It is becoming harder for Barbadians to earn any form of interest on their domestic savings accounts.
A day after CIBC FirstCaribbean officially slashed its deposits rate to between 0.05 and 0.15 per cent, local customers of Royal Bank of Canada (RBC) said they have also been put on notice that their savings rate is about to hit an all-time low of 0.01 per cent.
The RBC changes, which take effect on March 1, will affect customers with RBC’s Day to Day Savings, Enhanced Savings, Leo Young Savers and SixtyPlus accounts, and essentially means that those deposit accounts with a minimum $100 will only be able to attract one cent in savings interest.
Last month, CIBC FirstCaribbean had put its customers on notice of its reduction, which took effect on February 1.
However, the move by the two Canada-headquartered banks is still seen as a major blow for local depositors, who prior to April 2015 were guaranteed a minimum interest rate of 2.5 per cent until the Central Bank decided to de-regulate the market.
In an immediate response, former head of the Barbados Bankers’ Association Horace Cobham suggested that the Central Bank may need to make an about turn in the interest of local customers, who he said were clearly not reaping the benefits of the current surplus in the banking system.
The former RBC head said though he clearly understood that commercial banks were “caught in a quandary” given the current uncertainty in the marketplace, there was no reason why customers should not be guaranteed “a decent rate of return”.
Therefore, he suggested the need for better policing of the banking sector and the reopening of discussion on a minimum savings rate.
“Perhaps there is need for some half-way house, where there is some minimum rate of return,” Cobham told Barbados TODAY, while lamenting that “too often it becomes self-interest and you have to force banks to do what is right in small economies like those which exist in the Caribbean”.
As for what could be considered a decent minimum savings rate, the former banker acknowledged it was by no means an easy policy position to take. In fact, he suggested that the matter might even go above the head of the country’s Central Bank, since it would amount to a significant shift in Government policy.
“It probably isn’t three per cent. It probably might be closer to a one per cent,” he added.
The former banker acknowledged the right of commercial banks to a decent rate of return.
However, he said those who operate here needed to be more cognizant of the small size of the market and the limited investment options available to them.
“That is why . . . you need a successful domestic bank or regional bank in every society because [they] see their market as the market in which they operate, whereas international banks always have a foot in the door and one outside; meaning when they are looking at an investment they compare making the investment in Barbados versus making the investment in wherever,” he explained.
Cobham also challenged the notion that lending rates were coming down at the same pace as those which apply to savings, saying, “they have lowered lending rates, but not to the same extent they have lowered deposit rates. So their [profit] margins have increased.”
Prior to the Central Bank’s removal of the minimum savings rate, which was in place from 1991 and 2015, interest on loans and mortgages ranged from seven to nine per cent. However, since April 2015, interest on loans has been reduced to between four and six per cent.
Also weighing in on the latest move by members of the banking sector, economist Ryan Straughn warned that it would only make life harder for Barbadians, particularly those whose savings accounts were already below a certain threshold and therefore had already been subjected to undesirable bank charges.
“It is not just that it is nothing you are getting, it makes it worse because the fees now put you completely in a negative interest rate scenario and that is not something that the average householder in Barbados can afford right now,” a surprised Straughn said.
The former Central Bank employee, now a political candidate for the Opposition Barbados Labour Party, stressed that while the move would be of obvious commercial benefit to the banks, “it is really a very serious situation for households.
“Even on top of that you have inflation to contend with. So under normal circumstances where you would have a deposit rate of about three per cent or something like that . . . depending on the money you had, it would help to offset any inflationary effects they would have normally. But I think 0.01 per cent is a negative interest rate without the banks officially saying they are having negative interest rates, because the fees and inflation already put you in that negative territory,” he explained.
Straughn went as far as to suggest that putting money in the bank now was “pointless”, but expressed reservation about switching to credit unions, pointing out that while they were presently offering higher interest on savings, their lending rates were slightly higher than that of the banks.
To make matters worse, the economist said, he did not see any alternative opportunities for investment coming any time soon, while suggesting that the soon-to-be sold Barbados National Terminal Company Limited (BNTCL) would have been one such investment vehicle for Barbadians.
“The thing is, where do you move the money to?” Straughn asked, lamenting that the local economy was simply not growing fast enough.