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High Interest Rates are Crushing the Working Class

If you've taken even a casual skim through the newspapers in the last few years, you'll know that Belize has gone through its own version of what the Americans call the sub-prime housing crisis. Every month dozens of homes go up on auction as homeowners have been crushed by high interest rates and abandoned by an unresponsive and inflexible banking system. But what's behind it? And can anything be done to bring down those rates to make it so that homeowners don't become the homeless? I've been looking for answers for the past few weeks and I found that the solutions seem simple but there are no easy answers.

Betty Perez, Homeowner
"Honestly Jackie what I do on a daily basis is I am before God. I don't pray daily, I pray all day and in praying all day it helps me to go through for that day and when I reach the next day I try to face it the best I could because if I don't do that, I think I will be a suicide victim also."

47 year old Betty Perez is not alone. Thousands of Belizean families, mostly from the working class, are struggling to meet the demands on their mortgage payments and hold on to their homes. A problem created due to the failure of the banking sector to provide loans at affordable interest rates."

Betty Perez,
"To keep the payments going sometimes we had to don't pay one bill to pay a next bill and when you miss the payment from the bank, everyday the interest goes up and even when you go and talk them, you try to explain to them what you're going through. Sometimes they say I will give you a grace period or whatever but the interest still goes up. That does not help because when you meet the payment now, you still have that interest to pay plus your mortgage and then so that interest always goes up and you have your mortgage to pay and the interest is going up and you can't meet the two and sometimes the bank calls you in and they will tell you or they would write you a letter and say we'll be taking back your house. If you say you'll give them a little bit more then it means you will have a little less for food, a little less for clothing, a little less for education."

Equally disturbing is that Belizean banks have the highest interest rates throughout the region despite the fact that the banks have excess liquidity. According to Glenford Ysaguirre, the Governor of the Central Bank of Belize, with such access to liquidity he would expect a decline in the interest rates and greater competitiveness between these institutions.

Glenford Ysaguirre, Governor, Central Bank of Belize
"I think in all the other territories, the countries out there in the region, CARICOM countries, mortgage rates are lower than those in Belize. They are at 9%, 8.5%, 10% but much lower than ours here in Belize. So one would anticipate that in a market like that, with such excess liquidity, you would have seen a decline in interest rates. There has been a slight reduction but not to the magnitude that I would have expected and this is what I mentioned earlier that there is a certain stickiness of the interest rates. It goes up quickly but it would not come down when conditions dictate that it should and that is we need to look at what is the underlying cause and I suspect that some of the underlying cause is because of the smallness of the market, you don't have true competition so banks are not going after each other as aggressively as one would expect."

To get an idea of how bad it has had an effect on homeowners, just look through the newspapers weekly and see the high number of properties being auctioned and mortgaged. Some homeowners like Betty Perez have been forced to sell their household items just to make a payment to the bank.

Betty Perez,
"I got rid of my refridge, I got rid of my stove, I got rid of two of my beds, I got rid of my sofa set and almost everything in my house is what my kids they bought and said mom you could use it. So it is kind of hard but you have to work and you have to try and meet the payment or you might by on the street."

According to the Governor of the Central of Belize they do meet with bankers on a monthly basis to discuss what is happening and how best to address the problem.

Glenford Ysaguirre,
"To keep tabs on what is happening in the economy, to discuss what is happening in the system to see what needs to be changed. Banks tell us what they are experiencing, we monitor the level of bad debt because it is an indicator of what is happening in the economy and if you look at the reports being produced by the Central Bank and the public needs to be aware of this and that's why we publish information on the bank, so that they can see what is happening with the banks and what is going on with their competitors.

At some point we will come out of the economic recession. The question is how long it will be sustained and those factors that control or influence that are out of our control and basically determined by the developed economies and the rest of the world. We need to do what we can on the ground here to see if we can keep our economy afloat and see what opportunities are there for us so that we take advantage of these situations. But like I mentioned to you there is always a lag with what happens out there and when it happens here in Belize, when it affects us in Belize. So our recovery will be a bit slower than theirs or at least lag it by I think 12 to 16 months."

One suggestion is to lower the ceiling on the rates of deposits. An idea supported by Stephen Duncan the General Manager of Alliance Bank but yet to put into effect.

Stephen Duncan, General Manager - Alliance Bank of Belize
"Banks have been raising deposits in this country for a few years now at 9% and 10%. Now the depositors are happy, those people who have savings in the banks they are happy. So when one party is happy the other party is not happy. To get the lower rates we have to make the depositors unhappy because we have to push down the rates. So at this moment I think monetary policy and fiscal policy should be geared towards driving down the rates in the country."

Belize not only has the highest interest rates throughout the region but its rates on deposits are also higher than those in the region and internationally.

Glenford Ysaguirre,
"Deposit rates are significantly lower too. So we can't have our cake and eat it. We will have to expect lower deposit rates. We have been exploring and looking at the idea of reducing the flooring on savings and deposit rates to be more consistent with what is happening in the global economy. 4.5% is top rate anywhere else in the world right now on a savings deposit.

If we lower that, we want to see if it would have that impact on bringing down the lending rates. It probably won't happen immediately but we would have to get commitment from the banks to do so because you don't want to lower it and then the banks don't pass it on to the borrowers. Barbados had a similar situation like us where they have a flooring on savings and deposit rates but theirs was at 3% and they are now going through a process where they are gradually phasing out that flooring and they will let the rates be market determined. So if you have deposit rates that are market determined then you should also have lending rates that will be market determined.

What we are doing from the Central Bank point of view is monitoring the performance of banks to make sure that they are operating as efficiently as possible so they can find room to compress their spread. If they are operating efficiently they can compress their spread and maintain the same level of profitability and that is only operational efficiency but efficiency in terms of lending decisions because a lot of time creditors make bad decisions, they lend to people who shouldn't get it. They lend to people who are high risk and when that loan fails, they seek to recover and pass it on the cost to good borrowers through the interest rate that they must over in the system."

If interest rates don't come down, homeowners will no choice but to continue to surrender their homes just to survive.

Betty Perez,
"There is no way you can save. The food price is going up, everything is going up and even if we ask for a salary raise it won't help because everything else goes up when you get a salary raise so that really does not answer the question. The thing is that if our interest rates would lower and the rates for our light and our water will lower then people could survive.

Our government and even our banking system need to look at something differently because it is not higher prices will get more people but if you lower your prices and then you have so many people out here that say they study economics and so forth and if you study economics, you should know that if you lower your prices you get more consumers. And most of our people in Belize are either just above the minimum wage or at the minimum wage. So if you get those customers then you have money making."

The Governor of Central Bank of Belize Glenford Ysagurrie agree people cannot continue to lose their homes and while he believes another solution would the establishment of a credit bureau he offered this advise to both bankers and the general public.

Glenford Ysaguirre,
"People need to be very prudent in their investment decisions, especially in times like these. I think they need to sit down with a banker. When you go and negotiate a loan make sure you are getting the very best deal you can. You should shop. I also would like to make an appeal to the financial institutions that we need to rethink and this is our position at the Central Bank, we need to rethink what we are doing in the financial sector. The banking practices and things that we did in more benign times are not necessarily the best practices for times like these and there has to be some adjustment and I would like to appeal to the commercial banks to try and meet their customers somewhere in the middle there to make their adjustments and restructure these facilities so that people can weather the situation."

A word of advice not because you have surrendered your home that means your money problems are over. Some banks advise you that if they cannot get to sell the property for the asking price you will need to pay the difference which means you are being asked to continue to pay for the property you no longer own.

http://www.7newsbelize.com/sstory.php?nid=15312

Harry Lawrence on easing of interest rates
Editorial in The Reporter.

It is gratifying to note the gradual easing of interest rates on business and personal loans among commercial banks, but there is still a long way to go.

The Government of Belize has been hoping that Banks would voluntarily do what needs to be done and of their own accord bring down interest rates to help ease the economic crunch brought on failing bank, insurance and mortgage companies.

Indeed the banks have responded, but not fast enough and certainly not fully enough. We have noted Atlantic Bank's reduction on mortgage rates and Scotiabank's efforts to reduce the banking spread. We have noted with approval the DFC's offering of lower-cost student loans.

If the Belize Bank has done something constructive, they must have done so quietly, without public announcement. Heritage Bank (formerly Alliance) and First Caribbean (formerly Barclays) have been equally secretive about their moves.

But all the banks today have web sites and they all tell prospective clients what a bang-up job they are doing in Belize. All of them are doing well and three of them - Atlantic Bank, Belize Bank and Heritage Bank offer private personal and corporate accounts which give them access to international funds.

The World Bank has just published a review paper looking at the recent international financial crisis and questioning whether banks should be the hub of investment and insurance and mortgage and commercial financial activity all rolled into one, or whether there should be some restrictions to limit risks and to limit greed.

In Belize the question is whether commercial banks should be allowed to do international banking as well, taking advantage of Belize's tax haven laws. Such banks enjoy a huge advantage over purely commercial banks, but this advantage is not reflected in the way they do business here in Belize.

Credit unions in Belize charge interest of one percent per month on the remaining balance. For borrowers who pay their bills on time, this works out at a little less than ten percent a year.

Taking that as a guideline, we are of the view that commercial banks should charge interest at no more than 12 percent a year.

It will probably need legislation to make it happen, but this is far more seminal to our growth and development than the current hot debate about banning all offshore exploration.

http://www.reporter.bz/index.php?mod=article&cat=Editorial&article=4446

Use the credit unions til the commercial banks get the sense.