INTEREST RATE DEBATE HEATS UP IN JAMAICA

UNCLAS SECTION 01 OF 02 KINGSTON 001446

SIPDIS

STATE FOR WHA/CAR/ (WBENT),WHA/EPSC (JSLATTERY)

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR L LAMONICA

E.O. 12958: NA
TAGS: ECON EFIN JM
SUBJECT: INTEREST RATE DEBATE HEATS UP IN JAMAICA



1. Summary: Credit starved Jamaican businesses are
arguing with commercial banks about the high interest rate
regime following the reduction of interest rates on Bank
of Jamaica open market instruments, which are at their
lowest levels in over a decade. Commercial banks'
unwillingness to reduce rates led to calls for increased
competition through the granting of additional banking
licenses. Business leaders wrote to the Fair Trading
Commission requesting an investigation of the commercial
banks regarding charges of abusive practices and apparent
interest rate price gouging. Bankers argued that they
operate in a competitive environment in which interest
rates are dictated by free market conditions, and have
told the business owners that they're free to take their
business elsewhere. End summary.


2. Businesses represented by the Jamaica Manufacturers
Association (JMA),the Jamaica Agricultural Society (JAS),
and the Jamaica Exporters Association (JEA) are locked in
a heated debate with the Jamaica Bankers Association (JBA)
about reducing spreads and, by extension, lending rates to
the productive sector. The calls have come against the
backdrop of a decline in benchmark interest rates, which
have moved from 21 percent in November 2003 to the current
rate of 13 percent, the lowest in over a decade. The
unwillingness of commercial banks to reduce their rates
prompted members of the productive sector to encourage new
players to enter the market to drive down rates.
PanCaribbean Financial Services (PCFS) responded to the
call by applying to the Bank of Jamaica (BOJ) for a
banking license. In applying for the license, Donovan
Perkins, of PCFS, posited that increased competition would
lead to a reduction of spreads and, hence, lending rates.


3. The JMA and the JAS have also pointed out that, at
present, businesses borrow at rates of approximately 22 to
23 percent, which are prohibitive for small and medium-
sized firms. The groups stated that with banks offering
depositors as low as four percent, they were receiving an
18 percent interest rate spread. JEA President Andre
Gordon also stated that high interest rates are major
factors inhibiting the ability of exporters and
manufacturers to compete with regional counterparts. With
little response from the bankers association, the JMA and
JAS stepped up their pressure by sending a letter to the
Fair Trading Commission (FTC) requesting an investigation
into the activities of commercial banks. "We write to
make an inquiry into what appears to be an abuse of
excessive margins and overpricing which prevails because
of an existing market structure, which resembles that of
an oligopoly, which allows for enough market power to
exist for abusive charges to be made on customers," the
letter, dated April 14, stated in part.


4. The lobbying drew the ire of the Jamaica Bankers
Association (JBA),which replied in a newspaper
advertisement that, "We have noted with great concern the
pronouncements of public officials and some interest
groups, who are demanding investigations into the
operations of banks to determine whether price gouging is
taking place. The JBA considers these outbursts to be
highly irresponsible, and trust that the Minister of
Finance and the regulators will, in due course, take a
stance to denounce such utterances". The bankers, in
addition to pointing out that they operated in a
competitive industry in which market conditions dictated
interest rates, stated that recent assertions about the
level of interest rate spreads were basically inaccurate
and were, for the most part, grossly overstated. The JBA
also stated that when interest rates increased in 2003,
banks did not increase their lending rates in tandem with
trend. They also suggested that the lack of a credit
bureau in Jamaica means that banks were unable to properly
assess the risk profile for credit.


5. The JBA also posited that more Jamaican businesses
should seek equity capital through the stock market rather
than depending on commercial bank loans to fund their
businesses. The group further stated that a number of
Jamaican businesses were afraid to go to the market to
raise funds because they did not want to disclose the
information needed to attract capital from the equity
market. "Jamaican businesses need to put equity in their
business and commit to their business and stop
complaining," said William Clarke of the Bank of Nova
Scotia, the island's most profitable commercial bank.
Clarke has also suggested that a number of local
entrepreneurs have refused to access the various low
interest rate schemes offered because they do not want to
pump in the required capital or engage in the level of
transparency needed to assess properly the risk involved
in lending.


6. Comment: The interest rate debate continue for some
time, as banks will not be quick to reduce spreads given
their high cost structures and the need to maintain profit
margins. Commercial banks also recognize that they
operate in a market where they are free to set rates based
on market conditions. However the GOJ has just raised
over USD 300 million from the international capital market
and, barring any shock, the GOJ should be able to reduce
its appetite for funds on the local market. This will dry
up the relatively safe investment haven for commercial
banks, thereby forcing them to find lending opportunities
in the productive sector. Even then, a number of the
businesses clamoring for lower interest rates might still
find it difficult to access loans at competitive rates,
given the reluctance of private firms to divulge the
necessary information required to raise capital. End
comment.

Robinson