There was a time not so long ago in Guyana when the banking industry seemed a gateway to prosperity. Banks regularly announced large profits which seemed to rise every year and the future looked rosy. Things have changed, partly because there is more competition but also because there have been major problems with loans to rice farmers and millers. In addition, several other businesses have faced cash flow problems and in some cases receivers have been appointed by the banks acting under clauses in the debentures they hold as security.

Banks everywhere have, of course, always been vulnerable in times of financial and economic crises. Most recently in Argentina some banks were faced with virtual meltdown with the government's inability to pay its international debts and the threatened collapse of the currency after years of experimenting with dollarisation.

Our two newest banks, Demerara Bank and Citizens Bank, held their annual general meetings this week. Despite the difficult economic conditions to which both their chairmen referred they both emerged relatively unscathed from the rice crisis and both enjoyed a substantial increase in deposits. With the fall in the interest rate on treasury bills, finding good investments for surplus funds was not easy and Citizens Bank invested substantially in foreign securities. Private sector demand for loans has reportedly not been high and there is a lot of liquidity in the banking system.

The problems at Globe Trust and the enormous debt problem with the rice industry have brought home to everyone the essential fragility of the financial system. If loans are made imprudently or if there is a severe downturn in the economy things can go sour fairly quickly. The Bank of Guyana needs to beef up its inspection capacity in an effort to avoid crises developing without prior warning. The tough provisions as regards non-performing loans in the Financial Institutions Act have been much criticised and there is certainly a case for more flexibility. Yet given the sort of banking collapses one has sometimes seen in other countries, including Jamaica, it is almost certainly better to have tight rather than slack legislation.

Banks require good and careful management, like all other businesses. Both Demerara Bank and Citizens Bank have announced plans for expansion, which is encouraging. At the end of the day, they depend heavily on developments in the rest of the economy for their progress, as do most other businesses.