Cayman Islands: Local Banks - Licensed In Whose Best Interest?

Caymannetnews

11 January 2001

This story is reproduced by kind permission of Caymannetnews at http://www.caymannetnews.com

The multi-billion dollar banking industry, as part of the ever-burgeoning financial sector, is one of the twin pillars of the Cayman Islands economy and is the foundation of the islands' renown as the world's fifth largest financial centre.

According to information from the Monetary Authority, at June 2000, total assets of the banks stood at US $747.6 billion, a near 50 percent growth over the 1996 figure of US $497 billion.

The sector is comprised of 31 Category A banks - licensed to conduct business within and outside the Cayman Islands - 418 Category B banks, which are not licensed to take deposits from persons resident here or invest in asset which represents a claim on persons resident in the islands, and 15 Category B Restricted banks. In addition, there are 116 licensed Trusts - 54 unrestricted and 62 restricted.

Given its size and importance to the local economy, many have long argued that the banking sector's contribution to the public purse and to the development is far from what it could, or should be. Time and again, indigenous entrepreneurs, particularly small businesses, have expressed frustration in accessing loans at reasonable rates from the Class A banks.

A primary source of the frustration has been the fact that banks here operate with a prime rate, usually one percent above that in the US . But the further rub is that mortgage rates are usually three percent above the local prime rate.

Whereas average income earners in the US can access residential mortgages between 6.5 and 7.25 percent, the avergae Caymanian, especially young, first-time home buyers are hard pressed to afford a mortgage at 12 and 13 percent.

Readers will recall that last year, local banks, in a cartel-like move, increased interest rates on short and long term funds, in response to a hike in short term in the United States. This prompted a private members motion by Mr. McKeeva Bush, calling on governmnet to meet with the banks to discuss cushioning the impact of the increase on their customers.

This followed an earlier motion brought by Mr. John Jefferson requesting that Government should take steps to meet with the commercial banks offering mortgage financing in order to negotiate preferred interest rates for Caymanian owner-occupied homes.

In the local business sector, however, frustration with the banks continues and involves more than just interest rates. The majority of the top positions in the sector are not held by Caymanians, and qualified Caymanians returning home find a glass ceiling blocking their attempts to reach middle and upper management level in many of these institutions.

One can point to the sector's award of scholarships and contribution to community projects as evidence of their corporate care. When compared to scholarships offered by the six big accounting firms, however, it would seem that more could certainly be expected from the banks.

It has also been argued that Government should look to allowing all Class B banks - who want - to lend locally, thereby making more money available to sustain and diversify the local economy.

The new Government has promised that in its efforts to increase revenue, there will be no additional taxes on consumers. In the same vein, it has indicated that it will look to the financial sector for help.

Currently, the annual licence fee for Category A banks is $80,000 and $15,000 for those in Category B. As one financial analyst puts it, figures like the latter represent a mere fraction of the annual residential rental paid to expatriate managers of some of these very banks.

In other territories with or without offshore financial centres, banks are taxed based on a percentage of their profits.

Perhaps the time has come, for Government to consider a revision of the level of revenue raised from the banking sector. The community is certainly looking for a greater contribution in return for the personal and corporate safe haven they now enjoy.

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