For Public Banking

Feb 24, 2013 Features / Columnists, Ravi Dev

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The continued financial crisis in the developed economies has brought to the fore once again the old debate about the role of governments in the financial sector – including that conferred by ownership. In Guyana, back in the ‘70s, the PNC had launched the Guyana National Co-operative Bank (GNCB) as a public bank, competing with the several commercial banks then operating, and the Guyana Co-operative Agricultural and Industrial Development Bank (Gaibank) as a development bank, securing its funds from grants and loans from the international community. In the ‘80s the government effectively assumed control over the entire banking industry through varying levels of nationalisation of the private banks.
The rationale offered for our massive government intervention was the same as is being touted now in the developed world – market failure, albeit of a different type. In our case, GNCB as a public bank was responding to the unmet need for a more distributed and accessible banking system while Gaibank was intended to fill the endemic financing gap for targeted entrepreneurial activities left unattended by the commercial banks. The market failure sought to be corrected in the present meltdown is the credit-crunch consequence of the inability of the market to value the “toxic assets” held in the portfolios of all their major banks.
Our system quickly degenerated into a classic, criticised “repressed” financial system in which the government maintains artificially low interest rates, inducing an excess demand for credit which the government must now allocate. The low interest rates (effectively so when the high inflation rates were deducted) became an effective disincentive to savings and combined with the inability of the government to borrow internationally, eventually resulted in low investment and thus low growth. This situation was exacerbated by all the other potential negative features of development banking: cronyism, rent-seeking and corruption by bureaucrats, misallocation of funds in misconceived schemes etc. By the eighties we had reversed into negative growth.
When we entered into a Structural Adjustment Programme (SAP) in 1989 with the IMF, we accepted the other model of a financial system – one that was totally privatised and “liberalised” – putatively subject only to market forces, with government reduced to a “non- distorting” regulatory role. The privatisation of our banking system, including the dissolution of Gaibank and the sale of GNCB, was energetically pursued by the PPP government after they took office in 1992. It is rather ironic that the PPP has been subjected to sustained charges of corruption after they willingly divested the most lucrative potential source of graft.
We have now experienced almost two decades of an ever increasingly liberalised financial system – both in the world at large and in our own Guyana. Externally, we have seen to the world’s present peril that intervention by government is vital to the financial sector: the social function of overall national development that necessitated the invention (and the ongoing maintenance) of the banking system will inevitably be eroded and vitiated by the workings of unmediated human greed. A system driven only by the profit motive cannot do otherwise. While we have been spared the worst excesses of the slide into financial depravity experienced up north – through our relative “underdevelopment in financial instruments” – we have, on the other hand, unfortunately also not witnessed any turnaround in banking efficiency or the financial intermediation necessary to foster growth of our economy.
Our privatised banks have maintained and even extended the dispersion of branches into the countryside, but these have been deployed to more efficiently trawl for deposits rather than for disbursing more loans. In this former task, they have been singularly successful, but in their reluctance (even refusal) to service the domestic entrepreneurial potential necessary for our development, they have piled up billions and billions of dollars lying idle in their coffers. Theoretically, in the financial liberalisation model, the private banks were supposed to have competed with each other to lend the funds secured from deposits leading to the lowest possible rate of interest and still make a profit over the rate offered to attract deposits. It was to have been the best of both worlds, but it never reached Guyana.
Rather than leaving the financial market to do what was necessary to clear itself – offering lower rates to borrowers – the government offered the banks a way out: Treasury Bills. We got the worst of both worlds – lower rates for depositors and the highest rate for borrowers. To rub salt into the wounds of taxpayers, the government pays the banks billions in interest every year for the pleasure of keeping their money locked away – “sterilising excess liquidity”! The “spread” – the difference between the deposit interest rate and the lending rate – has always been in double digits. The banks were being rewarded for not doing what justified their existence in the first place – taking risks to lend money. What did it matter if no new business could be set up if they had to service loans at 20% interest?
In our considered judgement, and one we have been promoting for the longest time, we threw out the baby with the bathwater when we closed down our development and public banks. The raison d’etre for those institutions is even more evident – and necessary – today.

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