Banks and their foreign assets

Foreign Assets

The investment behaviour of the commercial banks in Guyana seemed to be taking a favourable turn.  That was how it looked at the end of March this year.  Except for a few restrictions, banks control the choices of how to utilize the money that their customers deposit with them.  Banks must make loans and advances to credit worthy customers, but they are not allowed to participate in the retail trade other than making loans to business customers.  Banks in Guyana cannot own property beyond that which is needed for conducting their business.  Within the last 10 years the commercial banks of Guyana have shown a preference for holding substantial amounts of their assets overseas.  The first quarter numbers in 2010 suggested that that preference was cooling.  In 2009, the commercial banks had about G$45 billion of their resources in various foreign assets.  The asset classes of choice were foreign currency and bank deposits which together accounted for over 98 percent of the foreign assets of the commercial banks in 2009.  This class of assets made up one-fifth of the portfolio of the banks operating in Guyana.  The rest of the portfolio was made up of Treasury Bills, loans and advances and physical property.

Despite its size, the net assets were down from the all time high of G$40 billion reported in 2008 and reversed a nearly 10-year trend by banks of increasing the share of foreign holdings in their portfolio.  Ever since the year 2000 when net foreign assets made up seven percent of the portfolio of the commercial banks, that asset class kept growing and peaked at 25 percent of the portfolio of commercial banks in 2008.  With foreign assets growing by leaps and bounds, it appeared for the last 10 years as if the commercial banks were not interested in allowing Guyanese much use of the money that they had put in their hands for safe keeping. The decline in 2009 was therefore significant, suggesting that there might be a deliberate effort on the part of the commercial banks to alter their investment strategy.  By March 2010, the foreign assets of the banks had fallen further to G$37 billion, leading to speculation that a risk adjustment had been made.


Negative Experience

It is not clear what was driving this change in investment attitude by the banks, but most of them seemed to be developing a stronger confidence in the Guyana economy.  It is not possible to ignore the scare that many financial institutions experienced following the Stanford and CLICO crises that shocked the region early in 2009.  Even though the financial system in Guyana was not severely hurt by the crisis, at least one bank admitted losing money as a result of its investment in Stanford International Bank and CLICO Trinidad Limited.  That negative experience reportedly influenced its decision to reduce its exposure in foreign assets.  Many Guyanese were also hit hard at a personal level and had their financial cover blown off like the roof of a house after the passing of a hurricane.  Yet, Guyanese remained faithful to their financial institutions and continued the relationships that they have had with them despite the uncertainties that emerged from the global and regional financial crises.  Guyanese increased their deposits by 5.3 percent in 2009.
Reallocation

With less foreign assets in the portfolio, more money becomes available for banks to make loans at home.  The realignment is a critical part of the investment strategy of the banks.  With reduction in foreign assets, banks expand their capacity to make more loans available to Guyanese. The activities of commercial banks are important to economic growth. In addition to mobilizing capital, banks facilitate the reallocation of resources.  In a competitive environment, entrepreneurs follow the money and try to enter the industry that would enable them to earn the highest levels of profit.  For Guyana, those would be the construction and the mining industries.  They generate the highest income in the country and it is not surprising that a growing share of loans is going to activities associated with those two sectors of the economy.

According to the Bank of Guyana (BOG), credit to the private sector grew during the first quarter of 2010 by 2.3 percent.  A major beneficiary of the upswing in lending was the agriculture sector which received a 21 percent in loans.  Loans to the manufacturing sector also increased by 12 percent.  It was surprising to see that the real estate sector did not receive a bigger boost in lending.  That sector of the economy was only able to register a 5 percent increase in loans.  Liquidity in the banking system remains high and this should induce banks to seek creative ways to convert the liquidity into shareholder value.  One good sign is the continued emergence of new lending and support programmes for customers of the banks to develop their resources and businesses.
Unique

Some of these programmes are unique to the lending agency as is the case of the Women-of-Worth programme introduced recently by the Guyana Bank for Trade and Industry (GBTI).  Others are collaborative efforts such as the Toolkit for Small and Medium Enterprise (SME) initiative implemented by Republic Bank in collaboration with the International Finance Corporation.  Notwithstand-ing the variation in ap-proach, there is an increased willingness of the commercial banks to leverage their relationships with their customers.  This should make for better service and the emergence of improved products for the general public. It is therefore encouraging to observe that the commercial banks are showing greater confidence in their customers.  If the comments in the annual reports of the various commercial banks are anything to go by, lending by commercial banks to the Guyanese public should expand significantly.
Excess Liquidity

That is, of course, if they could keep from altering the state of the excess liquidity.  As soon as it looked as if the banks were finally putting their money where their mouth was, their familiar tendency emerges.

In May and June of this year, the banks returned to binging on foreign assets.  From March to May, the banks increased their foreign exposure by 30 percent, virtually bringing their foreign holdings back to pre-2009 levels.  While foreign assets are a legitimate part of the portfolio of commercial banks, they do affect the rate at which banks could expand loans.