ANTON DE KOM UNIVERSITEIT VAN SURINAME INSTITUTE FOR GRADUATE STUDIES & RESEARCH The credit portfolio of Surinamese Banks A comparative analysis of its quality with banks in Trinidad & Tobago Thesis for the graduation of the Master of Science study in Banking and Fi- nance Paramaribo, October 2016 Author : Nawien Ghisiawan B.Sc. Supervisor : Prof. H. Visser Co supervisor : drs. W. Ramautarsing MBA Coordinator of the course : Prof. A. Caram Coordinator of graduation : mr. M. Tjon A Ten Acknowledgement First of all I want to thank my parents and brother for the encouragement and motivation to enroll in this Master course. A special thanks to my supervisor, Prof. H. Visser, co-supervisor, drs.W. Ramautarsing MBA, and the coordinators of the course, Prof. A. Caram and mr. M. Tjon A Ten, for their guidance, support and critical remarks during the writing of this thesis. Finally I offer my gratitude to everyone who has supported and contributed me during my study. Thanks all of you! Paramaribo, 1st October 2016 Nawien Ghisiawan i Abstract Banks are playing an important role in the development of an economy. They are perform- ing the intermediary role in channeling funds from surplus units to deficit units (from sav- ers to investors) in the form of loans to various sectors. The main risk they face during this lending process is credit risk. Surinamese Banks are the main players within the Surinamese financial sector. They pos- sess around 75% of all assets within the financial sector. From this part, 75% of all bank assets are owned by the three largest banks of Suriname. Most of their income are generated true traditional lending services (interest income). The dollarization and Nonperforming loan ratio of Surinamese banks are higher than banks in Trinidad & Tobago. The major risks Surinamese banks face are: credit risk, concentration risk and foreign currency risk. The current macro-economic developments of Suriname has impacted the Surinamese banks as follows: - Increase of credit risk i.e. Nonperforming Loans and write offs due to the past due payments of the Government longer than 12 months to their suppliers. - Adjusting provision policy i.e. decreasing profitability ratios of the banks. - Increase of dollarization of the credit portfolio. - The bank capital to absorb external (economic) shocks deteriorated. ii Contents Acknowledgement ............................................................................................................... i Abstract ............................................................................................................................... ii Contents ............................................................................................................................. iii List of tables and figures ..................................................................................................... v Abbreviations ..................................................................................................................... vi Chapter 1 Purpose and scope of the thesis ....................................................................... 1 1.1 Introduction .......................................................................................................... 1 1.2 Problem statement and sub questions................................................................... 2 1.3 Methodology ........................................................................................................ 3 1.4 Relevance ............................................................................................................. 3 1.5 Structure of the thesis ........................................................................................... 3 Chapter 2 The banking business environment .................................................................... 4 2.1 The balance sheet of a commercial bank .................................................................. 4 2.2. Challenges in the banking sector .............................................................................. 6 2.2.1. The theory of Asymmetric Information: Adverse selection and Moral Hazard 6 2.2.2. Risk profile of the banking industry .................................................................. 7 2.2.3. The Three lines of Defence ............................................................................... 8 2.3. Nonperforming Loans .............................................................................................. 9 2.3.1. Provision requirements for NPL ...................................................................... 10 2.3.2. Impact of Nonperforming Loans on the financial position of banks ............... 11 2.3.3. The determinants of Nonperforming Loans according to the literature .......... 12 2.4. Financial soundness indicators ........................................................................... 14 Chapter 3 An overview of the Surinamese Banking sector .............................................. 17 3.1 Structure and Characteristics of the Surinamese Financial Sector .......................... 17 3.2 Regulations of the Surinamese Banking sector ....................................................... 18 3.3 Nonperforming Loans ............................................................................................. 20 Chapter 4 Analyses and findings ...................................................................................... 22 4.1 Comparison of general (bank) indicators ................................................................ 22 4.2 Credit portfolio comparison .................................................................................... 25 iii 4.3 Financial Soundness Indicators ............................................................................... 32 Chapter 5 Impact of the current macro-economic situation of Suriname on the Surinamese banking sector ............................................................................................ 35 5.1. Current macro-economic situation of Suriname ................................................. 35 5.2 Impact on the Surinamese banking industry ........................................................ 38 Chapter 6 Conclusions & Recommendations ................................................................... 40 References ......................................................................................................................... 44 Appendix ........................................................................................................................... 46 iv List of tables and figures Tables a. Table 1: Distribution of the assets of the Surinamese financial sector b. Table 2: Provisions for Nonperforming Loans according to BIS c. Table 3: Core Financial Soundness Indicators d. Table 4: Comparison of general (bank) indicators as per 2013/2014 e. Table 5: Financial Sector Infrastructure Figures a. Figure 1: The Primary function of banks b. Figure 2: The Three Lines of Defence c. Figure 3: Cross Border financial linkages of the four Domestic Commercial Banks SIFI`s as per December 2015 d. Figure 4: Commercial banks loan classification v Abbreviations ATM = Automatic Teller Machine BIS = Bank for International Settlements Bn = Billion CAR = Capital Adequacy Ratio CARTRAC = Caribbean Technical Assistance Centre CBvS = Central Bank of Suriname ECCU = Eastern Caribbean Currency Union ERM = Enterprise Risk Management GDP = Gross Domestic Product ICT = Information Communication Technology IMF = International Monetary Fund IT = Information Technology Mln = Million NPA = Nonperforming Assets NPL ratio = Nonperforming Loan ratio NPLs = Nonperforming Loans POS = Point of Sale ROA = Return on Asset ROE = Return on Equity RTGS = real time gross settlement SIFI = Systematically Important Financial Institutions SRD = Surinamese Dollar USD = United States Dollar vi Chapter 1 Purpose and scope of the thesis 1.1 Introduction The banking sector is indispensable as they play a key role in the development of the econ- omy. The economic progress of a nation and development of banking is invariably interre- lated (European Journal of Business and Management, Vol.5, No.32, 2013). According to Mishkin (2009), without a well – functioning banking sector, it is very hard for an economy to reach its full potential. The primary function of the banking sector can be expressed as follows: Figure 1: The primary function of banks Source: The Economics of Money, Banking and Financial Markets, Mishkin 2009, p. 26 As expressed above, banks are performing the intermediary role in channeling funds from surplus units (savers) to deficit units (investors) in the form of loans to various sectors (indirect finance). This lending function is the main activity of traditional commercial banks and their credit portfolio is the main assets and vital source of revenue for these commercial banks. Lending decision of a bank is very important, because it determines the future profitability and performance of the bank. Thus the success of banking is based on their profit and the quality of assets they possess. As noted by Ramachandra (2007), it has to be accepted that banking business, by its nature, is fraught with risk of non-repayment. 1 1.2 Problem statement and sub questions Taking the Surinamese financial sector in consideration we see the following asset distri- bution of the financial sector: Table 1: Distribution of the assets of the Surinamese financial sector 100% 7 8 9 8 8 7 8 8 9 8 9 15 14 14 13