Analysis and News

Guyana’s Banking sector: Highly conservative and extremely profitable

BY GEOCAP's Contributor: Kayshav Tewari

The opinions contained in this article are solely those of the author.


When one considers the capacity of Guyana’s Banking system to lend against its actual lending to the private sector, we can easily see that our country’s financial institutions form a tremendous source of untapped potential. Using data from the Bank of Guyana, we find that at 2020 year-end the commercial banks’ ratio of private sector loans to the assets it controls was a mere 27 percent — 169 billion GYD out of 630 billion GYD.


If we look at the distribution of the remaining assets of Commercial Banks, we will see clearly the spare capacity of the financial system: the percentage of cash resources to total assets was 25 percent while the percentage of securities to total assets was 24 percent. The final 20 percent goes towards non-private sector loans and deposits. 


Profitability of the Banking System


Guyana’s banks are highly profitable and extremely liquid institutions. Lending rates in the sector average around 9 percent while government T-bills and overseas deposits earn around 1-1.5 percent. Deposit rates, on the other hand, stagger at around 1 percent. The interest rate spread, evidently, is very wide — this makes the banks profitable.


Net interest income for 2019 was $24 billion while other incomes (bank charges and fees) amount to $9 billion. With non-interest expense accounting for $16 billion, net income before taxation for the entire banking sector was $17 billion and net income after taxation stood at $11 billion.


On average, in 2019, commercial banks boasted a Return on Assets (ROA) of 2.15 percent and a Return on Equity of 14.15 percent. These statistics are comparable and, in some cases, better than other profitable banks around the world — for example, the ROA for US banks in 2019 averaged at 1.34 percent.


Profitable yet Conservative


If the returns in the Banking sector are so large, why is it that only less than 30 percent of its assets are being loaned out to the private sector? 


One answer could be for fear of bad debts and defaults on loans: the more that banks lend, the more likely it is that there will be bad creditors. However, in 2019, total loan losses net of recoveries for the entire banking sector was a mere $271 million. 


These facts suggest that the banking sector is highly conservative in their lending, and it, therefore, lends very selectively i.e., there is a crowding out in investment where the most eligible applicants for loans are the ones that will likely receive them. This disposition towards lending must change if we are to develop as a nation and a true free market economy. 


Reliance on existing relationships as the reason for lending, constraints on amounts that can be loaned, high-interest rates on loans are a few reasons which suggest that our banking sector might not be serving as a good intermediary of our nation’s savings and why reform must be made. There is an apparent leakage from the economy and a drag on investment and growth.


Banks can remain profitable while increasing loans/decreasing interest rates


When we consider how much the banking sector will grow over the next decade, we can begin to see how such a disposition by the banking sector can form a bottleneck and stifle economic growth. 


If we approximate the Compound annual growth rate (CAGR) of the banking sector over the next 10 years at 17 percent – given that the CAGR over the last ten non-oil years was 13 percent – we find that by 2030, there will be in excess of $3 trillion dollars in bank assets. 


From a macro-economic perspective, it would appear suboptimal that only 30 percent of this amount will go towards funding the private sector especially when it is completely feasible for banks to maintain their current levels of profitability while increasing loans. 


All other things being equal, if interest rates are halved, and loans to private sector increased from 30 percent of total assets to 75 percent, banks can maintain a similar level of profit considering that assets will be redirected away from loans/investments that earn a much lower return. 


Reform in the Banking System


While this change might technically be feasible, banks may still be reluctant to alter the status quo that benefits them so well. 


Policy reforms can also assist in this process: reliable and far-reaching credit information provided by credit rating agencies must become a priority for policy-makers who wish to enable a transparent banking system, competition can be pushed, digitisation of payments ought to be incentivised, legislation on the types of assets that suffice as collateral should be changed, and our court systems can become more efficient and less costly in cases of enforcement and bad debt.


The banking sector cannot change in a vacuum but change must be informed by dialogue and a reorientation of goals while being supported by a modernised and stimulating legal and economic environment.


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