Kaieteur News – The APNU+AFC had denied approval of the sale to Republic Bank of the local assets of Scotiabank, a Canadian owned financial institution. The excuse, which was used then, was that that sale would have given Republic Bank a too dominant role in the country’s financial sector.
This column has questioned whether the permission of the Bank of Guyana was needed for the sale of one financial institution to another. It would appear to be against the principles of the free market for regulatory approval to have been needed.
This column had noted that the sale of one bank to another is a normal market transaction. The State should not interfere but should limit itself to protecting against certain forms of financial concentration, such as monopolies, but this should not become a pretext to frustrate normal mergers, sales and acquisitions.
Scotia’s decision to sell had caused questions to be asked as to why when Guyana was set to become the leading economy in the Caribbean, Scotiabank was pulling out of the country. Scotiabank obviously does not share the same enthusiasm as the former government did about the future of Guyana’s financial sector.
The “chicken feed” royalties, which ExxonMobil and company are giving to Guyana was never going to be an incentive for Scotiabank to stay in what is, by international standards, a miniscule market. And it was most instructive that Scotiabank had decided to maintain a presence in Trinidad and Tobago, Jamaica, and in the Dominican Republic. But not in oil rich Guyana!
The Governor of the Bank of Guyana had another concern. He was worried about the market dominance, and concomitantly the implications for fair competition, now that Republic Bank is poised to acquire most of the regional assets of Scotiabank. In his estimation, if this acquisition goes through, Republic Bank would become “too big” and control just more than half of the banking sector. Now Vice President, Bharrat Jagdeo, had parroted the same concerns about concentration in the financial sector.
The regulator, the Bank of Guyana, denied permission for Scotia, to sell its local operations to Republic Bank, the intended buyer did not mount a legal challenge to the Governor’s and the government’s assertion that such permission was needed.
It should have. The Financial Institutions Act (FIA) requires permission from the Bank of Guyana to enter into a merger or amalgamation with another bank or to transfer the whole or substantial part of its assets in Guyana. Republic Bank was buying out Scotiabank. There was no merger, amalgamation, or transfer of assets
The fear of market dominance in the financial sector must not become an excuse to impose restrictions on the sale of banks to other banks. Former President, Bharrat Jagdeo, who is now a Vice President, was arguing that the total assets of the country’s entire financial system cannot finance the investment that is needed for oil exploration and production.
But this should be reason for Jagdeo to want a strong player to drive financial sector growth. The small banks in Guyana really cannot play such a role; they are too minuscule. Guyana needs a large player in the banking sector just as it needed a major hotel brand to boost its hospitality sector.
Now Jagdeo appears to be contradicting himself. While recalling that the PPP/C government had adopted a less than liberal approach to the financial sector, by limiting the number of banks earlier because of the failure of some financial institutions, he is reported as announcing a rethink of licensing new commercial banks. These new banks, which are likely to be considered, will be the very banks, which has signed an agreement to buy the local assets of Scotia.
Strangely, Jamaica suffered financial losses as a result of the balkanization of its financial system – another way of saying that these losses were on account on the fragmentation of its financial system into a number of small banks. But is this not the very notion, which will result from the granting of new commercial banking licences? Will the country’s financial system not be further fragmented?
Jagdeo is of course clueless as to the cause of the past implosion in the Jamaican banking system. This resulted not from balkanization, but in the first instance, in the 1990s from problems in the economy, and after 2008 from the run-on effects of the global financial crisis.
The financial crisis of 1996 has nothing to do with sequencing financial reforms, as Jagdeo would have us believe. It resulted from a combination of slow growth, poor investments, and the high real interest rates. All the making of poor economic policies and management. The later crisis was as a result of the degree of the island’s financial inter-connection to financial markets, something that countries like Guyana did not have to worry about.
It is now quite convenient for the PPP/C administration to now decide to issue new licences to new financial institutions, even though this may fragment the very system which Jagdeo claims is under-capitalized, even though a major player, Scotia is scooting.
(The views expressed in this article are those of the author and do not necessarily reflect the opinions of this newspaper.)
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