Finance minister says government will inject money into loss-making bank
The Cayman Islands government will not shut down its loss-making development bank, Finance Minister Marco Archer signaled Wednesday during his presentation of the government’s annual strategic policy statement.
Instead, government will seek to inject some cash into the entity, which provides funding for student loans, home loans and business loans to Caymanians who otherwise could not get them from commercial lending institutions.
“Mistakes were made in the past which led the Cayman Islands Development Bank to the brink of bankruptcy,” Mr. Archer said.
“This government has taken a more measured approach. Where a business shows true potential, the [development bank] will be placed in a position to provide further credit facilities.”
Plans by the current Progressives-led government include paying off $10 million in development bank debts early, while likely refinancing the remainder of the bank’s $30 million bullet loans that come due during 2015.
The development bank announcement Wednesday appeared to settle yet another question raised by a recent consultant report, which advocated closing the bank if the “political will” could not be found to support its operations.
The Ernst & Young consultant report considered three options for the Cayman Islands Development Bank. First, that it could be sold to a private sector entity; second, that it could be “recapitalized” and potentially commercialized through a private-sector partnership; and third, that it could be closed.
“Political support and action is the driver for change,” says the report, which was released last week. “If there does not exist a political will and support for the mandated functions of [the Cayman Islands Development Bank] endorsed by additional capital, then the whole service offering and function … can be abolished.
“There is no long-term benefit to [the development bank] continuing to operate in this existing state – which is effectively a run-off of the historical loan book with a very small amount of new lending.”
According to finance committee testimony, 60 percent to 70 percent of business loans granted by the development bank were delinquent as of mid-June.
Bank managing director Tracy Ebanks reported that nearly 90 percent of the companies that are unable to make their loan payments are startups. First-time business loans are considered extremely risky and tend to attract the highest rates of default, she told lawmakers. Many companies that missed loan payments could not qualify for a loan from a commercial bank and typically needed additional capital to deal with the downturn in the economy, she said.
Delinquency rates for student loans and home mortgages are “in the range of” 30 percent and 32 percent, respectively, Ms. Ebanks said.
As of June, the bank had about $1 million in student loans in various stages of drawdown. However, as a result of the slowing of the economy, many graduates are unable to find employment, even if they have a master’s or bachelor’s degree, Ms. Ebanks told the finance committee.
The high rate of mortgage defaults is also a consequence of the weakened economy, she said.
“We also find that our customer base is having extreme difficulties paying for their homeowner’s insurance. The rates are extremely high and we deal with the lower income families. So a lot of times we have to finance their homeowner’s insurance premiums and tack it on to their principal.”