Rate roadblock

Audrey Tugwell Henry, CEO of Scotia Group Jamaica, has urged the Government of Jamaica to ease tax burdens on banks, arguing that such measures are crucial for lowering interest rates and making financial services more affordable for Jamaicans.

Tugwell Henry made the call at the Jamaica Stock Exchange’s (JSE) 20th Regional Investments & Capital Markets Conference on Thursday. The veteran banking head pointed out that commercial banks and other deposit-taking institutions (DTIs) have had to contend with a higher cost of business in general which is compounded by two tax measures specifically for financial entities.

Regulated entities that are regulated by the Bank of Jamaica (BOJ) and Financial Services Commission (FSC) have an income tax rate of 33 1/3 per cent along with an asset tax of 0.25 per cent on the taxable value of their assets. This contrasts with regular or unregulated companies which are taxed at 25 per cent along with building societies incorporated under the Building Societies Act which are taxed at 30 per cent.

“So, there are other factors that impact rates in the market that need to be elevated. Since the time is short, I’ll just also use my comments to speak about the cost of banking in Jamaica and what the Government of Jamaica and central bank [can do]. There are other measures they can do to take down the cost of doing business for banks,” said Tugwell Henry in the CEO’s Meet the Press session.

While the asset tax collected by GOJ is not segregated and published in its general market publications, the asset tax paid by some of Jamaica’s financial conglomerates can give some insight into the cost of this expense. Scotia Group Jamaica paid $1.55 billion in 2024, JMMB Group paid $1.09 billion in 2024, and Sagicor Group Jamaica paid $910.50 million in 2023. Scotia Group Jamaica paid $8.29 billion in income taxes during 2024 across its subsidiaries, NCB Jamaica paid $15.21 billion in income taxes during 2024, and Sagicor Group paid $6 billion in income taxes across its subsidiaries in 2023.

“Banks pay an asset tax on total assets held, which is a disincentive to growth, but banks are growing anyway. The Government of Jamaica had implemented a temporary measure to institute an asset tax on banks and they have not removed that [tax]. That creates a burden on the Jamaican public because it is a burden that the banks are bearing. The other thing is that every single banking service attracts GCT. So, if the Government of Jamaica is interested in taking down the cost to the consumers, those are all things that are within their control to help to make banking services and interest rates lower for consumers and businesses,” Tugwell Henry added.

The asset tax was imposed on regulated financial entities in 2012. It was first imposed at a rate of 0.14 per cent of the entities assets each year, but that rate was increased to 0.25 per cent in 2014. Nigel Clarke, Jamaica’s former finance minister, promised to cut it in half in his 2020/21 budget presentation, but rescinded on the move when the COVID-19 pandemic reached Jamaica a few weeks later.

On Wednesday, his successor Fayval Williams addressed the proposed reduction in asset tax, underscoring the Government’s intention to honour its prior commitment.

“I know that the former minister of finance & the public service had given a commitment, and we continue to abide by that commitment. The timing of it though would be an important question here. So, as our budgets get stronger, I am sure that a given time, we will be considering for this commitment.”

Tugwell Henry, who is also president of the Jamaica Bankers’ Association, however, indicated that despite the high costs banks face to do business, they are still actively financing growth, citing data that show 99.3 per cent of deposits in the banking sector have been loaned out.

Tugwell Henry also reminded that banks have been required to keep 6 per cent of their prescribed Jamaican dollar (JMD) liabilities, such as deposits, and 14 per cent on foreign currency liabilities as cash reserves — money that cannot be loaned or invested and doesn’t earn interest.

The Bank of Jamaica’s (BOJ) open-market operations have roughly doubled over the past two years, absorbing some market liquidity. These measures helped the central bank meet its inflation target of 4-6 per cent, but also increased banks’ funding costs.

“In terms of interest rates, we really need to make sure that the market understands that there is no 100 per cent correlation between the policy rate and the rate that banks lend at in the market,” Tugwell Henry explained.

Her comment came in the context of the public expecting the BOJ’s recent 100 basis point cut to be filtered through the banking system immediately, with loan rates going down by the same amount.

The Jamaica Manufacturers and Exporters Association (JMEA), Private Sector Organisation of Jamaica (PSOJ), and Jamaica Chamber of Commerce (JCC) put out a joint release in December “strongly urging” the BOJ to continue cutting rates to stimulate the economy.

Tugwell Henry noted that when the BOJ raised its policy rate by 650 basis points to 7 per cent between October 2021 and November 2022, loan rates increased by an average of just over 100 basis points. Tugwell Henry argued that a more aggressive pass-through of rate hikes would have led to a surge in delinquencies and significant hardship for borrowers.

Robert Almeida, group CEO of NCB Financial Group Limited (NCBFG), who was also part of the panel, questioned the timing of concerns over the transmission of interest rates. “I’m curious as to where this question was two years ago while interest rates were rising 700 basis points. I don’t recall anyone saying how comes the transmission is not happening faster, why aren’t you raising your lending rates faster, what’s happening there. So, I think there are lags. The reality is banks have balance sheets that provide fixed rates on a lot of our assets.”

As the BOJ prepares for its February 20 monetary policy decision, Tugwell Henry noted that some lenders are exploring opportunities to reduce borrowing costs. However, the pace of these adjustments may be hindered by the time it takes for funding costs to decrease, as some depositors remain locked into higher interest rates.

The only factor that could potentially delay Jamaica’s subsequent rate cuts is the United States Federal Reserve either pausing its rate cuts or hiking rates again under a new administration. This is because Jamaica maintains an interest rate differential, ensuring that the BOJ’s policy rate remains higher than the US Federal Reserve’s rate. This policy aims to prevent capital flight, where individuals convert domestic currency into foreign currencies, putting pressure on the foreign exchange (FX) rate.

“So, we really have to assess the dynamics, not just in terms of what’s happening locally, but on the global market and be certain that the Bank of Jamaica will take its cue from the Fed. You cannot have Jamaican dollar rates lower than the Fed rates. So, we really have to monitor, we have to do the analysis, and we have been negotiating, particularly on the commercial side, in unlocking and unwinding rates as the movements are happening in the market. I can speak certainly for my institution,” Tugwell Henry closed.