INTEREST RATES NOT FALLING FAST ENOUGH

In the first quarter of 2010 Government, in response to the clamor for reduction of interest rates in the banking sector, sought to intervene in the market by making amendments to several pieces of legislation, namely the Treasury Bill Act, Central Bank of Belize Act and the Bank and Financial Institutions Act.    The purpose of those amendments was to be reflected in a reduction in lending rates to Belizean businesses and households to ensure sustainability under the current economic recession.  A review of the Bank’s performance will reveal that changes are slow and although several of the commercial banks implemented new initiatives to meet client’s needs, they are not moving fast enough and going far enough.

It is a known fact that the cost of financing in Belize is high and accessing credit not as easy.  Average interest rates on deposits in 2009 were 6.19% while at March 31, 2010 a slight reduction to 5.86% can be noted.  A review over the same period revealed the weighted average interest rate on lending actually increased from 14.07% in 2009 to 14.22% for this year.  It is important to note that lending rates vary significantly between mortgages and consumer loans.  Scotia Bank does record the lowest residential mortgage rate at 11%, with Belize Bank and Heritage Bank recording the highest rate of 13%.  Thus the movement between average lending rate and average deposit rate shows very little adjustment on the bank’s interest rate spread which averaged 8.21% in 2009 and now in 2010 is 8.03%.  The interest rate difference between deposits and lending is the operating cost and profit margin of the institutions managing these deposits and making funds available for lending; taking into account the taxes payable by the banks.  So with the banks passing on their operating cost to consumers, it begs the question how can interest rates be expected to decline when some banks continue to record positive profit margins.

A review of the financial position of the commercial banks in Belize as at March 31, 2010 illustrates the level of profits that are being realized despite the fact that Belize’s economy is still in the midst of a recession.   A review of the banks profitability can be noted by their return on assets (ROA) and return on equity (ROE).  ROA measures the banks’ profits for every $1 of assets, with 1% being the benchmark.  The higher the ratio the more income is being generated from a given level of assets.  At the end of the first quarter of this year all banks recorded negative returns with the exception of Atlantic and Scotia Bank, with the highest being 3.7% after tax for Scotiabank Belize.  ROE on the other hand measures profitability from the shareholders perspective and likewise all banks with the exception of Atlantic and Scotia Bank recorded negative returns.  The ROE could be further analyzed by decomposition of the ratio (DuPont analysis) to ascertain what is driving the high returns.  This writer would opine that both banks have been the beneficiary of large term deposits and operational accounts from public and private institutions such as the DFC, Social Security Board and Belize Telemedia Ltd.  So in effect, it is the Government that is contributing to the profit margins for those banks, instead of having financial decisions made based on risk and return analysis.

Another pointed issue is the availability and return on government securities.  Treasury Notes current return for a one year paper is 6.0% interest rate and for a two year maturity interest rate is 7.0%.  The objective of the legislative amendments was to have banks be mandated to hold larger quantities of these securities in an effort to drive interest rates closer to those levels.  However, as at March of this year ScotiaBank held the most with $60.6M and Heritage Bank the least with only $10.1M.

Government intervention through the Central Bank of Belize will be slow to manifest itself, due in the main to the fact that Government lacks the institutional capacity to avail itself of the tools required to effectively guide monetary policies.  The Central Bank has indicated the existence of a monetary policy reform project that has been in operation since 2009, further implementation in 2010 should see the formulation of liquidity management policy.    However, the implementation of any such policy remains elusive has the Government and Central Bank have both demonstrated impotence in meaningfully addressing interest rates.  Therefore, consumers are left to wait and see how best to survive under the current economic climate and play hop-scotch between the various banks while Government tries to get a grip on the financial situation.  While the ideas are being marinated, Belizeans continue to lose their homes.

Gwyneth Sydney Nah

Send comments to GwynethNah@gmail.com

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