Banks can do more to grow economy, says Williams
Published:Wednesday | June 22, 2016 | 12:00 AMEdmond Campbell
Making a case for banks to increase the level of credit to the private sector in order to help grow the economy, State Minister for Finance and the Public Service Fayval Williams said that Jamaican banks are adequately capitalised, their non-performing loans are low, and returns on their assets are strong.
"There is room for banks to accelerate credit creation to help the economy grow. Capital creation comes from profits that companies make, but a more important source is capital creation through bank credit," Williams argued during her maiden contribution on Wednesday to the Sectoral Debate in Parliament.
Below-average credit
Assessing the capacity of the banks to provide increased credit, Williams noted that bank credit to the private sector is approximately 30 per cent of gross domestic product. This is well below the 52 per cent average among countries in Latin America and the Caribbean based on a World Bank report titled Jamaica: Laying the Foundations for Growth and Debt Sustainability.
Gross domestic product represents the value of a country's overall output of goods and services for a fiscal year at market prices, excluding net income from abroad.
Williams argued that local banks were adequately capitalised, pointing to a Bank of Jamaica report which stated that capital adequacy ratios among Jamaican banks remained above the 10 per cent minimum benchmark. Capital adequacy ratio is about 15 per cent.
No issues with bad debt
Highlighting another indicator, which shows that banks are doing well in Jamaica, Williams said that loan quality, which is the ratio of non-performing loans to total loans and to private-sector loans, has improved to 4.1 per cent and 4.2 per cent, respectively, as at the end of 2015. "The international benchmark for non-performing loans is five per cent, so there are no issues with bad debt."
Turning to profitability, the state minister said banks enjoyed a 20 per cent pre-tax profit margin at the end of 2015 and a return on average assets of 2.1 per cent. She noted that the return on average assets for all banks in the United States was 1.03 per cent as measured by the Federal Reserve Bank of St Louis.
Williams stressed that "credit creation helps to expand an economy", noting that private sector credit growth is showing some uptick, increasing by 11 per cent year-on-year in the first quarter of 2016, partly reflecting increased capital investments in hotel and business process outsourcing industries.