Noble: The guys with the umbrellas; are T&T banks doing their part for the economy?

In 1930, The International Digest offered this quote: ‘A banker, it has been said jestingly, is a man who lends you an umbrella when the weather is good and takes it back when it rains.

‘It would be more correct to say that the banker, at the beginning of a storm which might turn the umbrella inside out, demands that you do not open it but stay indoors.’ 

Photo: The man with the umbrella…

The quote speaks to the risk-averse nature of bankers and their short-term view of life. Storms do pass and can be prepared for. This mindset sets up a confrontational dynamic since entrepreneurs take risks for breakfast. 

It further begs the question: what role can banks play in economic development? 

Trinidad and Tobago sits in a peculiar place. It is essentially still a ‘plantation’ economy; it has one major crop—oil and gas—with its fortunes tied to factors outside its control. 

Trade was never merely about economics. Business interests in the larger metropolitan countries further their interests through negotiation to leverage and dominate the local natural resources or markets. While Trinidad and Tobago’s oil and gas industry replaced its earlier sugar industry, in both instances, the output was sold in a sealed value chain to interests outside of the local economy. 

The global capitalists brought the money and the technology to monetise the resources, not transform our economy. 

Photo: A satirical second look at globalisation…

Do we know that the Bank of Nova Scotia opened a branch in Kingston, Jamaica, before it did so in Toronto? That branch was opened in 1889 to provide the trading funds for the ‘saltfish for rum’ trade. A Royal Charter established the forerunner of Republic Bank, Colonial Bank, on 15 May 1837; it was a virtual monopoly. 

Bear in mind that Trinidad was producing 38% of the oil in the British Empire in that year. It was, therefore, no surprise for Citibank to arrive in 1965 shortly after Texaco (1956), which was ramping up exploration and production. 

Fortuitously, Amoco struck oil in May 1969 with a production rate 55 times the land wells (Mulchansingh, 1971).

Despite the country being a longstanding significant gas and oil producer, there are tremendous and persistent social and economic disparities. Essentially, we are children with faces pressed against the glass, looking at the beauty enabled by our resources. We are not equal participants in the wealth generated. 

Joseph Stiglitz was right: growth can lead to an increase in poverty even while bringing enormous benefits. It is necessary to have a government and a private sector that recognise the social element in the economic equation, since low oil and gas revenues can conspire to create an unhappy ‘perfect storm’.

Photo: Lake Asphalt workers protest against non-payment of salaries in September 2021.
(via MSJ)

On the one hand, our nation is connected through prominent international oil and gas companies to the global world. Yet, on the other hand, a large segment of its citizens experience unpleasant lives. 

As citizens, we often talk about diversification but never seem able to move forward. Is it because the mobilisation of our savings and how those is allocated never enter the discussion? 

This silence is partly because of the Basle agreements, which seek to regulate the world’s financial interconnectedness, but also because of the ownership profile of our banks. 

Modern financial systems contribute to economic development and improved living standards by providing various services. These include clearing and settlement systems to facilitate trade—channelling financial resources between savers and borrowers, and creating multiple products to deal with risk and uncertainty. 

Banks specialise in assessing the creditworthiness of borrowers and providing a continuous monitoring function to ensure borrowers meet their obligations. Their reward is the difference in interest rates charged to the accumulated pool of savers and paid to potential borrowers (net of the monitoring cost).

Photo: A satirical take on bank loans.
(Copyright Glasbergen)

This whole process, known as ‘maturity transformation’, is at the heart of modern banking. 

The question to be asked and answered is: what is the optimal size of that spread? 

Locally, it has come down since 2010 but may reflect the changes in the country’s oil and gas fortunes. Coincidentally, there is a reported increase in fee income—is this designed to buffer this spread? Is the goal to equate fees to loan interest income? 

If the depositors do not receive increased earnings through higher interest rates paid, but they pay higher account charges, what effect on the savers can we expect? Which sector benefits?

Since the banks’ role as financial intermediaries greatly influences greatly how efficiently the economy allocates its resources between competing uses, we should be interested in whether their lending activity helps resources flow to their ‘best use’.

Image: Hang in there…

How can consumer loans be a higher priority than the financing of small and medium-sized businesses? Have our banks taken the shortcut to profitability by refusing to provide adequate monitoring to small and medium companies? 

All risks require management; monitoring small business loans is not insurmountable. Would our now large businesses have flourished had this  lack of interest existed at their start? 

We eat away at our foreign exchange reserves when we prime competition for consumer loans and promote credit cards. How sustainable are these decisions?

If we give some attention to the multitude of service entrepreneurs, we may find a stream of foreign exchange. While many of our more than 8,000 small businesses will not grow to be large companies with stable cash flows, how do we know which ones can? Will Shark Tank remain a television show?

The digital space must have young persons who can be mentored and developed into profitable business owners. 

Photo: Students observe a digital presentation in Tarouba.
(via Ministry of Digital Transformation)

Does competition between banks drive efficiency? Why is switching banks more complicated than switching mobile phone providers? How does this restriction link to the banks’ earned profit margins? 

Is digitisation expanding the market reach or profit margins? It is estimated that one-fifth of our citizens do not have a bank account. Will our banks reach out and bring them into the fold? Or will our banks reduce their teller and in-branch services?

In the last 20 years, we have seen the growth of the financial sector and an accumulation of wealth through finance rather than commercial activities. The gains in the stock market are not aligned to increases in employment levels or wages. 

Traditionally, we have been able to track changes in our economy’s structure via changes in employment data or contribution to GDP; now, we need to look at the profit contribution of sectors. Finance, insurance and real estate are the star performers. Dividend income, interest payment and appreciation of capital investment assume significant importance, even while their ownership is concentrated.

Image: A satirical take on banks.
(Copyright Hedgeye)

Manufacturing companies now have investment portfolio income that is a critical supplement to their profits. 

Is this the desired future? Is it sustainable?

Given our age-old problem of interlocking directorships, who is influencing bank strategy? Where does control lie? Is it credible that the commercial banks are mere receivers of directives from the Central Bank? 

Neil Fligstein’s ‘Markets as Politics’ (1996) tells us that who we are and our social connections determine market behaviour. He argues that the shaping of institutions is the product of contests between influential players. 

Fligstein notes that social crises are pivotal to understanding a society’s economic development, and the power struggles influence the shape of an industry. For example, in our country, the rise of the Black Power movement gave rise to the Workers’ Bank. 

Photo: Demonstrators in front of the Royal Bank of Canada in 1970.
(via NJAC)

Ng Wai (2010) provides a fascinating perspective on bank failures from 1836 to 1992. His paper argues that bank failure and acquisitions result from poor responsiveness to market structure and the competitive environment, lax lending and investment behaviour of banks, ineffective recruitment and retention of staff, government intervention and financial instability. Several of those lessons are still applicable today.

Will our banks keep their umbrellas dry? Is marking time the right choice for them? When the mega-deals run out, how will our banking system retain profitability? 

These questions should not be answered only by the government, which has a legislative role to play. Our schools have to step up and teach basic business maths so that budding entrepreneurs can understand how to prepare their financial statements as a precursor to running a sound business.

However, prudent bankers should facilitate broad-based business development. 

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One comment

  1. Essential reading for genuine educators and those with a genuine interest in moving T&T forward.

    So don’t expect any banker to read right to the end; like ostriches, they prefer their heads in the sand.

    But worse, don’t expect the Minister of Education to read it either.

    Unless, of course, some fashion magazine picks it up and publishes it.

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