The differential between the interest the banks pay and the interest they charge is huge, resulting in the high cost of money, as revealed in the new report published last week by Boletín Bancario of the Clasificadora y Evaluadora del Caribe, an economic consulting firm, EcoCaribe, under its president, Manuel Cocco. The publication shows that the prime rate varied between 23.1% and 25.9% in 1995, while the deposit rate varied between 10.5 and 11.2%, giving more than a 100% differential.
The bulletin states that it is necessary to reduce this margin, by increasing banking efficiency, and by their exercising more rigorous control over general and administrative expenditure. Other reasons for the high cost of money is the high percentage of the legal banking reserves, the fact that no allowance is made for current debts that have not been collected, the high cost of a banking license, and that depreciation reserves against assets are not deductible for tax purposes. The bulletin is compiled from the financial statements published by the banks in the press. It will be published every three months.
Commenting on the results shown by the statistical analysis, Celso Marranzini, president of the Asociación de Industrias and economist Jaime Aristy Escuder concurred that the high cost of banking also reflects the lack of competition.
Economist Andrés Dauhajre also touched upon the subject in his Saturday report in the Listin Diario. He feels that the cost of money will only decline with the execution by the new government of the structural reforms that are pending, such as those in the external sector, and the microeconomic, institutional and political reforms.
He mentioned the establishment of a free exchange market, trade liberalization, the halting of the undervaluing of imports, income tax reform, the continuance of the reforms in banking supervision, the conclusion of those currently being implemented in the monetary and banking systems, the promotion of the entry of new foreign banks, full autonomy to be given to the Central Bank, development of the capital markets, reform of the pensions schemes, and the modernizing of the judicial system are all part of the restructuring required in order to reduce interest rates, by reducing levels of risk, and encouraging an increase in efficiency in the banks.
But he states that “We should not pretend, nevertheless, that money in the Dominican Republic, a country where capital is not a relatively abundant factor, should cost the same as in the developed countries, where it is the relatively abundant factor and that the risk level of the country will continue being higher for many years, despite the reforms. In consequence, companies that will be successful in international markets will not be those that use technology intense in capital requirements, but those that use technology that is intense in the work factor, and that is the case which is predominant in the Dominican Republic.”