Concerns over Amendments to the Financial Institutions Act taken out of context by Ramotar

Jul 04, 2018 Letters

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DEAR EDITOR,
I am writing this letter in response to an article carried by Stabroek News on June 25, 2018, with the caption, “Ramotar concerned amendment to Financial Institutions bill can target some banks”.
In that article, the former President posited that the amendments therein could be used to sanction banks without them having recourse to the courts, which has been overlooked.
The former President also went on to call on the banks, the bankers’ association and the private sector to more or less challenge the bill – reinforcing the misinterpreted and misrepresented belief that the bill is intended to target certain banks.
It is not clear what would have influenced Mr. Ramotar into doing so. The contents of the referenced article to be coming from a former President of Guyana is nonetheless grossly worrying.
It should also be mentioned too, that, at the time of writing this letter, incidentally – an article carried in another section of the media dated July 02, 2018, the Opposition Leader acknowledged the very financial bills – that the former President Donald Ramotar was referring to – are in fact aimed at meeting certain conditions for the US$35 million World Bank Loan that was recently approved for the Government of Guyana.
Indeed, these amendments to the laws governing the local financial sector, are necessary to enable much needed reforms of the local financial sector, particularly the banking sector, given that the financial sector of Guyana is largely underdeveloped and is fundamentally driven by the banking industry.
The spirit of the amendments thereto seek to enhance and broaden the supervisory and regularity framework of the Central Bank by now having in place a comprehensive Administration and/or Resolution framework in order to deal with a problematic or a failing banking institution and other financial institutions. In so doing, legislative or legal powers are necessary to be conferred upon the Central Bank, which are in the form of these amendments as well.
It is of paramount importance that one understands that the judicial system is inadequate and inappropriate to comprehensively deal with a circumstance in which a financial institution or a bank for that matter is virtually bankrupt and thus needs to activate a liquidation process.
Unlike the process involving the liquidation of any other type of organisation, the uniqueness of a bank’s structure and broader economic purpose for their existence, is much more complex and can also potentially invoke far-reaching catastrophic, and systemic macroeconomic consequences. This is so because the financial sector, which in Guyana’s case is dominated by the banking sector, is the heart of an economy.
Therefore, if the financial system collapses then the economy will also collapse. For example, in the United States, their financial system unlike Guyana’s, is driven by the stock market, so when the stock market crashed in 2007/2008, automatically there was a global financial crisis, which originated in the U.S economy.
Similarly, in Guyana, if the banking sector collapses – bearing in mind that because of the structure of Guyana’s economy, the collapse of a single bank in Guyana could be very problematic if there is no comprehensive Administration and Resolution Process in place to deal with such situations. Thankfully, to date no bank has ever collapsed, but that is not an excuse for not having a framework in place to deal with such events.
In fact, the countries in which the global financial crisis emanated from and those that were affected, do have, and had at the time, these comprehensive and stringent regulatory frameworks and yet, these proved to be inadequate, as was demonstrated in hindsight that there was a collapse of the global financial system – which should be safeguarded from these events at all times and at all costs especially since the financial crisis of 2007/2008 cost the U.S economy more than U.S$4.1 trillion in losses.
It is primarily for these reasons that extensive and ever evolving reforms of the financial system and the entire global financial system became increasingly more important and necessary.
Against this backdrop, in Banking Regulation there is something referred to as ‘the Core Principles’, which is a regulatory standard for the global financial system.
The Core Principles are a framework of minimum standards for sound supervisory practices. This framework defines 29 principles that are needed for a supervisory system to be effective which are broadly categorised into two groups:

1. Principles 1 – 13 focus on powers, functions and responsibilities of supervisors.
2. Principles 14 – 29 focus on prudential regulations and requirements for banks.

Principle 1 – responsibilities, objectives, and powers: an effective system of banking supervision has clear responsibilities and objectives for each authority involved in the supervision of banks and banking groups within a suitable legal framework.

Principle 2 – Independence, accountability, resourcing and legal protection for supervisors: the supervisor possesses operational independence, transparent processes, sound governance and adequate resources, and is accountable for the discharge of its duties.

Now, it is therefore logical to think, or to deduce rather, that these amendments to the financial sector’s laws of Guyana were guided through the technical support of the World Bank and were also guided by these very core principles.

On the contrary, some may argue that one has to consider the relevance of the principles to the local economy but one also has to consider the fact that, if we don’t reform and put the frameworks in place to accommodate the development of the financial sector and the economy, then when will Guyana graduate from being a third world country? With such mentality, Guyana will always remain an underdeveloped, third world country.
Finally, it was highlighted recently by the Opposition Leader in the press that the IMF (International Monetary Fund) country report on Guyana cited the under – provisioning factor for bad loans by banks which directly affects the profitability of banks.
In a previous letter to the editor of this newspaper, a financial institution was highlighted in this regard, in which that particular entity highly and deliberately understated its provisioning for bad loans by a massive amount and thus fictitiously declared higher profits. This is a classic example of a problematic scenario, which could potentially become explosive, if not contained in a timely manner.
Yours faithfully,
Name and Address Supplied

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