Time to close Cayman’s 
‘Piggy Bank’

It is especially embarrassing for one of the preeminent banking capitals of the world – we’re talking about the Cayman Islands – to host a government “bank” with the record recently revealed by the Cayman Islands Development Bank.

The strategy of the Development Bank, established in 2002, apparently was to provide Caymanians with loans on conditions no commercial bank would ever entertain. Absent from the strategy, apparently, was a substrategy of how they would pay the loans back.

Lucky borrowers shared in considerable largesse: As much as $500,000 for businesses; $300,000 for homes; $75,000 for students; and (exclusively for civil servants) unspecified amounts for auto loans.

As the U.S. and the rest of the world have learned via the subprime mortgage crisis and global recession, when a bank loans money on friendly terms to people who aren’t able, or likely, to pay it back, the results are predictable: The borrowers take the money, the bank doesn’t get repaid, and the bank goes under or is bailed out.

The bank’s general manager Tracy Ebanks told Finance Committee last week that between 60 and 70 percent of the bank’s business loans were delinquent in addition to 30 percent of student loans and 32 percent of mortgages.

When two-thirds of Cayman businesses, one-third of students and one-third of mortgage holders are not repaying their debt, the only plausible explanation is they should never have been given the loans in the first place.

All the borrowing, losses and non-payments have accumulated over time. Next year, the bank is scheduled to repay some $30.5 million in bond debt.

According to budget documents, bank management plans to push back the due date another five years. (Like customer, like bank.)

In all, the bank’s total debt – more than $35 million – is about equal to the principal amounts owed by bank customers – $32 million. That sounds more rosy than it actually is, since the default rates are so high.

According to Ms. Ebanks, the bank is currently pursuing litigation involving nearly 100 accounts. We’ll see what the bank’s success rate will be in the courts, and how much of the recovered funds go to attorneys involved in the litigation.

It’s no wonder that government has been unable to find someone willing and suitable to act as chairman of the bank’s board of directors, a position that has been vacant since May 2013.

In the meantime, the government continues to keep the bank on life support, acting as guarantor for the bank’s debt and feeding it from general revenue. Next year’s subsidies include a $1.5 million “equity injection” as well as about $500,000 from Cabinet to help cover operating expenses.

The Development Bank’s bleeding needs a tourniquet – now. For too long, the Development Bank has been a one-way street for the transfer of public funds from the politically controlled treasury into private pockets.

Lawmakers and bank officials need to reverse the flow of cash: Stop making new loans, continue taking payments from solvent borrowers, and, after recovering as much debt as possible, close the local piggy bank for good. 

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7 COMMENTS

  1. Any bank that is in the business of leading people money that no other bank will do is doomed to fail. This is a seriously bad model anyway. Why would they even consider lending money to folks that regular banks decline, if anything they should have started a program that would help people get into the position where they would qualify for loans from banks that are good at knowing who to loan money to and how much. This is the same reason the US economy collapsed, it basically came down to the government offer to back mortgages and say they would pay them if the people didn’t. So what happened is banks just started lending to anyone, luckily for banks in Cayman they didn’t go this route. I personally know people who got mortgages for 3-4 Hundred thousand dollars on minimal salaries that the mortgage companies knew they could not afford. What will happen here is the CIG will have to pay off the debt and close the bank. Most of the homes will have to get foreclosed on and then go on the auction block and get sold for way less than they are worth, throwing the market off for decades.

    I can only imagine how many family members and friends of people associated with the Bank got a piece of that pie.

    Cayman has been living high off the hog for decades, it’s sad but it is now catching up to them.

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  2. I hear you Robert, the interest rate means nothing if you don’t have to pay it back. Most of these loans will never get collected such as the student and Small Business loans that have no collateral. They may be able to foreclose on the homes the folks got mortgages for and sell them for half the price. But I’m sure there’s some loop hole that will keep the CIG from collecting because they won’t want to put those voters out on the street.

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  3. Time to find an asset manager who knows how to negotiate with delinquent borrowers.

    Perhaps reducing interest rates to manageable levels or taking a partial write-off of principal in return for re-payment.
    In fairness to the Development Bank many of these loans may have been made before the world economy collapsed and they are not the only bank facing write-offs.

    On the other hand, when 70% of your borrowers are delinquent it shows a serious lack of ability at borrower qualification.

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