reserves are important because they represent the amount of money the country has to pay for its imports and other foreign expenditure. They also help ensure that the Bahamian dollar remains on par with the U.S. dollar.
In May, the prime minister pointed out that the external reserves stood at around $600 million, the highest level they have ever been.
A recent report from the Central Bank last week indicated that the reserves now stand at more than $651 million.
Tameka Lundy, The Bahama Journal
