US embassy cable - 05KINGSTON1446

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