On November 25, 1996, Hon. Minister for Finance, Industry
and Planning Mr. Julius Timothy, addressed the Nineteenth Annual General
Meeting of the National Commercial Bank of Dominica.
I am indeed honoured to be invited again to present the keynote
address at the Annual General Meeting of Dominica’s bank - the National
Commercial Bank of Dominica. Since I spoke to you last year Dominica’s
economic situation and its future, and the role of the National Commercial
Bank in relation to the national economy has been constantly in my thoughts.
On this occasion, I would like to share some of my thoughts with you, and
to invite you to re-examine your performance and plans against the new
challenges which Dominica must overcome in order to survive as an
independent nation with a vibrant economy.
First, I would like to congratulate you - the Board of Directors,
Management, and Staff - for another year of solid financial performance. I
note especially that your efficiency ratio was impressive, and that your
strong earnings allowed you to substantially strengthen shareholders equity
while still proposing a 15% dividend on shares for the year ended June 1996.
Also noteworthy is the fact that by retaining some $26 million in
undistributed profit, you are laying a sound capital base for the planned
expansion of your institution. You have shown prudence in increasing your
Provision for Loan Losses; and by aggressive collection strategies and a
proactive approach to managing credit risk you continue to achieve positive
results in the quality of your loans. You have been good bankers.
Second, I would like to clarify the U.W.P. administration’s position
on the role of indigenous banks, especially any set up by the government or
in which government is a major shareholder. The National Commercial Bank
must be seen against the background of the Government’s commitment to assign
to the private sector the lead role in productive and commercial affairs,
based on the belief that the private sector is likely to be more efficient.
In the case of the national bank the government’s position is that it
should be more than just one more commercial bank, or just an addition to
the capacity for providing banking services to the society. It expects of
the institution, sensitivity to the national development aspirations, in
concordance with the development strategies being pursued, and assistance in
promoting and maintaining economic stability. Undoubtedly, this imposes on
an indigenous entity like the National Commercial Bank, responsibilities
beyond those of merely preserving its financial integrity while maximizing
profits for its shareholders. It has to simultaneously advance the national
interest. This makes the task of the directorate, management and staff more
difficult and of more comprehensive scope than that of their counterparts in
other commercial banks.
This position is in keeping with the original rationale for setting up
national commercial banks in newly independent states, especially in the
Caribbean. Researchers at the University of the West Indies and elsewhere
showed that the branches of foreign commercial banks (and insurance
companies), which had dominated the colonial financial scene for over a
hundred years, had been a powerful instrument for channeling the region’s
savings to support investment in metropolitan countries. Indigenous banks
and insurance companies would not do this; and would be more sensitive to
the needs of the native economy. So most Caribbean governments set up
national commercial banks; (the strategy used for achieving this is not
important for the point I wish to make). Over time, the foreign-owned
branch banks have changed. They are now almost completely managed by
Caribbean nationals, in some cases they have incorporated locally and
Caribbean nationals participate strongly in their ownership. Having become
much more secure in the post-independence political and economic
environment, these “original banks” no longer operate as a powerful
instrument for outflow of our domestic savings. The setting up of
indigenous commercial banks very probably provided part of the incentive for
these changes and must be credited in part for these changes in the original
banking system. Of course, the new post-independence policy environment
also played an important part.
This does not mean that the indigenous institution no longer has a special
role. It must continue to be the conscience of the banking sector so far
as sensitivity to the national interest is concerned. To illustrate what I
mean, let me review briefly the recent performance of the economy and
against that background the performance of banks in Dominica.
Preliminary data for the first half of 1996 indicate that the Dominican
economy slowed down considerably as compared to 1995. This was due to the
severe damage to agriculture caused by unfavourable weather in the latter
half of 1995. There was a sharp contraction in export volume of bananas -
30.5% - during the first half of 1996. Although, our small manufacturing
sector is estimated to have grown during the first half of the year, the
growth in tourism sustained, and activity in the construction sector
increased minimally, developments in the island’s dominant banana industry
continued to dictate the level of economic activity. Partly, this is due to
the fact that earnings from bananas normally account for about 60% of
merchandise exports, and these fell drastically during the first half of
this year. This also is due to the fact that the region as a whole is
dependent on banana exports for a large share of its foreign exchange
earnings. In the first half of 1996 when Dominica and the OECS Region as a
whole suffered a deterioration in the export earnings from bananas, the
trade deficit worsened. Given the nature of the Region’s financial
arrangements, monetary expansion depends to a large extent on the growth of
export earnings and on the growth of the import bill. The enlargement of
the deficit retarded growth in money supply. The slowdown in monetary
growth was very pronounced in Dominica where bananas are more important in
export earnings than in other OECS members. 1
The performance of NCB during this period is reflected in the following
indicators:
a. Deposits fell by 2.9%
b. Loans fell by 5.6%
c. Total assets increased by 2.6%
d. Net foreign assets increased by 28.4%
Profit was $2.8 million compared with $3 million in the same
period of 1995
e. Net liquid assets ratio was 34.1% at the end of June 1996.
Meanwhile, for other commercial banks (as a group) in Dominica the
indicators showed a somewhat different picture:
f. Deposits increased by 2.7%;
g. Loans increased by 0.7%;
h. Total assets increased by 0.7%;
i. Net foreign assets increased by 36%, (but one
bank decreased it);
j. Profit (average) was $1.42 million compared
to $1.45 million in 1995;
k. Net liquid assets ratio was 19.2% at the end of June 1996.
Before indicating the tentative conclusions which one may draw from
these figures let me tell you that the source is The Eastern Caribbean
Central Bank and specifically the Governor’s Report to the Monetary Council
which met in St. Vincent in October. The report presents the data for
individual banks, but for the purpose of comparison with our indigenous bank
I have shown the other banks as a group.
One such conclusion may be relevant to the NCB’s thinking about its future
strategy. It is that NCB’s ability to attract deposits seems to be more
sensitive to a downturn in economic performance than other banks’.
Admittedly, it would be desirable to examine data over a longer period to
have more confidence in the outcome; hence, I can only suggest that this is
something the Bank should look into. If on more thorough study the
conclusion seems valid, then you will want to formulate some tentative
hypotheses as to why this is so. I will hazard some conjectures.
l. It may be that NCB’s depositors are drawn from occupational
groups in sectors which are more seriously affected by economic downturns
generally. Or it may be that its depositors’ income streams are more
dependent on banana export earnings.
m. It may also be that the composition of NCB’s deposits (demand, savings,
and time) differs substantially from other banks. The fall in deposits in
the Dominican banks as a group during the first six months of 1996 was due
to the fall in demand deposits, savings and time deposits having increased
slightly.
These would suggest that NCB needs to diversify its deposit base.
You may wish to tailor your efforts to attracting more of those categories
of deposits that may be less sensitive to economic downturns. See what
sections of the community are not being served by your institution and plan
accordingly. The ECCB noted that the downturn in the Region’s foreign
exchange earnings from trade would have been more disastrous had it not been
compensated to a small but important extent by increase in voluntary
inflows, mainly deposits from overseas. This is an important lesson for
Dominica and the national bank. NCB should examine the merit of redoubling
its effort to attract foreign savings especially by Dominicans living
abroad. If done in conjunction with land settlement and development
schemes, this may prove attractive to Dominicans who plan to return home
eventually.
The difference in lending performance cries out for explanation, since with
the increase in total assets and the high liquidity ratio the reduction in
loans by NCB does not seem warranted by the decline in deposits. Although
there was also a slowdown in the growth of their lending, other banks did
not reduce loans outstanding during the downturn. Before determining this
matter, it should be remembered that lending is a two-way street. There
must be willing borrowers and willing lenders. Did the decline in lending
reflect a decline in demand and in number of creditworthy borrowers or a
decline in willingness to lend due to a heightened sensitivity to risk and a
concern about profits? Did NCB not share adequately in the apparent switch
of lending from agriculture to construction and housing? These are not
questions to which I yet have the answers. I raise them however to sharpen
your awareness of the importance of the lending strategy of an indigenous
national bank. But let me opine that given the greater sensitivity to the
national interest which the indigenous bank should demonstrate, it is not
expected to react to a downturn in economy activity in a manner which
exaggerates rather than minimizes the downturn. In other words it is
expected to help preserve national economic stability and to contribute to
an orderly adjustment.
There was no difference between the indigenous national bank and other banks
in the direction of adjustment in their Net Foreign Assets. Bear in mind
that a positive net position in the bank’s foreign account means positive
net lending abroad since the bank would be holding more of foreign
liabilities than foreigners are holding of the bank’s. Before I reveal my
concerns and preference on this issue, let me make clear that prudent
banking requires holding foreign assets both for reducing risk through
portfolio diversification and for facilitating foreign transactions in the
daily operations. That said, the issue is when is it appropriate to
increase lending abroad. I am concerned that the building up of foreign
assets at a time when the country is experiencing a severe fall in foreign
exchange earnings will exacerbate the economic adjustment necessary to halt
the deterioration in the balance of payments account. It is understandable
when foreign-owned banks run for cover when there is a hiccup in the
economy, but indigenous national banks are expected to stand their ground.
This should not be interpreted rigidly; I only intend to say that what is
best in the national interest at the time should be given appropriate weight
in your decisions.
My final comment on the performance comparison relates to the profitability
of banks during the downturn. All experienced a slight decline in dollar
terms, but the decline appears to have been marginal given the severity of
the decline in export earnings and other indicators. It seems fitting to
comment that the banking sector cannot expect to remain aloof within an
economy in a prolonged recession, and it is therefore in the sector’s
interest to invest in helping to bring about the economy’s early recovery.
This may mean reducing the spread between deposit and lending rates,
reducing certain discrete charges, providing greater assistance in cases of
delinquency among cooperating borrowers, providing more pre-lending
assistance to borrowers wanting to invest in modernizing or expanding their
plant, and being generally more helpful to clients. Yes, this could imply
lower profits. Purely private, partly or wholly foreign-owned banks do not
accept lower profits except where they are convinced that the returns over
the longer term are worth the sacrifice of profits in the short term; but
its shareholders may prefer the certainty of short-term gains. An
indigenous bank with substantial government ownership, has the advantage of
being able to count on one shareholder who will always put the national
interest first, and will be willing to stand aside in the matter of dividend
distribution in order to make the investment for the economic recovery and
the country’s future. This advantage requires of you that you play the role
of leader among banks in giving consideration to the national interest.
Third and last, I will tell you a little about what the Government’s
strategy for long term recovery is, and ask that you plan your role and
future performance against that background. Our strategy is essentially the
same as that for other OECS member states but especially those affected by
the deterioration of our banana marketing arrangements. Dominica must
restructure its economy to reduce dependence on only one export, namely
bananas. This involves diversification within the agricultural sector to
other crops and to livestock production. It also involves diversification
among sectors by increasing the contribution of other sectors, such as
tourism and services, to Gross Domestic Product and to export earnings.
Diversification is expected to come about through active sponsorship of the
process by providing appropriate infrastructure, efficient institutional
support and a positive policy framework, including incentives to the private
sector. The private sector is expected to play the lead role in production
and therefore in the direct investments to change the composition of
capacity.
The Government of Dominica recognizes that the restructuring of the economy
requires the reformulation of the objectives and functions of the public
sector to improve its efficiency and reduce the burden it imposes on the
rest of the economy. It will have to attempt to do more with less. This
means being not only more efficient, but being sufficiently flexible to
accept the need for change and to accommodate the process of change.
At the sub-regional level the efforts to maintain financial growth
and stability and ultimately economic development are being spearheaded by
the ECCB, and one of the instruments used towards achieving these goals over
the past two decades has been the strong EC dollar policy, which has worked
well.
Put another way a strong EC dollar policy simply means pursuing
measures which will defend the exchange rate of the EC dollar at the current
level that is EC$2.7 = US$1.00. In other words devaluation is not
considered a policy option.
First of all, the system we operate in the ECCB area makes us each
other's keeper. The ECCB operates a common reserve pool in which all the
countries place their reserves into a common fund on which they can draw.
But since there is no automatic access to the fund, countries have to follow
good fiscal policies in order to access the fund. The conditions governing
access and amounts available to each member government are stipulated in the
Central Bank Agreement of 1983. So that this pooling arrangement which of
necessity requires limits to access to the fund by any one member government
has made it impossible for indiscriminate practice which has contributed to
some of the exchange rate pressures in some of the larger Caricom countries
where one Minister of Finance "call the time". Adherence to these limits
are reinforced by the requirements by its agreement that the ECCB shall at
all times maintain external reserves not less than 60% of the value of
currency issued by it and in circulation and other demand liabilities
including exchanging commemorative coins. It is in recognition of this
in-built control in a multi-state Central Bank model that efforts are being
pursued for the establishment of a Caricom Central Bank. Another in-built
benefit of the multi-state Central Bank and the pooling of reserves, in
defense of the strong EC dollar, is the fact that it is hardly likely that
all member countries will experience economic downturns at the same time, so
declines in direct investment capital in St.Kitts will be compensated for by
higher export earnings for agricultural produce from St. Vincent and vice
versa. Similarly, declines in foreign exchange earnings from bananas can be
compensated for by increases in earnings from tourism. This pooling
arrangement indeed makes us our brothers' keepers, and cushions the EC
dollar from the impact of foreign exchange losses in any one member country.
As can be seen from the following table with selected balance of
payments (bop) data obtained from the ECCB, tourism has become by far the
largest contributor of foreign exchange in the ECCB area
FOREIGN EXCHANGE EARNINGS
TOURISM BANANAS DIRECT FOREIGN
INVESTMENT
($000) ($000) ($000)
1990 1,465 387 565
1991 1,584 328 518
1992 1,727 376 425
1993 1,925 269 385
1994 2,145 217 499
1995 2,064 239 608
while any sharp contraction in banana export earnings will lead to a decline
in foreign exchange earnings for the sub-region, it is clearly evident from
the data that the impact does not have to lead to an exchange rate crisis
for the EC dollar.
Confidence in the system, and the way it works which have resulted
in the strong EC dollar have even been underscored by international
financial agencies in Washington who have agreed that the system should not
be tampered with and they in effect accept that devaluation is not the
panacea for economic growth in the EC dollar area.
The ultimate signal of confidence came with the liberalizing of the
exchange regime in March 1996, which did away with the bureaucratic red tape
involved in getting foreign exchange up to $100,000. One can now simply
walk into the bank and purchase foreign exchange up to $100,000. Up to
today, while I address you, the ECCB holds reserves in excess of
requirements by the IMF in relation to imports, and the EC dollar remains
backed 99% by foreign reserves, way in excess of the 60% required by the
Bank's agreement.
In conclusion, we want to urge all the players in the financial
sector to take up the challenge. In being more involved in financing the
diversification process, you are making your contribution to maintaining a
strong EC dollar, and ultimately development of Dominica.
It is against this new challenge, that I ask you to review the role
of your institution in the economy and society. It is against this view of
the requirement for moving toward a brighter future that I ask you to
approach your task with flexibility and resolve. Sensitivity to the demands
of the national interest does not mean throwing out traditional objectives
of profitability, security and efficiency. Your record of stewardship as
bankers makes me confident that you will continue to mind these objectives.
My hope is that you will now demonstrate a greater sense of balance between
the more private and the public good.
Thank you again for the opportunity of sharing these thoughts and concerns
with you.
This page ©
CaKaFete 1996