Banks in Timor-Leste
Are they helping the national economy or are just helping themselves?
by José Ramos-Horta
Over several meetings with some of the best minds of Timor-Leste I tried to gather as much information as possible to understand the financial status and services provided by BNCTL and foreign banks based in Timor-Leste … Read the full article.
A Reply
Thank you for raising these excellent points, Mr José Ramos-Horta. But first one must ask: Why do the international banks charge such high interest rates?
A bank requires security for any loan given. Usually, this takes the form of holding land title certificates as collateral. But Timor-Leste has no land title law despite many years of efforts, so the banks have no security against which to loan money.
Even as the owner of a reasonably large business, if I wish to get a bank guarantee for any reason, the bank insists that I provide separate cash security for the same amount that I wish to get the bank to guarantee. Meaning I lose access to the same amount in my account as the bank guarantee. Why would I bother losing access to my money, earn no interest on it, and have it attract a hefty interest debt from the bank, unless it is absolutely necessary!
Whether it is the central bank or the commercial banks, the lender needs to secure collateral (as it is the case around the world). If the Central Bank is to take on a major lending role, they must be transparent and show how they will assess to whom they lend money? Perhaps there should be a cap on how much one can borrow from the Central bank so that everyone benefits rather than only a handful of fortunate businesses/individuals: then if you are a good customer and prove yourself, you can apply for an extension. Ideally, lending solutions for medium to large sums of money should be left to commercial banks, unless it is in the national interest for the government to lend the money.
Furthermore, micro-finance banks charge 18% or more because they experience a higher rate of defaults. There should be more checks and balances to counter this broken record. After all, most micro banks around the world seem to be profitable enough to attract the interest of the large commercial financial institutions like Citigroup and Deutsche Bank, according to Keith Weigelt of Wharton University.
The interest rates are high across the board in Timor-Leste, and regulation is needed to bring them down. I see a few solutions:
Fix the land title law ASAP. This will unlock the greatest potential to take this nation forward. It will allow people to buy and sell properties and use the proceeds to invest in their dreams of starting a business, educating themselves, and taking up the once-in-a-lifetime opportunity for a better life in this emerging nation.
Legislate foreign banks to provide more acceptable interest rates, for example, placing a cap on rates.
Require banks that take government deposits to lend a sizeable percentage of that money to business and individuals alike, at their own commercial risk at a reasonable interest rate. Mr Horta, you are spot-on with your point that they should not take these deposits and do nothing for the country.
So until land title law and regulation on interest rates is passed, interest rates will remain high – a problem that could be solved now if the government wished. Please consider.
Sakib Awan