I have long fretted about the instability of Jamaica’s predatory and anti-development financial sector. Banks have hurt us in the past, they are the cause of much of our distress now, and I fear they will bring us ruin in the future.

Recently, I took another look at the Bank of Jamaica’s (BOJ’s) 2021 annual report and there were quite a few things I found worrying about the state of the financial sector. The interconnectedness of banks, their dominance, the pervasiveness of their influence and power, their resistance to regulation and supervision, and the risk of widespread contagion, if one were to become distressed, is cause for a great deal of concern.

With all that is going on in the global economy and in Jamaica’s, I was not reassured by the BOJ’s claim that risks to the financial sector were moderate and that the sector “remained broadly robust to contemplated [or other] shocks”.

According to the BOJ, bank assets have grown (by 13.6 per cent or $275.3 billion in 2021) due mainly to increased investments, cash and bank balances. While consumer lending has increased, corporate loan demand has declined and lending for productive purposes fallen. Real economic growth, in consequence, remains anaemic. However, bank profits have soared.

Moreover, the growth in bank assets largely reflected an increase in foreign currency assets. This growth, in turn, was due mainly to the acquisition of foreign currency securities and increased foreign currency cash balances, as well as a result of the depreciation of the Jamaica dollar. Or in other words, depositors are increasingly putting their money in forex accounts. Banks in turn are making a killing facilitating the “flight to safety”, speculating against the Jamaican dollar. Meanwhile, the Net International Reserves are being depleted in a futile, and potentially disastrous, attempt to defend the Jamaican dollar against the depredations of scammers, arbitrage-peddlers and margin-gatherers.

As far as investments were concerned banks, flushed with cash, stored the excess liquidity — which the BOJ’s easy money policy had facilitated — in low-risk assets such as foreign government securities and GOJ securities. And, to further increase profits, provided loans to other financial institutions — with little or nothing to the productive, growth-generating, employment-creating, export-producing, import-saving Micro, Small and Medium Enterprises (MSMEs), or for agriculture, or for renewables. Luxury housing? That they do. Need a new car? Their doors are wide open. Distribution? Go check them.

Recent studies have shown that elevated property prices, of the kind common in Jamaica’s overheated luxury housing market, can inflict serious damage on the economy by crowding out productive investment, attracting and underutilising the best managerial skills, and misallocating capital. Super-inflated house prices, contrary to what we have been told, have not “bubbled up” the economy.

Cash and bank balances increased by 19.8 per cent ($73.7 billion) in 2021 compared with growth of 23.5 per cent ($70.7 billion) in 2020, with very little, if any at all, deployed to productive uses.

As corporate loans declined and growth in personal loans increased in an economy constrained by size, banks, in order to increase yields, expanded their reach into overseas markets. So said the BOJ. Loans to overseas residents increased by 36.7 per cent ($30.1 billion) in 2021. And as the banks expanded overseas, the stock of non-performing loans (NPLs) increased, moving by 12.6 per cent ($3.7 billion) to $33.0 billion at end of 2021. In addition, the ratio of NPLs-to-total loans increased. The rise in delinquencies in 2021 was: overseas residents ($1.8 billion); businesses ($1.3 billion); and individuals ($0.6 billion).

Bank profits are enormous and on the rise in an economy mired in stagflation, with hardships on the increase, the quality of life deteriorating, and young educated people fleeing. Pre-tax profits of banks in 2021 totalled $47.0 billion, 85 per cent higher than the $25.4 billion recorded in 2020. This was mainly due, the BOJ tells us, to a rebound in some non-interest revenue streams (particularly dividends and fee income on loans).

We know that lost ground has to be recovered but why the haste? The pre-tax profit margin for 2021 increased to 21.5 per cent while the return on equity for the banking sector climbed to 16.6 per cent; it was 9.2 per cent in 2020. However, the net interest margin for the banks fell moderately to 5.4 per cent from 5.9 per cent in 2020, due to reduced loan growth, the increased stock of non-performing assets, and the greater share of lower-yielding assets such as cash balances and low-risk securities, as we have seen.

The banks’ much-improved profit performance in 2021 was largely due to a rise in non-interest income which soared by 35.1 per cent ($27.3 billion), countering the contraction of 11.7 per cent ($10.3 billion) reported in the previous year. Banks have increased their reliance on revenues generated from dividends, arbitrage from foreign exchange trading, and the write-back of loan loss provisions to income. Banks, the BOJ reported, also recorded increased income from fees and other charges on credit cards as some banks resumed the application of fees and charges to customers that they had temporarily waived, after pressure, during 2020. In addition, consumers increased their reliance on short-term unsecured debt to meet funding needs.

Commensurate with the slow rate of loan growth and increased investments in low-risk assets, fees from loans and investment activities as a proportion of non-interest income declined to 23.5 per cent at the end of 2021, relative to 25.4 per cent at end of 2020, representing the lowest proportion over the last five years.

What is to be done? Well, here are a few suggestions. Guided interest rate policy, by a fit for purpose BOJ, to direct resources towards productive uses and to build ecological resilience; using the National Housing Trust to expand the affordable housing stock, thereby deflating the housing bubble; placing restrictions on and increasing taxes on the ownership of multiple properties; revision of the property tax regime to take greater account of improved land value; setting limits on the proportion of banks’ portfolio available for household loans; targeted household debt cancellation and restructuring; and a special tax on super profits by banks.

Needless to say, this would require courage and leadership.

Ambassador Emeritus Audley Rodriques is former senior Jamaica envoy to South Africa, Kuwait, and Venezuela.