By Peter Queeley, Financial Analyst/General Manager, St. Patrick’s Credit Union
There is a common saying in Montserrat that “when your neighbor house is on fire, wet yours”. The regional credit union movement on a whole wet their houses in 2014, when the Government of Barbados implemented a 0.2% tax on the assets of Credit Unions operating in Barbados. Indeed, most if not all of the regional credit union leagues and credit unions wrote letters of protest to the Barbados Government expressing their disappointment and disapproval of the action taken by the Government of Barbados.
A number of heads of regional credit unions, including the local St Patrick’s Cooperative Credit Union Ltd (SPCCU) actually visited Barbados to express their disgust with the actions of the Barbados Government towards the credit union sector. In August 2015, the SPCCU invited the General Manager of the Barbados Credit Union League to Montserrat for the 13th Annual OECS Credit Union Summit. The result of the Summit was a resounding no towards above the line taxation of financial institutions and taxation on a whole of Credit Unions. In May 2016, after significant pressure, the Government of Barbados removed the 0.2% tax on assets on Credit Unions.
In terms of the implementation of the Bank Interest Levy, “Voodoo Economic and Financial Policy” is how I would describe the Government of Montserrat (GOM) approach to enforcing that particular legislation. At best, the GOM policy stance on the implementation of Bank Interest Levy Act can be described as ill-advised and unrealistic. At worst, the GOM policy stance can be described as a downright demonstration of economic and financial incompetence at the highest level with no other effect but cripple indigenous banking, destabilize the financial services industry and further retard a declining economy.
The Bank Interest levy Act from my research appears to originate as far back as 1979, with amendments in 1982, 2006 and 2015. The most recent amendment which occurred in 2015, provided for the imposition of “a levy of 0.5% of the average deposit balances which shall be computed as the average of the deposit balances at the end of each month in the calendar year immediately before the year of payment.” “Deposit Balances means the credit balances in all interest bearing accounts including fixed and time deposit accounts”
Based on the above, the Bank Interest Levy can best be described as an above the line taxation measure since the levy will be imposed on the financial institution before the calculation of the bank’s net income.
Generally, in banking, net income is calculated as (interest income + (plus) other income) – (interest expenses, operational costs, provision for loan losses and diminution of investments and depreciation). The taxes are generally levied on the net income of a financial institution. Therefore, by imposing a bank interest levy, the Government has actually increased the operational expenses of the financial institution, the effects of which I would explain later.
My knowledge of the history of banking in the Eastern Caribbean region intuitively instructs that the Bank Interest Levy Act along with other similar tax legislations were developed and implemented during the 1970s era, in order to combat locally base foreign companies from repatriating their profits in the form of exorbitant management fees and expenses. The same would have resulted in lower net income, hence taxation revenue for the local governments. Such was the banking situation in Montserrat in the 1970s when foreign branch banks such as Barclays Bank, Royal Bank, First American Bank and Chase Manhattan Bank dominated the banking financial landscape.
However, the above the line taxation methods does not comport with indigenous financial services operations and in particularly indigenous banking operations whose operations and staff are exclusively local. In my humble opinion, such forms of taxation in the financial services industry must be vigorously resisted and confined to the dustbin of history.
Now let’s turn to examine the possible effects of the Bank Interest Levy from a banking operational and an economic and financial impact standpoint.
From a banking operational standpoint, if the bank interest levy is absorbed by the bank, (ie The Bank of Montserrat) the same would have the effect of increasing the operational costs of a banking institution, reducing operational profit and in some cases pushing the institution into a loss making position. Even more detrimental is the fact that because the Bank Interest Levy is deducted above the line or before net income, it can have the effect of forcing a financial institution that otherwise would have made a small loss into a further loss making position.
Based on the above, it is fair to conclude that the bank interest levy can have the effect of reducing a banking institution pretax profit, weakening the banking institution financial position and ultimately threatening the banking institution position from a safety and soundness and capital adequacy standpoint.
Moreover, the implementation of the Bank Interest Levy does not comport with the current international and regional thrust adopted by the Eastern Caribbean Central Bank (ECCB) in terms of its stance of strengthening banking institutions capital adequacy position and increasing financial resilience. In fact, the implementation of the Bank Interest Levy Act makes a banking institution like Bank of Montserrat who is required by law to increase is paid-up capital, unattractive for share capital investment purposes. No investor would want to invest in any institution, where the government is levying an above the line tax base on the amounts in bank balances.
Readers should note that in September 2015, the Federal Government of Australia abandoned plans for a bank deposit tax which would have imposed a 0.05 per cent levy on deposits up to $250,000. The tax was proposed, but not legislated by the former Labour Government ahead of the 2013 election would have raised about $1.5 billion over the next four years. Prime Minister Tony Abbott declared, “The last way to make our banks strong, the last way to protect depositors is to hit banks with more taxes.” Whilst, Treasurer Joe Hockey noted that “the recommendations of the recent financial systems inquiry, which called for lenders to be better capitalised than most global banks, made the levy unnecessary and “bad policy”.
From an economic and financial standpoint, the implementation of the Bank Interest Levy Act runs contrary to the thrust by the ECCB Monetary Council in terms of reducing interest rate of loans and advances to spur economic growth and controlling commercial banks’ fees and charges which they have indicated represent an additional financial burden on customers.
When faced with increasing taxes, especially above the line taxes, a banking institution basically have three choices. The bank can choose to absorb the tax, which I have already explained above, would have a negative effect on the institution.
Secondly, the bank can opt to cover the additional cost incurred by the levy by increasing its lending rates and gain more revenue.
Thirdly, the bank can opt to cover the additional costs incurred by the levy by shifting the costs to the customers in terms of increasing fees and charges.
Options 2 and 3 above would be actions contrary to the policy stance in terms of spurring economic growth and development and controlling costs associated with banking as advocated by the Monetary Council of the ECCB which Montserrat is a member.
Quoting from the Communiqué of the 81st Meeting of the ECCB Monetary Council 24 February 2015, the ECCB Caribbean Monetary Council “discussed economic conditions within the ECCU and concurred that coordinated planning and the execution of strategies to strengthen the financial sector and stimulate broad-based sustainable growth were key to the overall development of the ECCU economies. Council agreed to reduce the minimum savings deposit rate from 3.0 per cent to 2.0 per cent”
The said policy decision was implemented to ease the deposit interest rate cost to banks in the region, otherwise known as the cost of funds. The same resulted in bank’s having the ability to provide loans at lower interest rates to the private sector, thereby spurring growth and development. It is noted that the 0.5% Bank Interest Levy which is attached to bank balances would have the effect of increasing the effective rate of costs of funds for banking institutions in Montserrat.
My research has outlined that only St Vincent and the Grenadines in the entire Eastern Caribbean Currency Union currently operates such legislation. Hence the reason I presume why loan rates in St Vincent and The Grenadines are slightly higher than its Eastern Caribbean neighbors
Again, quoting from the Communique of 85th Meeting of ECCB Monetary Council held on 22 July 2016, “the Monetary Council recognizes that increases in commercial banks’ fees and charges impose an additional financial burden on customers. Council also expressed extreme concern that the increase in fees was implemented after it had approved the reduction in the Minimum Savings Rate (MSR)”. Therefore, for the GOM to implement a levy on bank balances that has the effect of causing Bank of Montserrat to shift the resulting increase costs to customers, represent an action by the GOM, directly contrary to the express position of the Monetary Council.
Finally, any credible Minister of Finance in the ECCU region or their economic and financial advisors would note that the watch word now in the ECCU region is the creation of a single financial space. Within the context of a single financial space harmonized legislation and taxation policy towards the financial services sector is the order of the day. Therefore, implementing a levy on bank balances will only serve to make Montserrat an unattractive financial services jurisdiction compared to its pairs in the context of the Eastern Caribbean Currency Union and Single Financial Space.
In conclusion, similar to its action to implement the Bank Interest Levy Act, I have noted a recent trend by the GOM to implement or take measures contrary to those that are recommended by its main economic and financial advisor, the ECCB. The said trend is reflected in the GOM closing down the Montserrat Development Corporation (MDC) despite the ECCB indicating the need to restoring key infrastructure to facilitate and attract private sector Investments. The GOM also closed down the Project implementation Unit (PIU) despite the ECCB indicating the need for the implementation of on-going public infrastructural and redevelopment projects. Additionally, the GOM put a hold on the Ferry Operations despite the ECCB indicating access to the country whether by boat or plane is critical. Finally, the GOM response of “First Call” on the BREXIT issue reflects the fact that the GOM is only focus on budgetary aid and imposing new taxes as opposed to growing the economy thereby developing its own revenue sources.