An open letter to the Governor of the Bank of Guyana
Kaieteur News – As head of the regulatory body for the Act governing Financial Institutions operations, I hereby request you Governor of the Bank of Guyana to recommend to the Minister of Finance an amendment to Section 33 of the Financial Institutions Act. The bottom line is to properly define the words’ unsafe and unfounded practices by financial institutions’ and to re-imagine ways to curb those institutions’ profits.
In these times of severe economic, social, political and financial uncertainty brought about by the Covid-19 Pandemic, individuals and entities will need loans or overdrafts to compensate for liabilities, or to obtain new capital to keep operations running in light the detrimental effect of the Covid-19 restrictions along with the nearby general election fiasco. This is not the time for business as usual. Because of the usual cooperation among Commercial Banks and other financial institutions directly or indirectly, bankrupts have little other choice than to borrow at high interest rates; whereas in reality, competition alone should have resulted in lower interest rates in our free market scenario.
Governor, many people may not fully understand the impact of borrowing at high interest rates with compound interest, penalties and other fees involved; and the negative consequences being brought to bear on a defaulter, especially in these unforgiving times. The hidden price of credit is too high and some protection from exploitation must be given. Although interest in commercial banks has declined slightly, it is still high. Interest and compound penalties combine to make repayment a nightmare and cause borrowers to lose property even after repaying the simple capital and interest.
Since deregulating interest rates to create a financial free market, financial institutions can do what they want in relation to interest and fees. The spread between interest on saving and borrowing has widened; while commercial banks offer 1.5% interest on savings they charge 8 to 20% interest on loans and overdrafts and reap billions of dollars from stakeholders, regardless of the public interest.
While commercial banks have to make money to expand and move forward, it makes no sense that businesses should be destroyed in the process. The idea of profit over social progress must be seriously reconsidered and the enabling authority is in your good office Sir – Governor of the Central Bank. I call for compound interest to be excluded if interest exceeds 6%; and if any compound interest should be charged simple interest below 6%, the rate should be the savings interest rate now at 1.5%, not the 8 to 20% borrowing interest rate currently set by commercial banks.
Governor, some financial institutions registered under the Money Lenders Act were, and continue to charge, up to 40% interest on loans and non-collateral secured through a bill of sale, also compound interest and a fine if ‘ r the lender by default. . This is in contrast to the Money Lenders Act, which protects borrowers from interest rates above 32% annually on non-collateralized loans, and no more than 18% interest on loans secured by bills of sale. It is estimated that some Financial Institutions registered under the Money Lenders Act have mistakenly collected tens of millions of dollars by enforcing compound interest and should be forced to repay their clients if lenders move to the courts, or if the Central Bank maintains a Commission of Inquiry into the affairs of this financial institution.
On the other hand, the Financial Institutions Act makes no provision for protecting borrowers from high interest rates, high fees and compound interest. A good example is the fee charged for services offered by ATMs. Since the establishment of the ATM machines, which is a good service, fees have walked from $ 20 to $ 70 dollars per transaction – 250% more – though the Banks benefit from millions of transactions in excess of when service was introduced in Guyana. Public and private sector salaries are also paid through the banking system. Banks make a lot of money on services, through ATMs and debit cards. They do not have to impose excessive interest rates on loans or high fees to make money. The $ 70 dollar fee for an ATM transaction should also be cut to $ 50 dollars.
The debit card machines installed in business places are a good development, but one of the disadvantages is the $ 100,000 installation cost; moreover, places of business are required to install several machines for the various commercial banks when one machine can do all the work for all the banks, if agreement can be reached among them.
To save our local industries the credit price has to be revised downwards, if not, local businesses would not be able to compete with foreign investors who get credit at 6% interest and below from foreign sources. Financial institutions need to make money but not in an unjust way that ignores the public and our society.
I call on the Bank of Guyana to intervene to lower the price of credit and let the Bank’s intervention be a feature of Guyana’s economic system when circumstances are necessary.
Michael Carrington
Former Member of Parliament