It’s exploitation!
Fifty years before US President John F Kennedy made his famous “Ask not what your country can do for you” speech it was Khalil Gibran who, in an article ‘the new deal’, challenged old and new ideas in the Middle East about politics, business, religion, education, media, and governance.
In particular, he asked: “Are you a merchant utilising the needs of society for the needs of life, for monopoly and exorbitant profit? Or a sincere, hard-working and diligent man facilitating exchange between the weaver and the farmer? Are you charging a reasonable profit as a middleman between supply and demand? If you are the first, then you are a criminal whether you live in a palace or a prison. If you are the second, then you are a charitable man, whether you are thanked or denounced by the people.”
Bankers are often labelled as the ultimate middlemen in business who take public deposits and then on-lend the same deposits at a higher margin. In 2020 the World Bank listed Jamaica as having the highest interest rate spread — that is, a bank’s lending rate minus its deposit rate — in our region at 9.6 per cent. Haiti stood at 6.2 per cent; Trinidad and Tobago, 5.1 per cent; and Costa Rica, 4.1 per cent.
Meanwhile, the average spread for Latin America and the Caribbean was 6.3 per cent. This situation is more severe when one reviews the Jamaican micro or short-term lenders whose interest rate spreads often exceed 30 per cent.
The intention of a free market system is to drive competition between players, which redounds to the best service and prices to the general public. However, governments have long recognised that businesses operating as monopolies or oligopolies need regulation in the public’s best interest. In most developed countries, strong anti-trust legislation exists to protect their citizens in these circumstances.
Earlier this month US President Joe Biden acknowledged that, even with competition in the marketplace, some companies can grow so large that they disrupt the intended efficiency of the free market. Citing “capitalism without competition isn’t capitalism; it’s exploitation,” he signed a new executive order aimed at cracking down on anti-competitive practices in Big Tech companies, such as Amazon, Facebook, and Google. This comprehensive order includes 72 actions and recommendations intended to reshape the thinking around corporate consolidation and antitrust laws. (CNBC, July 9, 2021)
In addition to the interest rate spread, banks earn their income from two other major sources, namely fees and foreign exchange trading. Based on National Commercial Bank’s (NCB) 2019 audited accounts, they earned $73.4 billion in net income for the year, 52.6 per cent ($38.6 billion) came from their interest spread, 22.1 per cent ($16.25 billion) came from fee income, and 16.9 per cent ($12.4 billion) came from foreign exchange trading. These earnings for one bank represent an average of 26,886 for every person living in Jamaica.
People’s National Party (PNP) Member of Parliament Fitz Jackson has been fighting the battle on the Jamaican bank fees over several years. He was instrumental in the formulation of the Banking Services (Amendment) Act, 2018 to hold banks accountable to a consumer code with fair terms in line with the Consumer Protection Act and other general principles of contract and consumer protection laws. The Bill was debated in Parliament on February 13, 2018, but defeated by the Jamaica Labour Party (JLP) Government votes.
In my experience, some of these local bank charges are truly unjustifiable. For example, the fees to cash a third-party cheque, the cost of a return cheque, and the business costs associated with depositing cash into your own account are simply intolerable and back breaking for some. Almost all transactions in a bank are now automated; therefore, transaction costs should be minimal.
One of the primary requirements to perform as a licensed bank is the collection of cash, so why are banks allowed to charge extra for a service which is not optional? This is like taking your car to the mechanic for repairs and he charges an extra fee just to lift up the bonnet to look at the engine.
How are banking fees determined? What does it actually cost to process a cheque through the banking system in a competitive market?
A normal business cannot charge more than a certain percentage mark-up on their costs or a customer will simply take their business elsewhere. But in the Jamaican oligopoly banking system it does not appear to work that way, as all the players charge similar rates, irrespective of their individual costs.
In relation to foreign exchange trading, why is the margin spread not limited by the Bank of Jamaica? If the trading in foreign exchange is restricted by the Bank of Jamaica, why are banks permitted to speculate in the foreign exchange market and hoard foreign exchange from time to time?
Once we accept that the cost of basic food is directly affected by the movement in foreign exchange we should explore more effective and efficient alternatives to deliver foreign exchange into the marketplace. I recommend we create two special foreign exchange windows at the Bank of Jamaica. The first should be for essential services in electricity, water, fuel, health care, and education. These sectors should be allowed to purchase their foreign exchange directly from the Bank of Jamaica and not through the commercial banks. The second, should be for large purchasers who require US$500,000 or more monthly from the commercial banks wherein the banks should be limited to no more than a two per cent margin on sales.
By doing this we could deliver lower costs of foreign exchange to the market and limit the excessive margins the banks are allowed to make under the present system.
Our responsibility as leaders is to serve the majority of our constituents and the public at large. One of the best ways to do this is to ensure that the public has full access to information that affects their daily lives.
Throughout the rest of the world there have been great advances in banking the unbanked and electronic payment systems. The Government and the Bank of Jamaica need to encourage investors to implement what has been successful in other countries.
For us to grow our economy we need a stable, modern, and competitive banking system that will grow with people and not at the expense of the people. A banking system which sees the growth of small business as one of their primary objectives. “Capitalism without competition isn’t capitalism, it’s exploitation.” It’s time we break the bank oligopoly system in Jamaica with true competition.