THE DEREGULATION of the savings account rate by the Central Bank of Barbados will be a game-changer for individuals and institutions alike. Barbados will now have a market-determined savings rate.
At the best of times, within the last decade, the 2.5 per cent return (less 12.5 per cent withholding tax on interest payments) at the banks was often not adequate to compensate for our local inflation rate.
This led to the erosion of purchasing power of any funds being saved on a medium to long-term basis.
The removal of a minimum savings rate has been generally met with cautious optimism by fund managers. With a savings rate of one per cent to 1.5 per cent expected from the commercial banks, many traditionally conservative Barbadians will be forced to find alternative vehicles for their investing and savings dollars.
The ability of money to do work in its most effective form often depends on its ability to flow freely as market conditions allow.
Artificial pegs, while having some merit in inefficient markets, can also hamper the movement of money to the location of greatest utility.
The removal of such barriers, in theory, causes natural competition within the banking structure.
As a result, a more efficient financial market is experienced and this in turn leads to better decision making for people looking to capitalise their returns according to their appetites for risk.
The expected decline of the savings rate will result in the decline of the cost of funds for the banking structure. This should result in favourable margins and competitive loan rates over time.
The lower rates on loans is attractive for individual and commercial credit. Loans, mortgages and other lending instruments can now be offered to the public with more attractive terms and thus allow for the disbursement of cash into the economy.
This facilitates favourable activities such as capital investment, business growth and increased consumer spending.
Moreover, the deregulation will prove advantageous to the investment markets.
With lower levels of interest at the banks, return-seeking clients and investors can now find increased relative benefits from other forms of investment. Endowments, mutual funds, stocks, bonds and other kinds of financial instruments should benefit from increased annual subscriptions. Increased demand for these equity and debt instruments can result in more buoyant financial markets and further financial development.
Investors can also expect to benefit in the mutual fund investment space. Those with a higher appetite for risk will tend towards the potential rewards of the local growth and balanced funds and the investors with more conservative tastes, will lean towards the safer income funds.
The potential for returns with these instruments, whether through capital appreciation or income generation, should provide long-term growth opportunities.
This change in regulation has the potential to create value, enhance efficiency and lower financial costs. While there will be threats to institutions across the financial space which are not subject to lower overall cost of capital but still have to offer competitive products, the opportunities to the economy may be immeasurable.
The true winners of this financial shift will be those who understand the opportunity costs within the new financial environment and those who understand the opportunities beyond the bank.
• Omar Kennedy is the wealth manager at Sagicor Asset Management Inc. and holds an MBA from Pace University in New York.
