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Komolafe: Prime rate reduction could penalize investors, savers

  • Emmanuel Komolafe.

Guardian Business Reporter

Published: Jan 11, 2017

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Chairman of the Bahamas Insurance Association (BIA) Emmanuel Komolafe pointed out that the recent reduction in the prime rate from 4.75 percent to 4.25 percent could penalize investors and savers while favoring new and existing borrowers.

Komolafe explained that, due to the exchange control regime, companies operating from within The Bahamas, and in particular local companies, are restricted in their ability to invest outside of the country.

“These entities are therefore heavily invested in government securities and bonds with flexible interest rates tied to the prime rate. It follows that the recent reduction of the prime rate would negatively impact their returns/yields and may not compensate for the risk associated with the investment in question,” Komolafe told Guardian Business.

He questioned what percentage of total loans in The Bahamas is expected to be impacted by the prime rate reduction, and what The Central Bank of The Bahamas has (CBOB) determined will be the overall impact on the economy.

“As an example, it has been estimated that mortgage loans account for only $455 million of the $843 million of non-performing loans in the banking sector,” Komolafe noted.

“Will the anticipated spending and economic activity brought about by the prime rate reduction compensate for the hit taken by pensioners, pension funds, long-term policyholders, savers and investors?.

“It appears that the goal is to encourage more spending and either intentionally or inadvertently discourage savings and investments.

“If this is not the goal, what is the overall objective or end game? In the final analysis, a multi-faceted approach which involves the use of fiscal and monetary policy measures, as well as targeted reforms is required to turn the economy around,” said Komolafe.

The move to reduce the prime rate also comes amid a high amount of excess liquidity in the banking sector.

However, Komolafe contended that “the excess liquidity cannot be separated from the underlying micro debt and high non-performing loan crisis, high unemployment and underemployment, the perceived or actual risk averse nature of lending institutions and the resulting small pool of qualified or eligible borrowers”.

He added that in the absence of a functional credit reporting system and credit bureau, “we also run the risk of worsening the existing debt crisis without proper monitoring”.

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