Dear Editor,

The problems associated with Globe Trust and Investment Company Ltd.(GTICL) may be just the tip of the iceberg in the icy waters in which our banking system now floats. To say that the deposits held by Globe Trust are only a small portion of the total deposits held by the commercial banks, even though true is however too simplistic and misleading a policy response which ignores the complexities that now threaten the soundness and reliability of our banking system.

The question is not the size of the deposits held by Globe Trust but, more fundamental, the issues raised by the suspension of operations by the company and the extent to which such issues also affect other banks and financial institutions.

This matter should not be made a political football. The current witch hunting and attempts to embarrass can only cause more confusion and a distraction from focusing on solutions to the problems. One of the tenets of banking is the privacy of customers' accounts and transactions. It is therefore the responsibility of those concerned, including the media, to refrain from publishing the names of and details on the transactions of banks' customers. Such a policy by the banks undermines confidence and trust in the banking system.

Directly, several parties are to be blamed for the situation in which Globe Trust now finds itself. The central Bank of Guyana was tardy in its handling of the situation, particularly since there was a qualified auditor's report of the GTICL's last annual report and financial statements. Second, the board of directors and management of Globe Trust betrayed the fiduciary trust and confidence placed in them by shareholders and depositors. Indirectly, such civil society organizations as the media, the association of accountants, the University of Guyana economics and business departments, and the private sector should have examined the annual report of the GTICL when it was issued months ago and made comments which would have alerted regulators (Bank of Guyana and Ministry of Finance) and the shareholders and customers of GTICL.

There are several issues which have to be examined not only in relation to Globe Trust but other financial institutions and the banking system as a whole. First, there is the question of the efficiency and capabilities of the Bank of Guyana and the Ministry of Finance in monitoring and controlling the operations of the commercial banks and other financial institutions taking customers' deposits. If the tardiness was due to technical weaknesses (i.e., lack of trained professional staff) in the inspection units of these government regulators, then immediate steps should be taken to strengthen the inspection units with qualified accountants, financial economists and business management experts.

Second, government's banking and financial policies should be consistent in its application. For example, the reported waiver by the Ministry of Finance of certain provisions of the Financial Institutions Act to allow banks to reschedule loans to the rice sector and the provision for the write off of some of these loans (Stabroek News Editorial of 28 Feb. 2001), should be equally applied to all banks and sectors.

Third and undoubtedly the most complex issue is the question of risk disclosures. In other words, what are the major risks in the loan portfolios of banks and financial institutions which can adversely affect profits and earnings. So far, we have not seen in the media the specific risk factors in the bulk of GTICL's loan portfolio. We need to know what percentages of the loan portfolio went to each of the major sectors of the economy, and how these sectors repaid the loans. A sector analysis can bring out the main conclusions without having to publicly disclose the names of the borrowers who make up the loan portfolio.

We know from published figures that such major commercial banks as the National Bank of Industry and Commerce(NBIC); the Guyana Bank of Trade and Industry (GBTI); the Demerara Bank; and Citizens Bank have been exposed to risks in the agriculture sector, particularly the rice industry. We also know from the Key Economic Indicators published by the Private Sector Commission that growth in the major industries over the past year has been on the downturn. Shareholders and depositors need to know the extent to which the downturns in the major industries have adversely affected the viability of the banking system.

Several of the banks are holding "dead" assets from foreclosures, since there are hardly any buyers or the assets have to be sold below the value of the outstanding indebtedness of the loans. We have seen the exposure which Demerara Bank faces as a result of its loan to the bankrupt Guyana Airways 2000. It was reported (Stabroek News of 28th. Feb.2001) that the Chairman of the bank had indicated that the return on average total assets in the year 2000 was a poor 1.5%, which was less than the estimated inflation rate for the year of 8.6% and the 364 days Treasury Bill discount rate of 9.69% as of September 2000. We need to know the extent to which this and other risk exposures have reduced the profitability of the bank, and exposed the deposits of customers.

Furthermore, some banks fall within a group of companies in which it is not unusual business practice for inter-company transfer of funds to take place. Where such practices occur, the risk exposures should be examined and publicly disclosed by the group of companies. With the downturns in the major world stock markets over the past l8 months, several international commercial banks and venture capital companies have made losses or reduced profits and earnings. What is the position with respect to the commercial banks and financial institutions in Guyana which have made such investments?

Another risk factor which needs close monitoring and analysis is the recent trend of equity investments in commercial banks by insurance and public companies, e.g., by Banks DIH Ltd and Hand-in-Hand Insurance Co.Ltd. in Citizens Bank. Fluctuations in the profitability and earnings of commercial banks will no doubt affect the distribution of shareholders' dividends by the insurance and public companies concerned. Here, insurance legislation and company laws come into play with the financial acts and regulations.

Yet another risk factor is the recent decision by the government to allow commercial banks to grant mortgages for private homes. Here again customers' deposits will be exposed to repayment risks. The recent collapse, reported to be the largest postwar bank failure in Germany and requiring an estimated US$1.75 billion government bail out (See The Wall Street Journal of 2nd. August 2001), of the German Bankgesellschaft Berlin (BGB) was partly due to unprofitable investments in low income real estate (prefabricated houses).

It is obvious that the issues which now threaten the stability of the banking system are numerous and complex, and do not apply only to Globe Trust. In conclusion, the following suggestions are made:

i) with respect to the immediate concerns with Globe Trust, the government's policy should be consistent and non-discriminatory. Discussions should explore all the possibilities of allowing the company to continue in operation after a thorough cleansing of the board of directors and senior management, and the putting in place of mechanisms to monitor and analyse the operations of the

company. Here, all efforts should be made to collect as much of the outstanding debts from those borrowers who are in a position to repay, and/or a rescheduling of loans;

ii) the government, the opposition political parties, the private sector and banking community, and appropriate civil society organizations, including the trade unions and the University of Guyana economics and business management departments should come together in making practical proposals for tackling the present problems of the banking system. This bi-partisan group should be advised by operational personnel (national, CARICOM and international) in the banking and financial sector; iii) both at the regulatory and enterprise levels immediate steps should be taken to introduce and practice enterprise risk management in monitoring and controlling the inherent risks which affect the commercial banks and the banking system as a whole. Here, technical assistance should be sought immediately within CARICOM from the Central Bank of Jamaica which had a similar experience with its banking system a few years ago and the Eastern Caribbean Central Bank (ECCB) with its experiences in both central banking and brokerage operations on the international stock exchanges;

iv) further technical assistance should be sought from the IMF; the USAID (Federal Reserve Board and Comptroller of Currency); and the UK ( Bank of England) for the establishment of efficient inspection units at the government regulatory agencies, and the training of personnel to staff these units;

v) the economics and business management departments of the University of Guyana, with assistance from similar departments at UWI, should assist the regulators and banks, in monitoring and analyzing the annual reports and financial statements of banks, insurance companies and other public companies. These higher institutions of learning should also assist in the education and training of more qualified accountants, financial economists and business management experts;

vi) loans for refinancing of debt should be kept to a minimum by the commercial banks. Loans should be closely monitored to ensure their proper utilization in accordance with a phased implementation schedule. This procedure will ensure that loans are not used for purposes other than those for which applications were made or that the loan proceeds do not end up abroad as capital flight;

vii) shareholders, directors and all staff of banks must be subject to the same due diligence, loan analysis, and lending policies as applied to other borrowers;

viii) shareholders should subject the boards of directors, the chairmen , chief executive officers and other senior management staff, to strict scrutiny and performance accountability.

ix) to facilitate more up-to-date monitoring and analysis of the accounts of banks and other public companies, legislation should be introduced which makes it compulsory for these companies to publish their financial operations every quarter; and

x) the government should introduce legislation and ensure the establishment of the appropriate mechanisms for customers' deposits to be insured against the risk of liquidated banks and financial institutions collecting deposits.