AS I SEE THINGS: Banking nightmare: part 1
FOR MANY YEARS NOW Caribbean countries have been struggling immensely to record even what can be considered minimum rates of real economic growth in a sustained manner. Yet, commercial banks, which are supposed to play a crucial role in our economic transformation, continue to behave in ways that leave much to be desired.
While the management of those entities are free to exercise whatever judgements they wish in the execution of their duties and responsibilities, I am firmly of the view that the unsuspecting public too also has a right to be sensitised of the conduct of those financial institutions given their importance in shaping the economic future of our region. For that reason, I have decided to dedicate the next three columns to the role and behaviour of commercial banks operating in the Caribbean, the buying out of local interest in said entities, and the clear lack of real competition among the banks.
Consider this – businessdictionary.com characterises the roles and functions of a commercial bank as: “Privately owned financial institution which accepts demand and time deposits, makes loans to individuals and organisations, and provides services such as documentary collections, international banking, trade financing. Since a large proportion of a commercial bank’s deposits is payable on demand, it prefers to make short-term loans instead of the long-term ones (which are handled by organisations such development finance companies and home mortgage companies).”
In the context of the Caribbean, financial institutions that discharge such huge responsibilities must, by definition, have a meaningful role to play in the economic development of our countries. Further, the economics and finance literature is replete with theoretical explanations and empirical findings that establish a link between finance and economic growth, dating back to Joseph Schumpeter in 1911. In Schumpeter’s conjecture, commonly branded as the theory of “creative destruction,” innovation and entrepreneurship are the driving forces of economic growth.
Schumpeter viewed finance as an indispensable building block of this progression, arguing essentially that innovation and entrepreneurship will blossom when the economy can fruitfully muster productive savings, allocate resources efficiently, reduce problems of information asymmetry and improve risk management. Clearly, these are all services provided by a developed financial sector of which commercial banks are central.
If, therefore, commercial banks do have a significant role to play in the reconfiguration of Caribbean economies, why then are we witnessing the failure of both governments and central banks to regulate adequately the behaviour of the banks in the public and consumers’ interest? Indeed, the failure of policymakers to recognise, through their actions, that the fundamental role of commercial banks in any economy and, especially in a developing economy, is to provide the vital lubricant required for economic growth and development: credit at an affordable level which, in turn, requires that the conduct of banks encourage, not discourage, saving by the populace.
In that respect, legislative, regulatory, fiscal and monetary measures can and should be taken by all governments concerned about their countries’ development to ensure that banks perform the vital role they ought to play in our countries’ transformation. That is important because quite frankly banks are not like any other businesses. You see, other businesses can fail without bringing down an entire economy. But, as the financial crises of 2008/2009 in the United States and the mid-1990s in Jamaica demonstrated, bank failures can potentially lead to the meltdown of an entire economy, requiring extreme measures to forestall. And that is the plain truth.
Going forward, I want to offer this straightforward advice to the management of our commercial banks: please refrain from activities which discourage savings and making obtaining loans for productive purposes difficult and anti-developmental.
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