Jamaican Banks Favor Government-Lending

Jamaica has plenty of skilled small business owners but they are shut out of credit markets. One big reason: Jamaican banks get a much better deal lending money to the government than extending credit to shopkeepers and entrepreneurs.

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RENEE MONTAGNE, host:

And now, a story about how governments can end up stealing money from their citizens - without even knowing it. The story comes from Jamaica. Alex Blumberg, from our Planet Money team, reports.

ALEX BLUMBERG: To understand how this works we're going to make two visits in Jamaica. The first is to a place called Riverton City, one of the largest ghettos in Kingston. It doesn't have electricity or running water. And on the edge of this ghetto, next to a large commercial strip, people have set up rudimentary businesses - haircuts, fruit for sale and a tire shop.

So you run this business, right?

Mr. WAYNE DESONI (Owner, tire shop): Yeah, I run this business, but I work out in the sun.

BLUMBERG: This man, he's a little hard to understand, is Wayne Desoni. He runs this tire shop and in case you didn't catch what he said there, he said he runs this business but he works out in the sun.

And that is because this tire shop is not the kind of tire shop you see in America, with actual walls and a ceiling. It's a hand-built shack on the side of the road. It's got dirt floors, no roof. But it does have equipment, which Desoni has built by hand out of a random assortment of spare parts. For example, a tire retreader he built out of a chassis of an old car.

Mr. DESONI: This is American Lincoln vehicle, I had to add to it.

BLUMBERG: Oh, so that's like a strut from a truck here?

Mr. DISONI: Yeah. Yeah.

BLUMBERG: Disoni told me that he would update his equipment, build himself an actual building to work in, but he can't get a loan. And part of the reason is that the Jamaican government might actually be getting in his way.

So to explain this we need a radio drama, and I'd like to invite my Planet Money colleague David Kestenbaum on to help us out.

Hey, Dave.

DAVID KESTENBAUM: Hey.

BLUMBERG: So I am going to be playing the part of a banker. And you are going to be playing the part of the Jamaican government. Are you ready?

KESTENBAUM: Yep.

BLUMBERG: All right, action.

KESTENBAUM: Alex.

BLUMBERG: Yes.

KESTENBAUM: I need to borrow some money.

BLUMBERG: Well, you've come to the right place, cause I am a banker. I see you've borrowed a lot of money from us already.

KESTENBAUM: Yeah, I have a lot of bills; trying to help out the citizens of Jamaica, health care, education and I've been borrowing to do it. And I need to borrow some more.

BLUMBERG: Well, that's convenient for me, because it turns out I have a million dollars just sitting here. I need to lend to someone and charge them interest -cause that's how I make money. My plan was to scour Jamaica looking for hard working entrepreneurial types who need a loan, figuring out which ones are likely to pay me back.

KESTENBAUM: You could do that or you could just lend it to me. I could borrow that whole million dollars from you right now and I'll pay you 19 percent interest.

BLUMBERG: Nineteen?

KESTENBAUM: Yeah.

BLUMBERG: Deal.

End scene. Thank you, David.

KESTENBAUM: You're welcome.

BLUMBERG: So that little radio drama, economists call this phenomenon the Government Crowding Out Private Investment: If the government is willing to borrow massive amounts of money at high interest rates, bankers don't need to work to find people in the private sector to lend to. And this brings us to our second visit in Jamaica, not the ghetto this time - a very different part of Kingston.

(Soundbite of a helicopter)

BLUMBERG: That sound you're hearing is a helicopter landing on the top of the south tower of one of the largest banks in the Jamaica, NCB Bank. I am waiting to interview the guy in the helicopter - this guy.

Mr. MICHAEL LEE-CHIN (Chairman, NCB Jamaica Limited): My name Michael Lee-Chin and I'm an investor.

BLUMBERG: A billionaire investor, to be exact. In fact, Michael Lee-Chin owns the bank we're on top off right now, though he started out a bouncer in a nightclub. And according to Lee-Chin, the fact that the Jamaican government was always there to borrow money has made bankers, like the ones who work for him, complacent.

Mr. LEE-CHIN Complacency we were satisfied.

BLUMBERG: Why would you lend to anybody else? Why would you find entrepreneurs? Why would you go out and seek other investments, if you can just make your money buying government debt and - do I have that right?

Mr. LEE-CHIN: You have it perfectly right. You could make more money living off government - trading government paper, than actually going out and producing.

BLUMBERG: Last year, about half of all the money the Jamaican government brought in, in taxes, went to pay interest on loans it had taken out - just the interest.

But recently that has changed. Earlier this year, the government and the banks cut a deal. Banks agreed to reduce the amount the government owed them. In other words, to Lee-Chin's surprise, the banks all volunteered to make less money.

Mr. LEE-CHIN: Had you asked me whether this would have been possible, I'd have said no.

BLUMBERG: And you - your bank owned some of this Jamaican debt, right?

Mr. LEE-CHIN: Huh, we are the largest lender to Jamaican government.

(Soundbite of laughter)

Mr. LEE-CHIN: So our hit was the largest.

(Soundbite of laughter)

BLUMBERG: The hope is that now government can devote more of its money to providing things like police and education, and that banks will now have to find actual people with actual businesses to lend their money to.

For NPR News, I'm Alex Blumberg.

MONTAGNE: You're listening to MORNING EDITION from NPR News.

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