Frequently Asked Questions

Why do we need banks?

We need banks because: they provide a secure place for the accumulation of savings; they provide the wherewithal (loans) for us to purchase and invest in goods and services which we could not have afforded on our own; and, they facilitate payments, which is important for the functioning of a modern economy.

Why is the difference between the interest a bank earns on loans extended to customers and the interest paid to depositors for the use of their money (the spread) so high?

Interest rate spread reflects the risk that the bank might not get back its funds. They also include the cost of deposits and cost of operations. These risks and costs are different for different countries. When all of this is considered in the context of Trinidad and Tobago then spreads are not high but just about where they can be expected to be.

Do banks make exorbitant profits?

Bank profits can appear exorbitant if viewed in absolute terms. However, when considered against the large amount of assets which they manage, banks do not make unreasonable profits. In other words, profits must be related to the amount of assets that banks or any other business deploys. Viewed this way, one realizes that other businesses, say in the energy sector have far higher rates of return on their assets and which is fact necessary.

What do banks do with their profits?

Bank profits (that is, net income after taxes and expenses) are paid to shareholders and are also utilized to upgrade technology, train staff, expand and improve products and services and expand the capital base of the enterprises.

Why are lending rates so high?

Lending rates reflect the monetary policy rate set by the Central Bank, the risk of the enterprise that is borrowing, the cost of funds and operational costs. If these rates are high, then bank lending rates will be high. Since all of these costs and risks tend to be higher in small developing economies like Trinidad and Tobago then lending rates are relatively higher than in other countries.

Why are deposit rates so low?

Deposit rates reflect liquidity conditions, simply put, that is the amount of money in the banks. If liquidity is high, often because borrowing is weak, then interest rates tend to be lower. If the deposits which banks hold are being used up in a strong demand for loans then deposit rates will rise.

How do banks contribute to economic development?

Banks contribute to economic development by promoting savings, and lending to the private sector, government and households. These in turn then invest and make purchases which drive sales, employment and general economic activity.

How do banks contribute to social development?

Banks do this both directly and indirectly. Directly, banks lend money for housing, schools, hospitals, roads etc., which constitutes the infrastructure for social development. Banks also help people to save for retirement. Indirectly, banks help businesses grow and thrive, allowing firms to employ people and pay taxes etc.

Why do cheques take so long to clear?

Cheques are promises to pay. Before they can be cashed the bank must make sure that they will not suffer a loss for the monies they pay out. This might not be the case for several reasons. For example, the payer may not have sufficient funds in the bank or the check might be stopped.

Why do I have to pay service fees to access my own money?

The bank incurs costs when it employs people, installs security systems and pays taxes etc. in order to keep the money and other assets of depositors safe. In order that it meets these costs it must charge fees.

Ronald Ramkissoon Ph.D.
Chair, Economics Sub-Committee of BATT

April 22, 2013

Ronald Ramkissoon Ph.D.
Chair, Economics Sub-Committee of BATT

April 22, 2013