On the line:
New Building Society Limited (NBS), December 31, 2002
BUSINESS PAGE
Stabroek News
June 15, 2003

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Introduction
In today’s Business Page we review the 2002 Annual Report of Guyana’s leading non-bank financial institution whose assets have crossed the $20B mark. Its deposits of almost $19B make this deposit-taking institution the third largest in Guyana behind the National Bank of Industry and Commerce and the Guyana Bank for Trade and Industry (GBTI). Incidentally, the gap between the deposits in the Society and GBTI was narrowed by 58% during the last year and the Society now stands just $1.5B away from the number 2 spot.

Despite this and other experiences in the financial sector, the Bank of Guyana appears to have overlooked its responsibility to ensure that the Society applies for a licence under the Financial Institutions Act.

With its deposits representing 18% of total deposits by commercial banks and far exceeding those held by Demerara Bank and Citizens Bank, both duly regulated, the implications must be clear. Even the Chairman’s Report called the Society “the third largest financial institution in Guyana” but the Report states on page 21 of the annual report that “the Society has not been registered under the Financial Institutions Act.” C’est la vie.

The Society has seven locations across Guyana, second to NBIC, and therefore is able to serve a wide cross-section of our society. With the housing drive of the Government, the service provided by the Society is welcome to those seeking to build their home.

The Society had 4,506 mortgages at the end of 2002 and current mortgages are offered with interest rates of 9.95 per cent, 41% lower than the average lending rates of the commercial banks. This is expected given the exemption from taxation on income which is payable by commercial banks at 45 per cent.

Financial performance
The Society recorded its highest profits (at least in G$ terms) since its formation in 1940 of $316M, an increase of 55% from the previous year, making it the most profitable financial institution in the country. This perhaps explains the commercial banks’ regularly stated concern that the Society which has many of the characteristics of a commercial undertaking should continue to enjoy tax exempt status. The increase in profits arose largely from a large decline in interest expenses of $118M or 9.62 per cent, compared with a more modest fall in interest income of $30M or 1.7 per cent.

The effective rate of interest charged on loans fell marginally from 11.1% to 10.0 per cent, while the effective rate of interest earned on investments declined from 10.0% to 5.4 per cent. Useful information on interest earned on investments was dropped in the prior year.

The investments of the Society are concentrated in treasury bills which have seen record lows in interest rates. Under its incorporating legislation, the Society has certain restrictions with respect to investments and one of the challenges it will face is how to diversify its portfolio within the narrow parameters under which it operates.

The average interest paid on investors’ funds declined from 7.6% to 6.1% which is still substantially higher than the rates available to depositors at commercial banks which of course are taxed at the rate of 45% or 2% of turnover, whichever is the greater. The fixed deposit rate plunged from 9.8% to 5.9 per cent.

Administrative and other costs (excluding depreciation) increased by $17M or 7% over the previous year while provision for loan losses increased by 102 per cent. Staff costs fell by 2% or $3M while directors’ costs (excluding salaries paid to directors) remained the same.

Financial position
The Society’s total assets increased by 17.6% while investors’ funds which are in effect deposits increased by a slightly larger 17.68 per cent. The balance sheet continues to be strong with cash ($2.5B) and treasury bills ($8.6B) representing 58.65% of depositors’ claims. Cash resources increased by 50.12% during the year and by a staggering 1,330% since December 1999. The Society is actually benefiting from the commercial banks’ inability to offer attractive rates on deposits and businesses are now placing funds with the Society to take advantage of its better rates. Loans increased by 18.10% in 2002 and by 62.58% since December 1999. Had the Society not had a ceiling on the amount it can lend, its loan portfolio would have been significantly greater. As a result, the Society urgently needs to find investments to reduce the increasing liquid resources and investment in treasury bills as the returns on these are not sufficiently high.

The Society had provision for loan losses of 0.56% of total loan assets, easily the lowest in the country and reflects the quality of the security which it takes against its loans as well as its lower interest rates which are not as burdensome as those charged by the commercial banks. The policy on provision is dependant on the value of mortgaged property which is becoming increasingly lower in a depressed market. At the Society’s AGM, its Secretary/ Director disingenuously compared the Society’s bad debts situation with those of the commercial banks without pointing out the vastly different regime of provisioning under which the commercial banks operate under the Financial Institutions Act.

The Society’s reserves stood at $2.5B or 11.58% of total assets on par with that of GBTI at 11.08 per cent; again reflecting a healthy buffer against the uncertainties of the future.

This level of reserves is inexplicably high and does a disservice to those who contribute to it. In a company with shares such a level would be reflected in the share price but although the Society offers shares accounts, their nature is more of a deposit. As a result, the current members are making a sacrifice for the benefit of future members.

Governance
This has continued to be a major issue in the Society and the directors who virtually elected themselves by the use of proxies a few years ago have hardly done themselves great justice with the way they manage shareholders/ members’ relationships. The directors have shown a great reluctance to prepare AGM minutes which win widespread approval while many of the questions raised were unsatisfactorily answered.

Related party disclosures exclude management compensation in line with other public companies reporting under International Account-ing Standards.

This issue has been adequately addressed by Business Page in the last few weeks and we anxiously await a position on the matter by the accounting profession. Given that the Report speaks of related parties’ transactions in the normal course of business, it is possible that not all such transactions have been disclosed.

It is becoming hip now for companies to say they have audit committees and the Report discloses that the Chairperson of this Committee is an attorney-at-law as is another member of the committee.

The suitability of the members of the Audit Committee must be questioned in light of worldwide developments including the Higgs and Smith reports in the United Kingdom. The Society should aim to ensure that the members of the Audit Committee are duly qualified to carry out their mandate given the increasing pressures exerted by the public on such committees.

Conclusion
It has taken the Board two years to come up with some purely cosmetic changes to the rules which despite a mandate from the members was done as an internal job. The majority of the changes are Christian to first names, solicitors to attorneys-at-law, “cents in the dollar” to per cents to the dollar, etc. Before the current crop of directors, the Society had undertaken far more fundamental changes but these appear to have been ignored.

While the Society remains a sound institution with very prudent rules and policies, the governance system leaves much to be desired.

The proposed changes are not adequate and BP hopes that greater democracy will prevail to allow for more fundamental changes including the notorious proxy rule which brought the current directors on board and through which they appear bent on staying there.

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