2 replies to this topic

[Belmopan]

An interesting discussion was sparked on the Belize Culture Mailing List this week over bank interest rates in Belize with this opinon:

It is true that bank CD rates are very low in the U.S. right now. However, yields on some blue chip stocks are attractive. Altria, for example, is paying near 7%, and the stock price has been quite stable, so the yield is unlikely to change very much. Yields on high-grade corporate bonds and municipal bonds are also attractive in many cases.

There's risk in stocks and bonds, of course, and Belize CD and savings rates are attractive. But keep in mind that deposits in Belize banks are uninsured. So in case of a bank failure -- and these are pretty small banks, typically with majority ownership not in Belize but from countries such as Honduras and El Salvador -- one's entire savings could be lost ... just like in the U.S. in the Great Depression when banks failed before there was deposit insurance.

As to credit, I personally think increased access to reasonably priced credit is what Belize and Belizean businesses need most. The recent problem in the U.S. (and Europe) was not credit per se but unregulated or lightly regulated credit, along with the development of overly sophisticated financial instruments such as exotic derivatives.

The entire capitalist system is built on reasonable access to credit. In fact, there's a theory of history that holds that it was the Judea-Christian acceptance of "usury" that enabled Europe and later the New World to move out of the Dark Ages. By contrast, Islam never accepted usury and began to lag far behind in development. (Today, Islamic banks have work arounds that allow them in effect to collect interest on the time value of money, without breaking Islamic law.)

The irony of capitalism is that on a micro level it is a worthwhile goal to be thrifty and save a lot and not get into debt -- the whole Ben Franklin thing -- but on a macro level if nobody borrowed anything, and if businesses didn't try to grow through sensible borrowing, we'd be back in the feudal age.

--Lan Sluder

[Belmopan]

Manolo Romero subsequently posted a good analysis of current bank lending practices and interest rates in Belize from a letter to the editor submitted by a former media executive turned resort owner:

I have been following the long running public debate over too high interest rates at the commercial banks, which culminated in Monday’s legislation on overnment’s borrowing powers.

It remains to be seen whether these new measures will bring any relief to long suffering consumers and businesses, but my strong suspicion - based on history and human nature - is that any rate reductions will be minuscule and short-lived.

What I find puzzling, however, is that there are two obvious and easy measures that will bring immediate and significant help to the
borrowing public.

The first is the enactment of a Truth in Lending law. This type of legislation became popular in the United States in the early 70’s, and while the wording varies from state to state, the essence of the initiative is to make sure that borrowers know exactly what they are getting into when they sign on the dotted line.

They generally feature the requirement of a common terminology for all loans, usually expressed as an Annual Percentage Rate (APR) that allows consumers to compare rates from different sources. At present in Belize, there is no commonality among lenders, which means that one bank may quote an APR, another may use the “add on” method, while the next may utilize the “declining balance” system.

The result is that borrowers are unable to compare offers in an informed way.

Another feature of Truth in Lending laws is they require that common interest rate be displayed in VERY LARGE TYPE, so you’ll know exactly
what rate you’re paying. This would apply to all advertising, as well as loan documents, and affect all lending institutions, including
pawnshops and stores that sell on credit, in addition to banks.

Some Truth in Lending laws also prohibit overly aggressive solicitation of loans by banks. A few months ago, I received a phone call from a very well-spoken young lady who informed me that I qualified for a $20,000 unsecured loan from her bank.

When I asked her what the interest rate was, she proceeded to tell me how much I would repay per month.

“No,” I said. “I want to know the rate of interest, not the monthly payment.”

She acted like it was the first time she ever heard that question, and put me on hold. A full two minutes later, she came back on the line and whispered, “Twenty-five percent.”

I thought that I had not heard correctly, and asked her to repeat what she had said. This time, the reply was a bit louder, but still timid. “Twenty-five percent,” she shyly stammered.

“Young lady,” I demanded in my most authoritative voice, “would you borrow money at twenty-five percent interest?” She paused for what seemed an eternity before replying, “Sir, I am not authorized to answer that question.”

Now I don’t know how many unsuspecting Belizeans fell victim to that ethically challenged campaign, but I do know that dozens of people on the Placencia Peninsula and thousands nationwide are in debt slavery to the banks, pawn shops and Courts (which may actually do more lending business than some of our smaller banks) … which brings me to my second point: There is an institution that does not gouge, trick or cheat its customers, because its customers are also its owners. It’s called a credit union.

A typical credit union in Belize lends money at 12% and pays interest on deposits (called dividends) at 7% or more. In the case of the Holy Redeemer Credit Union, the nation’s largest, last year they paid dividends on savings of 7.5% and offered a 10% rebate on interest paid on loans not in arrears, which made the effective borrowing rate around 10.8%.

This put the all important spread between borrowing and lending at a little over 3%. This is a number that compares favorably with any banking system in the world, and is less than half of the average spread enjoyed by the local banks.

Why the big difference? Some can be attributed to tighter regulatory controls on the banks, but the major reason is that the banks are in business for profit, while the credit unions return their “profit” to their members.

So why would anyone with half a brain pay 25% interest to the bank when they could pay 12 % - or 10.8 - at the credit union?

To be fair, the credit unions do ask that you first be a saver and build up some equity in your account, but that’s just good sense for any family. Credit unions also don’t offer as wide a range of services as the banks: things like current accounts, credit cards and foreign exchange, but for the bread and butter business of saving and borrowing, they are a deal that’s hard to beat.

To those folks now paying 25%, you need to join a credit union TODAY, begin saving tomorrow and in six months borrow enough money at 12% to pay off your 25% loan. Use the money you save to open credit union accounts for your children.

As for Prime Minister Dean Barrow, while I heartily applaud your public commitment to lower interest rates, I would simply ask you to push for two measures that will certainly bring some real and immediate relief: a Truth in Lending Act, and some strong words of encouragement for credit union membership.

Sincerely,
Stewart Krohn

[chris45]

The crucial thing about the true cost of lending in Belize, is the highly damaging effect these rates are having on small business.
How can we possibly expect commercila development and economic growth if there is no viable source of funds for capital investment or to support cash flow for businesses which ARE growing?
I am not sure that Credit Unions are the answer for business, but they certainly are for the micro business.