An open letter to the Governor of the Bank of Guyana

Jan 07, 2021 Letters

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Kaieteur News – As head of the regulatory body for the Act governing the operations of Financial Institutions, I hereby ask of you the Governor of the Bank of Guyana to recommend to the Finance Minister an amendment to Section 33 of the Financial Institutions Act. The bottom line is to properly define the words ‘unsafe and unsound practices by financial institutions’ and to re-imagine ways to curb profiteering by those organisations.
In these times of grave economic, social, political and financial uncertainty brought about by the Covid-19 Pandemic, individuals and entities will need loans or overdraft to offset liabilities, or to obtain new capital to keep operations running in light of the adverse impact of the Covid-19 restrictions coupled with the adjoining general elections fiasco. This is not the time for business as usual. Because of the usual collaboration among Commercial Banks and other financial institutions directly or indirectly, insolvents hardly have any other choice than to borrow at high interest rates; while in reality, competition alone should have led to reduced interest rates in our free market scenario.
Mr. Governor, many persons may not fully understand the full impact of borrowing at high interest rates with compound interest, penalties and other fees attached; and the negative consequences that are brought to bear on a defaulter, especially in these unforgiving times. The hidden price of credit is too high and some protection against exploitation must be put in place. While interest at commercial banks has reduced marginally, it is still high. Compound interest and penalties combine to make repayment a nightmare and cause borrowers to lose property even after paying back the capital and simple interest.
Since the deregulation of interest rates to create a financial free market, financial institutions can do what they please pertaining to interest and fees. The spread between interest on saving and lending has widened; while commercial banks offer 1.5% interest on savings they charge 8 to 20% interest on loans and overdraft and reap billions of dollars off stakeholders, without regard to the public good.
While commercial banks must make money to expand and progress, it makes no sense that businesses should be destroyed in the process. The notion of profits over societal progress must be seriously reconsidered and the enabling authority is in your good office Sir – Governor of the Central Bank. I am calling for a ban on compound interest if the simply interest is higher than 6%; and if any compound interest should be charged on simple interest below 6%, the rate should be the savings interest rate which is now at 1.5%, not the lending interest rate of 8 to 20% which is currently imposed by commercial banks.
Mr. Governor, some financial institutions registered under the Money Lenders Act were, and are still charging, up to 40% interest on non-collateral loans and loans secured by bill of sale, also compound interest and a fine if the borrower is in default. This is at variance with the Money Lenders Act, which protects borrowers from interest rates above 32% annually on non-collateral loans, and not more than 18% interest on loans secured by bills of sale. Some Financial Institutions registered under the Money Leaders Act are estimated to have collected tens of millions of dollars wrongfully by imposing compound interest and should be forced to repay their clients if borrowers move to the courts, or if the Central Bank conducts a Commission of Enquiry into the affairs of these financial institution.
On the other hand, the Financial Institutions Act makes no provision for the protection of borrowers from high interest rates, high fees and compound interest. A good example is the fee imposed for services offered by ATM machines. Since the establishment of the ATM machines, which is a good service, fees have hiked from $20 to $70 dollars per transaction – 250% more- although the Banks are deriving benefit from millions of transactions in excess of when the service was introduced in Guyana. Public and private sector wages are also being paid through the banking system. Banks do make a lot of money on services, through ATM machines and debit cards. They don’t have to impose excessive interest rates on loans or high fees to make money. The fee of $70 dollars for an ATM transaction should also be slashed to $50 dollars.
The debit card machines installed at business places is a good development, but one of the drawbacks is the installation cost of $100,000; additionally, business places are required to install several machines for the various commercial banks when one machine can do the entire job for all the banks, if an agreement can be reached among them.
To save our local industries the price of credit must be revised downward, if not, local businesses would not be able to compete with foreign investors who are obtaining credit at 6% interest and lower from overseas sources. Financial institutions need to make money but not in an unjust manner that ignores the public good and the well-being of our society.
I am calling on the Bank of Guyana to intervene to reduce the price of credit and let the Bank’s intervention be a feature of Guyana’s economic system when circumstances necessitates.
Michael Carrington
Former Member of Parliament

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