ECCB headquarters in Basseterre, St Kitts
By LK Hewlett
BASSETERRE, St Kitts (WINN) -- One of the leading threats to the Eastern Caribbean Currency Union (ECCU) financial system is the high level of non-performing loans of banks in the countries that share the EC dollar.
This is according to Timothy Antoine, governor of the Eastern Caribbean Central Bank (ECCB), in a recent media engagement in Dominica:
“Where are we as a region? On financial stability we are stable and somewhat resilient; what’s the goal, strong and resilient, and why are we not there yet, because there are some weaknesses in our financial system including our banking system, which we need to be aware of.
“What do banks do for a living? Take deposits and make loans, that’s the bottom line; they do some other things too but that’s their main business. Right now we are very concerned with the high level of nonperforming loans. At then of 2015 the ECCU was at 17% -- that means of the total loans issued 17% were bad, or nonperforming.
“Now the problem is the international benchmark is 5%. We really should not have bad loans in excess of 5%. It’s very important for us to see that come down for many reasons, including the very issue of growth and job creation.”
“As the banks make less money from loan interest, this results in increased banking fees and charges and decreased lending, especially to the business sector.
“Those bad loans mean the banks are making less money because interest income is down, profitability is down. So what are we seeing? We’re seeing more bank fees and charges and I know you don’t like these fees and charges but that’s a result of that.
We’re also seeing banks not being able to lend as much as they should. In terms of private sector credit we continue to see a decline so even though the economies are growing again, private sector credit is still in decline, and that’s a concern, so we are very keen to see private sector credit expand.”
The Central Bank is recommending, among other resolutions, that national banks amalgamate. He said for such a small economic space and population, the ECCU has too many banks:
“Every time we identify issues in the currency union, we also attempt to identify solutions, recommendations. The first is the establishment of the Eastern Caribbean Asset Management Corporation, that is set up as a company, corporation and the idea is that it would buy bad loans from banks to help reduce the non-performing loans. As the nonperforming loans go down the banks will feel more encouraged, more confident about lending.
“Consolidation of banks: the current environment is very difficult for our indigenous banks. At the moment we have twelve indigenous or national banks, but here’s the issue- we only have a population 630, 000. So when you add the indigenous banks with the foreign or international banks, frankly spoken, there are too many banks in this small space.
“And why do I say that? Because the costs are high; so consolidation would provide a lot of benefits for the people o the region and we are strongly encouraging our indigenous bans to come together.”
A recent IMF working paper looked at the impact non-performing loans in the ECCU is having on the region’s financial sector and economic activity, and determined that non-performing loans are at the core of the ECCU banks’ financial distress.
The IMF paper said the regional financial infrastructure requires further strengthening, noting that the lack of a credit bureau and credit-rating agencies continues to restrain potential lenders from availing themselves of borrower’s financial history.
Republished with permission of West Indies News Network