Profitable banking sector vital for economy: Researcher

Caption:  Professor Satish Chand

By MATTHEW VARI

Sunday, February 8, 2015 (Sunday Chronicle, PNG)

THAT was the explanation given in response to queries raised by the Central Bank in reference to preliminary findings presented by the National Research Institute into Margin of average interest rates offered for deposits in PNG, which have been very high over the last ten years.

In a one day forum to discuss the preliminary research being carried out to address high bank interest rates in relation to bank Interest rate margins in Papua New Guinea- lead research author and Professor, Satish Chand, reminded those present that it was vital for the country to have a thriving profitable banking sector.

His comments were in response to queries raised by Assistant Governor for Monetary and Economic Policy, Dr Gae Kauzi, on commercial banks to consider lowering their interest rates considering their high profit earning as confirmed by some banks in the country.

He referred to one of the major reasons given by commercial banks for the high interest rates in country as that of high cost of doing business in the country as very high.

“If you look at the bottom line of profitability- the profitability of commercial banks have been very high to,” Dr Kauzi said.

“Commercial bank liquidity is exponential. There is one bank in PNG that reported in the South Pacific Governors meeting that its PNG operation is the most profitable that they are subsidizing less profitable banks in the South Pacific region.”

“While commercial banks may argue that the cost of doing business is high in PNG- you could reduce your rates and still make profits.”

Commenting on the points raised, Professor Chand cautioned, however, that an excessive profitable banking sector was also detrimental to the economy.

“You want a profitable banking sector- you don’t want them to make losses, a loss making banking sector affects the economy as a whole,” Chand added.

“At the same time you don’t want an excessively profitable banking sector because that way it creates inefficiency in terms of savings and investment.”

“So you want incentives for people to save and invest and this is why the regulator must ensure that there is equal ground between both extremes because the last thing you would want is for the sector to collapse.”