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Bonds BRH: "an instrument of monetary control"

Frantz Duval: You just mentioned Sogebank, which has always been profitable. Almost 10 years after their introduction, we are asking more and more questions about Bonds BRH. BRH Bonds are pretty much what banks do in terms of bottom line. As an economist, are you in favor of keeping the Bonds BRH as it is now? P.M. Boisson: Two things I would have liked to say, a correction and an answer to your question. A correction first: Comparing income from BRH Bonds to the benefit of banks is like comparing turnover and profit. BRH Bonds don't pay banks as much as you say, and I'll tell you why. BRH Bonds are mainly financed by term deposits. If you look at the movement of interest rates you will find that every time the interest rates go up on BRH Bonds, they also go up on term deposits. So, it's the net that compares to profit, not the gross.

That is, the net interest margin made on the BRH Bonds that was to be compared and not the gross interest margin. In this sense, no, Bonds BRH do not constitute the major part of the profits of the banks, on the contrary. Now am I for or against the good BRHs? I am certainly for it and I will say why. Bonds BRH is an instrument of monetary control. It has nothing to do with a bank profit instrument. In fact, BRH Bonds were introduced to allow money that is created ... because the state creates money. This currency is inevitably found in the banking system. When it ends up in the banking system and it is not used by banks for loans, since the demand for loans is very low in Haiti. Let me take a little aside to tell you that today Haiti is one of the countries with the lowest credit requests in the world. Because we have for example 13% of our GDP which is invested in credits to the private sector, all inclusive, while Latin America on average has 28%, Asia has 60% and developed countries have more than 100% . So we are a very low credit country. And the reasons why demand is low are many and very clear. The country's underdevelopment means that the formal sector, which is served by the banks because of the banks' lending methodologies, has become increasingly weak in the economy. So the industry has suffered tremendously from the problems the country has had over the past 20 years, resulting in very few loan applications. There are very few requests for credit when the state creates money and this money goes into the banks, if the banks do not have the means to replace this money, you have two risks: The first risk, c is that the banks don't take that money. And this is a risk that materialized in the 1980s. The banks were like thinking I don't care about that money. I can't keep paying people, cashiers, and interest if the money can't be invested. However, if this money is not placed in the banks, it will immediately go out and hunt for currencies and put pressure on the exchange rate. Second risk is the banks use this money to make bad credit. By doing so, it will have two types of fallout. Firstly, threat to the long-term reliability of banks, in terms of their solvency and threat to the exchange rate, because when you make more loans you also inject money which in equilibrium in the economy will create inflation and also pressure on the exchange rate. So it is an obligation for the state to find a way to sterilize resources that it itself has put into circulation. Previously, the state did so through reserve requirements. But reserve requirements had at one point reached over 70% on demand deposits. We could not continue to capture liquidity in the form of a reserve requirement. Apart from any distortions this cycle created, it was not sustainable in the long term. In doing so, the State, as in all countries of the world, found itself in front of the evidence that it pays interest on its own head, because the Bonds BRH are only one way for the Central Bank to take money in circulation to finance the credit it makes to the State. Which credit is due to budget deficits accumulated over the years. So it has nothing to do with the banks themselves which are passive in Bonds BRH. Basically, the BRH Bond is just a residue, what the bank receives as money supply and what it can invest in credit. So it does not contribute, but not at all massively for the benefit of the banks as we think. It varies from period to period. But I can tell you that at some point the real interest rates we pay on term deposits even got to be higher than those we get on BRH Bonds.

Frantz Duval: You just referred to business credit, and so on. We have just experienced something very simple, the Digicel has just arrived on the market, the Haitian banks were not able to address its request for credit, that is to say for a large company it is almost impossible for Haitian banks to address credit, at the same time they do not seek to address or stimulate demand that households could have had either. After all, isn't there ...? P.M. Drink: They're two different things. The reason commercial banks are unable to address Digicel's request is very simple. Banks are limited in size (by the market) in Haiti. Today, the entire Haitian banking system has around US $ 1.3 billion to US $ 1.4 billion depending on the exchange rate. This is the size of a small bank in the United States, a small community bank. Then when you look at the capital ratio, the banks have roughly $ 60 million to $ 70 million in capital. However, the prudential regulation of the Central Bank imposes on banks a limit of 20% of their own funds maximum. That is, you cannot make an individual entrepreneur more than 20% if the entrepreneur is not tied to the bank. If you take $ 60 million collectively, the banking system cannot make a loan to an individual entrepreneur over US $ 12-14 million.

But Digicel's investment is $ 125 million. So 10 times higher than the entire banking system as a whole, if they got along with each other couldn't do Digicel. There is certainly a serious problem that even an investment much less than that of Digicel could not have been financed. So that's a different kind of problem which is a mechanical problem, the size. Now the other issue you're talking about is do banks feed households? I would say that I reason by difference. Certainly household credit and credit to small and microenterprises today is significantly higher than it was barely ten years ago. I'll give you some figures. When I joined the banking system in 1991, there were barely 2,500 loans from the banking system as a whole at the time. Credit cards did not exist, microcredit did not exist. Today, if you mechanically add up the big credit card players (Sogebank, Unibank, Capital, etc.), you come up with maybe 25 thousand credit cards. Compare to 2,500 credits that there were, you have 25,000 credit cards that are credits. Now when you look at the market, there are 87 thousand micro-credits which are given within the 18 member institutions of the ANIMF (National Association of Micro-finance Institutions) and which only represent 12% of the demand. But if you take 87 thousand plus 25 thousand, that's 112 thousand credits 15 years later. The Haitian population has not increased at this rate. So there is clearly and clearly an extremely important revitalization of credit to small and to households which has been made by the banking system. Now remember what we always said in all of our interviews. The banking system must be careful. The function of a bank is not to come and distribute money and lose it. It's about making profitable loans that pay off. Now in this regard, I can say that all these additions we are talking about were sustainable additions. Because credit card companies are profitable today. They didn't make bad credits. Micro-credit is profitable although the banks themselves in terms of the number of loans (87 thousand) do not have the majority. There are a lot of companies like Fonkoze, or Finca which also give micro-credits of different statues. To sum up what I mean, there is a huge effort that is in difficult situations to give small loans to households. The phones you're talking about, there are banking companies, like ours, that give people credit to buy phones. So it has improved considerably in 15 years. Frantz Duval: Since you are talking about telephones, we can make an observation of what we are going through these days. A few years ago, Haitians found money to put into cooperatives, and now everyone is finding money to buy a phone. It’s the credit that finances, it’s hidden savings. How does the bank analyze all of this? P.M. Boisson: We were, like everyone else, struck by the strength of the demand for telephones. It's extraordinary. We can't say we predicted this. Digicel's latest success is remarkable and Comcel is just as remarkable with 500,000 subscribers. I remember that in the early 1980s there were 60,000 active lines in Haiti. A single company, La Comcel alone today has 500,000 telephones. It's extraordinary. That being said, the economist that I am will tell you the following: If we compare to other countries that have populations similar to Haiti, we are still really small. We are still talking about a market that is less than 10% covered. So that's not it yet. Now, where do people get the money from? I don't have the exact number, but a substantial portion of these phone purchases come from diaspora money. However, if there is one part of the Haitian economy that has grown phenomenally over the past 20 years, it is the diaspora. Because, when we talk about GDP, we forget that Haitians who are in the diaspora today are Haitians who were in Haiti. So, we should not consider only as additional income to the Haitian economy, the income that goes to Haiti, it is only a fraction. Someone who, for example, made 700 or 800 dollars in Haiti a month in Haiti, crosses an inlet and two years later makes 25 or 26 thousand US dollars a year. This is US $ 2,000 a month from the US $ 100 he earned two years ago. So, this is GDP that is not generated in Haiti but outside Haiti by Haitians. These Haitians send a fraction which represents about 10% of their income and which generates about a billion dollars in Haiti. Or more than 20% of the GDP. So it’s a tremendous success. This success fosters a purchasing power that did not exist before and it is largely he who fills this phone demand. That being said, some people will say that talking on the phone is not productive. Why don't we preferably build roads with all this money? However, in economics, what determines value is utility. If anyone wants to spend money on talking on the phone, they are happy there. It was not money that was given to him as outside help. It is the money that is generated by the production of services and goods by Haitians. For me, I find this very positive and quite sustainable. Of course, the phone purchase itself is just one episode that happens once or twice in 3 or 4 years. What is especially remarkable is the great derivation of purchasing power to pay for phone minutes. to be continued…

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Economic Overview - Poorest country in the Western Hemisphere; two fifths of all Haitians depend on an agricultural sector that is vulnerable to damage from frequent natural disasters.

GDP (Purchasing Power Parity) -