Attorneys
"Are the Caribbean's Banks Treating Their Customers Fairly?"
Inter-American Dialogue's - Latin America Advisor - Financial Services
September 6, 2010
Q. Are fees charged by banks in Jamaic and across the Caribbean fair to customers and good for business? Are banks adjusting interest rates appropriately accross the region? Is the current level of regulation and consumer protection laws for the Caribbean's banks and financial services companies appropriate?
A. Contrary to Finance Minister Shaw's accusations, the motives behind Jamaican banks' reluctance to lower their interest rates despite reductions in the central bank's benchmark rate are not necessarily invidious. Instead, this seemingly unjust disparity can be reconciled by reference to two key economic factors prevalent both in Jamaica and throughout the Caribbean region: a) mass banking deregulation that reduced the role of state-owned banks and, in turn, lessened competition over commercial interest rates and 2) high fiscal deficits that drew central banks' attention toward issues of monetary policy and away from basic banking supervision. In the early 1990s, over 50 percent of total banking assets in Jamaica and throughout much of the Caribbean were state-owned. This is no longer the case today. Officials began to realize that the existing governance structure was in large measure responsible for the severe shortcomings that have plagued the Caribbean banking system, and that the heavy weight of public sector financial entities was holding back critically needed financial sector development. Consequently, many such banks were privatized. Unlike state-owned banks, private banks are less beholden to the benchmark rate because they do not borrow exclusively from the central bank's discount window. Their interest rates, in turn, tend to run higher. Moreover, due to Jamaica's chronically high fiscal deficit, its central bank has been forced to adopt a bifurcated role, directing its focus more toward monetary policy and price stabilization than the regulation of commercial banks. This relative lack of regulation further diminishes the central bank's leverage over commercial interest rates, for it fosters a more liberal marketplace where rates are better determined by supply and demand than by government fiat. The disparity between Jamaica's commercial and benchmark rates is attributable not to some concerted scheme to defraud consumers, but to natural economic forces that help define the contours of any financial marketplace. Drastic government intervention to artificially depress interest rates in Jamaica is not only unwarranted, but can lead to graver consequences than those which such measures are designed to prevent. Read more...