The FIA - Villain Of The Peace?
This piece has been written for the
October newsletter of the Caribbean Association Of Indigenous Banks (CAIB).
It is printed herein with the kind permission of the CAIB and the
commercial banks operating in Guyana.
The Financial Institutions Act introduced
in Guyana in May 1995 is under the microscope of the public as
commercial banks are forced into a financial straight jacket by its
rigid provisioning requirements. One of the country’s weekly
newspapers in its issue of August 4, reported that the banks had
repossessed twenty-eight properties in one week in an apparent downturn
in the economy. What is not good for the country is that not only is
that the key rice sector is so badly hit but that the slow down is
affecting most sectors of the economy and across the country.
The FIA was a first rate, first world
piece of legislation adopted and enacted as part of the restructuring of
the country’s economy under the terms set out by the IMF in return for
assistance under a series of programmes going back to 1989. The
principal objectives of the FIA were:
- To establish an internationally
accepted system of capital definition and minimum capital levels
- To provide strict guidelines for
provisioning purposes including off-balance sheet exposure;
- To set out rules for what may be
considered good security;
- To restrict credit to single and
group borrowers; and
- To give the Central Bank - the Bank
of Guyana - greater responsibility and authority over the
operations of the commercial banks.
The principal objective of commercial
banks’ regulation is of course the protection of depositors’ funds
which is extremely important in the absence of any type of depositor
protection like the FDIC in the United States. Another important
objective is the reduction of the risk of bank failures which could have
such a devastating impact on the rest of the economy. Perhaps it would
not be overstating the case to add that in the context of increasing
globalisation the developed countries wanted to ensure that the
financial systems in the developing countries maintained some degree of
stability and were able to meet their international obligations.
From the time the FIA was first mooted
the bankers raised a number of concerns some of which were addressed in
the legislation subsequently passed. However there was not much the
authorities could do without significantly affecting the substance of
the legislation. The flip side of the concern for the security of
depositors’ funds is of course that those funds be securely invested.
If they are not then the interest rates on loans to be charged would be
prohibitive if the banks were still to make a profit and attract further
depositors’ and investors’ funds. Banks had previously stretched
their discretion as far as their auditors would accept and generally
carried some loans and advances the repayment of which depended on the
banks continuing to roll forward those facilities. The legislation took
account of this and provided for a grace period of four years from June
1, 1997 in which banks could bring their provisioning into compliance
with the Guideline issued under the Act.
The banks each adopted a policy that took
account of its own circumstances. One of them indicated that it had
adopted international norms for the classification of loans and advances
and that in so doing it had already been in compliance with the FIA.
Most others however felt that the implications for immediate
provisioning would be disastrous for their financial statements and are
utilising the entire four year period for compliance.
What has compounded the problems for the
commercial banks however is the difficulties which the economy has been
experiencing since 1997 when the country held general elections which
have since seen social, political and economic repercussions. As if this
was not enough bad weather is creating havoc in the crucial rice sector
and gold, lumber and sugar, the other main pillars of the economy are
all experiencing problems of varying degree. Indeed so serious has been
the problems for the rice sector that the Bank of Guyana has twice
waived the provisions of the FIA to facilitate refinancing of credit
facilities in that sector.
Interestingly enough the Banks have not
responded with great enthusiasm to this waiver, a recognition that the
FIA gave them the opportunity to call in some of loans which they may
have been too liberal in granting in the first place. Indeed the Banks
are finding that the FIA is not of much use in those cases where
security had not been perfected or they accepted projections which were
too unrealistic to be true.
The banks now seem to be torn between
their desire to show profit and the danger of restoring on their books
loans which may yet prove difficult given the uncertainty of the economy
in the immediate future. The banking sector is becoming extremely
competitive and the desire to show profits is very strong but at the
same time they also realise that paying corporation tax at the rate of
forty-five percent (45%) on paper profits is not good business.
Has the FIA worked?
I surveyed by way of a short confidential
questionnaire the views of the commercial banks in Guyana their views on
the operation of the FIA. The consensus among the responses is that the
FIA has forced the banks to adopt greater discipline in their evaluation
of credit applications with emphasis placed on ability to repay,
security and documentation.
Respondents agreed that generally the FIA
has operated in the interest of the banks and that the strengthening of
their balance sheet places them in a better position to withstand
unexpected shocks. They noted that by extension their borrowers benefit
as well since the banks must now impose and enforce discipline
among those who seek to borrow from them. However it was felt that the
Act discriminated against agriculture and specialised large scale
manufacturing as a result of the assessment for security valuation
purposes. The respondents consider that stricter financial discipline
was unavoidable in the interest of development of the economy - that
once the economy showed signs of slippage the chickens would come home
to roost, as indeed they have.
On the other hand it was felt that some
of the rules were inflexible and restricted banks’ ability to assist
customers in unusual circumstances. Commenting on the provisioning
requirements one banker noted that the 20% provision for accounts rated
as sub-standard was unnecessarily stringent since those loans are, by
FIA definition, well secured. One international operator commented that
the Act does not give due regard to Branch banking.
It was also felt that the classification
of accounts after 90 days past due is more stringent than in other
countries and the strictures imposed thereby on borrowers do not allow
the flexibility to withstand unexpected shocks. The limit of two to the
number of times an account may be re-financed was commented on as
similarly restrictive although this was not referred to by most of the
Despite the inflexibility in the
legislation the supervising authority, the Bank of Guyana was rated as
helpful and co-operative with the banks without compromising the intent
and integrity of the FIA. One banker commented that the transitional
period was too short and did not anticipate or cater for a slow down in
One respondent considered that the FIA as
currently in place is insensitive and inappropriate to developing
countries economic, legal and social conditions and that their strict
enforcement could precipitate a collapse of the economy while trying to
remedy deficiencies in the banking system. It was noted for example that
there is no financial market and that commercial banks are performing
the role of development/merchant banks: having to lend long while
borrowing essentially short. Unlike developed countries jurisdictions
such as Guyana have a wide range of critical deficiencies. The legal
system is overloaded and does not accord a high priority to commercial
matters while companies legislation does not allow distressed companies
the type of Chapter 11 relief available in the United States of America.
The accounting and tax system and culture are extremely deficient while
as is becoming apparent in the press there is still prejudice against
bankers seeking to enforce their security.
The lessons from the Guyana experience
As this article suggests while every
financial system requires the existence and enforcement of strong
regulatory mechanisms for the generation of confidence and stability,
the successful operation of such a system assumes a compatible
accounting, legal, social, cultural and political environment. Each
country has to examine the constituent parts of its society and as far
as possible ensure that banking regulations are not imposed in a vacuum.
Guyana at the beginning of the nineties was coming out of a long period
of political experimentation which had done great harm to the economy
and the regulatory environment. For the four years up to the
introduction of the FIA the economy had been coasting along smoothly and
the transitional period of four years for full compliance might have
been quite adequate had this trend continued.
On the other hand it is frightening to
consider the consequences if the FIA had not introduced greater
discipline in lending. Indeed one of the unintended consequences of the
FIA is the creation of a reserve of debts against which provision had
been made and from which recovery will therefore constitute profit.
For those countries in the Caribbean
which are thinking of similar legislation the Guyana experience would be
very useful as a case study. For those which already have such
legislation this would still be useful. It is always a good policy to
review the operation of major legislation after a few years. There could
be no better case for such a review as the FIA and its operation in
The contributor wishes to acknowledge the
contribution of the commercial banks operating in Guyana by responding
to our questionnaire.