The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Clearing Banks Association’s (CBA) chairman yesterday rejected the industry’s branding as an “oligopoly”, adding that there was “no evidence” of price-fixing and fee setting collusion.

Gowon Bowe told Tribune Business that an Inter-American Development Bank (IDB) report, which described the Bahamian commercial banking industry as having an “oligopolistic nature” that limited price competition, was an “inappropriate characterisation” of the sector.

Suggesting that its first quarter Caribbean Regional Quarterly Bulletin had provided an “overly-simplistic analysis” of the factors driving bank costs and prices, Mr Bowe said some of the key issues ignored included borrower creditworthiness and an inability to access all information relating to their financial histories.

The credit bureau’s introduction is designed to address this weakness and improve financial access, particularly for Bahamians with good credit histories, with the Clearing Banks chief pointing out that high system liquidity - currently in the $1.5bn range - was influencing low deposit rates and high spreads with lending rates.

Arguing that there was a tendency to “single out” particular issues as opposed to identifying “root causes” and tackling them, Mr Bowe said the relatively small size of the local market had deterred Bahamian commercial banks from deploying capital to venture capital-type loans - unlike their US counterparts.

And, while the IDB report had focused on what it deemed to be favourable return on equity ratios (ROE) for Bahamian banks, he added that these ratios were low compared to the returns deemed acceptable by regulators and institutions in developed countries - where in excess of 15 percent was often deemed the minimum requirement.

Mr Bowe said the answer to improved financial inclusion and access in The Bahamas lay in improved consumer education, something the CBA and its members are working on with the Central Bank.

“I think that is a bit of an aggressive statement, in that the term ‘oligopoly’ is suggesting - which is incorrect - that these are entities working collaboratively together to achieve certain outcomes,” Mr Bowe told Tribune Business of the IDB report.

“There’s no evidence as it relates to price fixing or certain fee setting that’s happening among the industry. To say an oligopoly is suggesting a limited number of companies working together and I don’t think that’s an appropriate characterisation of the industry.

“You have to put it in the context of a 400,000 population and how many institutions are required. The definition of an oligopoly may be theoretically correct, but the economic principal is of working together to control a market, and that’s not the case here.”

Mr Bowe was responding after the IDB report said lack of competition in the Bahamian commercial banking industry has created barriers to accessing financial services in this nation.

The IDB’s Caribbean Quarterly Bulletin for the first three months of 2019, released yesterday, said the absence of greater “price competition” among the six Bahamas-based commercial banks had increased lending rates and spreads that made products too costly to access for some Bahamians.

“The cost of financial services reflected in rising lending rates limits access to credit and strengthens barriers to financial inclusion,” the IDB report said. “Spreads between deposit and lending rates increased by almost three percent from 2010 to an estimated level of 10.4 percent in 2018, roughly two percent higher than countries in the Latin America and Caribbean region.

“The oligopolistic nature of the commercial banking market limits price competition within a profitable sector. Return on equity (ROE) levels were favourably measured at 6.8 percent in 2017, slightly below the 7.9 percent level at the end of 2016.”

Mr Bowe said the IDB report had focused on commercial banks to the exclusion of other entities in the Bahamian financial services industry, especially co-operative credit unions, which are now regulated by the Central Bank and accepting customers beyond their traditional industry and union bases.

“I think it was an overly simplistic analysis in terms of what is driving prices,” he added. “Financing costs are driven by creditworthiness and the availability of information to assess creditworthiness. If you have no information on the borrower the interest rate is higher than expected.

“That is a large part of the initiative to establish a Credit Bureau, separating those that are high quality credit from those that are low quality, and the price differential should become more explicit.

“I think there’s often a desire to pinpoint or single out some of the challenges we face as opposed to focusing on the root causes and addressing them subsequently.”

Mr Bowe added that the high level of non-performing loans that has plagued the commercial banking industry for the past decade has also impacted the cost of credit for new borrowers, as institutions aim to ensure “they don’t fall into the same bucket”.

“Domestically, what we have commenced with the Central Bank, is looking at how we educate the consumer in terms of how financial institutions price loans and deposits, how persons manage their affairs to ensure the most positive credit rating, and how persons shop around to seek the best opportunities,” he told Tribune Business.

“There has to be consideration of education of the consumer as it relates to their ability to drive competition and pricing by their willingness to move and do business with institutions that may have better structures for their financial needs.”