I believe that the announced relaxation of lending rules for domestic credit, by the Central Bank of The Bahamas, is timely and should serve to inject some stimulus into the recovering economy of the country. As a general expectation, increased availability of credit should lead to an expansion in consumption and therefore has a positive impact on economic growth and government revenue. In theory, there is also an argument to be made for the adverse effect of credit on inflation. However, demonstrating its understanding the nuances of the local economy The Central Bank, and the Government, should be commended for the continued adjustments to facilitate recovery of the economy.
With current state of domestic liquidity and the prudent guidance association with the relaxation, this policy shift should have a positive impact across the board without introducing any significant amount of additional credit risk to the financial system. Banks will be able to expand credit to qualified borrowers at a more robust rate thereby more effectively deploying liquid assets that has built up over recent years and represents a significant opportunity cost. On the other hand these qualified borrowers will have increased access to credit and will be able to increase their purchasing power thereby benefiting others businesses.
Of importance is that this adjustment, moving debt service ratio from 40-45% up to 50% directly affects mortgages. The housing market whether through construction or purchase of existing properties is significant for the Bahamian economy. Real estate transaction is a major contributor to government revenue. Therefore, the extent to which this relaxation generate greater demand for goods and services will have a positive spill over for continued improvement of the country’s fiscal circumstances.
At a time when inflation is having real negative effect on completion of construction loans due to increase cost of material, the shift to being able to secure 100% financing subject to equity contribution is a potential significant game changer. For many homeowners and for the construction sector where the risk of incomplete projects, due to inflationary pressures, have increased dramatically this policy change will make a significant difference. In recent times, we would have observed a slowdown in construction starts in the lower end of the market. Construction starts are an important indicator of economic growth. This adjustment, through restricted to best credit risk, could therefore provide a significant boost
While the rule shift refers to “personal credit”, we must remain mindful of local realities and nuances. A significant amount of small business funding is secured in a personal capacity. This relaxation therefore holds positive implication for productive deployment of loan capital by entrepreneurs and small businesses. Having regard for the entrenched funding gap, as reported by the IDB, indirectly this could serve to make up some of the deficiencies.
Policymakers should be encouraged in continuing finding prudent means of ensuring the expansion of economic activities. A balanced mix of direct fiscal and macro-prudential policies that boost private sector commerce will serve to enhance and sustain the recovery underway and eventually providing much needed additional revenue for government.
Hubert Edwards is the Principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.com. Hubert specializes in governance, risk and compliance (GRC), Accounting and Finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. He also chairs the Organization for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com