The Tribune

The Bahamas' consumer loan "madness" is making sustainable economic development impossible, as more than nine out of every 10 credit applications fall into this category.

Franklyn Wilson, the Arawak Homes chairman, told Tribune Business that the seeming addiction of Bahamians to personal borrowing needed to be "drastically reversed" if the country was to prosper.

Suggesting that Bahamians had to "re-order values" and change their financial priorities, Mr Wilson said all parties - banks and borrowers - may have to "take a hit" to successfully alter course.

And, responding to new Central Bank of the Bahamas data, the businessman called on politicians from all parties to explain in detail how they planned to tackle excess consumer borrowing.

Mr Wilson was speaking after Central Bank statistics for the 2015 second quarter revealed that 90.5 per cent of the 11,435 loan applications received by commercial banks during that period were for consumer credit.

The 10,350 consumer loan applications dwarfed those for both mortgages and commercial loans, which stood at 748 and 337, respectively.

And the Central Bank report also revealed that more than out of every four consumer loans in the 2015 second quarter were for debt consolidation - the traditional 'last resort' to stave off repayment default.

Consumer loans typically involve borrowing funds for auto purchases, travel, education and medical bills. They are relatively short-term, and carry higher interest rates, compared to mortgages.

Bahamian commercial banks having increasingly focused on consumer lending in the 2008-2009 recession's aftermath, viewing them not only as higher yielding but also as lower risks than mortgages.

Consumer loans can be secured via salary deductions, thus guaranteeing repayment, and are viewed as more attractive that a mortgage market where more than $600 million worth of credit is delinquent.

Mr Wilson, though, has long been among those arguing that the consumer lending binge continues to undermine the Bahamas' economic development.

They believe the focus on this sector, to the detriment of all others, is diverting much-needed funding away from productive areas of the Bahamian economy - the real estate, construction and housing markets, plus entrepreneurs and the business community.

"What is happening in the banking sector in this country has to stop," Mr Wilson told Tribune Business on Friday, in response to the Central Bank report's contents.

"There's a need for a serious public policy change as it relates to bringing more discipline to the consumer credit market. It has to happen. This country cannot progress significantly further unless this happens."

Mr Wilson described the 1990s move to scrap the 35 per cent 'down payment' requirement on all consumer loans as "the worst public policy decision".

He likened debt consolidation as "going from Peter to Paul", and added: "That's all it is; you run from one bank to the next. You're moving from your left pocket to your right pocket. It's madness.

"It's impossible, in my view, for the Bahamas to have sustainable economic development without this matter being addressed. It's impossible.

"I don't care how many Baha Mars we build, what else we do; until this is addressed it's impossible to have sustainable economic development. It may be economic growth, but it is not development."

The Central Bank's figures for the period April-June 2015 reveal that, out of 2,606 debt consolidation loan applications submitted to the seven commercial banks, some 2,106 or 80.8 per cent were approved.

"Overall, consumer loans had an average approval rate of 83.7 per cent, with locational distributions of 84 per cent, 85.6 per cent and 72.7 per cent for New Providence, Grand Bahama and the Family Islands, respectively," the Central Bank said.

It added that the relatively high loan 'approval' ratios - more than four out of every five submissions were granted - indicated that the majority of applications were coming from 'good quality' borrowers who had the ability to meet bank lending criteria.

Yet the Central Bank said 57 per cent of 'denied' consumer loan applications resulted from the borrowers already having "elevated debt service ratios" - meaning they have too much debt, and are too highly leveraged.

"The public may already may understand that to mean 'maxed out'," Mr Wilson told Tribune Business of the 'denied' applications.

"They're maxed out. You cannot go back; you are already maxed out. How are you going to live? You've used this credit as your lifeline and can't get any more. You're like the alcoholic who can't get to his room. What are you going to do?"

And the Central Bank itself conceded: "The results also reinforce the challenging economic context, where consumers remain unable to meet the 45 per cent debt service ratio and whose ability is circumscribed by underemployment and the lack of funds to make a down payment.

"This is evidenced by the significant gap between the number of consumer applications -which are generally for small value loans - and mortgage proposals approved during the period."

Mr Wilson urged all politicians, and political parties, to explain their proposed policy response to the Bahamas' consumer lending/borrowing binge and its consequences.

He suggested that all sides, banks, borrowers and the Government, would suffer "some pain" in any correction. For this reason, the Arawak Homes chairman said they needed to spell out "how fast" they would go, so as to minimise the overall economic impact.

"There is a serious need to tackle this issue through public policy," Mr Wilson told Tribune Business. "All the political parties in the next general election need to tell the people this can't realistically be addressed without some pain.

"How fast, or slow, are we going to reverse this trend? It's not whether we do it; it's the speed at which we do it, because it will impact the economy.

"The pace at which they seek to restore prudence and equilibrium in the market is the question for every politician," he added.

"In doing it, to what extent do we deal with this thing that the bankers call 'moral hazard'? You don't reward people for how reckless they were in the past, but they need to be restructured and reorganised."

Mr Wilson said both consumers and the banks were "going to have to take a hit" for the Bahamas to escape its over-zealous consumer lending and borrowing.

He added that even the Government would not escape, suggesting that "the explosion in consumer lending" had helped to boost its tax revenues by financing auto purchases.

Almost 20 per cent, or one in five, consumer loan applications in the 2015 second quarter were for auto purchases.

"This is terrible," summarised Mr Wilson. "We can't build a country like this. How do we reverse it and get back to a culture of self-reliance, get our people to re-order their values?

"I don't see how we effect this change without some lenders taking a hit, some borrowers taking a hit and the economy being impacted.

"To me, the more sensible, careful and objective the conversations are, the better. We don't want to do it in a reckless way, but we have to do it."