Mr. GLEN Lall (Kaieteur News Proprietor) should find out who wrote the clumsy editorial “Banking Scam” (Kaieteur News, 24 September 2009) and sack ’em. This is because this editorial is indicative of the trashy News Reporting that Kaieteur News is peddling.

In this editorial (“Banking Scam”) the essayist said that savers are given up to 4% interest on their savings and business borrowers are charged over 14% interest on their loans. And, the difference in between the saving and loan rates (the interest rate spread) is the profits that the banks receive after deducting their costs.

So, as an example if Bank (A) had savings of G$100Bn its profits BEFORE costs would amount to 10% (14% Loan Rate – 4% saving rate) of G$100Bn which is G$10Bn. This is a naively incorrect view.

First of all, if bank (A) had savings of G$100Bn then about 12% of that amount is collected into a Central Bank Reserves pool (that all local banks maintain) so that in the event that there is a run on the banks there would be relative stability. So, G$100Bn savings cost the bank 4% which is about G$4Bn. But, only a maximum of 88% of this savings is actually used for loans. Or, G$88Bn is allocated to borrowings. This means a 4% saving rate needs to generate over G$4Bn/G$88Bn (times 100%) to give a BREAK EVEN Loan Rate of 4.55% without considering other Costs.

IF the bankers are worth their weight in $$ then they would take out all their costs before lending any money so that there is inbuilt continuity in the banking system. This means, wages, rates, bills and other costs are deducted before monies are allocated for loans.

In any event, after all loans are catered for there is always an “excess” that is not used up. This “excess” is pooled together with all the other various banking “excesses” and termed “Liquidity”. Normally, banks would transfer this excess to a “safe” overseas bank so that they can benefit from depreciation of the Guyana dollar.

This is where Treasury Bills come in. The Government literally “Borrows” this “excess” money to finance development projects and gives the banks a 2%-4% rate of interest on Treasury Bills. So, instead of having billions of dollars in capital flight leading to huge currency devaluation the “excess savings” (the liquidity) is used for development leading to increased economic growth rate and job security.

The alternatives would be to have these huge amounts of monies sitting in the banks which would lead to increased interest rates (above 14%) as this “savings” would still need to be financed by the respective bank. Or, another alternative would be to send this money abroad which could lead to heavy losses for the banks as in the case of CLICO.

Another naive view that was peddled by this editorial is that new businesses could borrow monies at a lower loan rate if there is increased regulation. The view is naive because there is no clear understanding by the essayist of the relative success and failure of new businesses (the view held by the essayist is that a new business in Guyana would always succeed). As a guide, over 98% of new businesses fail in their first year. So, many banks would tread carefully when lending to new businesses. It would be better to lend to existing businesses at a lower interest rate than to lend to new businesses with less than 1 years trading experience.

Guyanese do not wish to keep having to correct the naivety of Kaieteur News. So, I would recommend that Kaieteur News stick to news reporting as opposed to its current policy of government bashing. In any event, I am not a reporter but just a “layman”. I suggest that Kaieteur News contact the banks and ask them whether my “layman” view or Kaieteur News “expert” essayist is more accurate in the interest of accuracy.
SEAN BRIGNANDAN