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A credit score is a number assigned by a computer matrix that summarizes the histori-cal credit information on a credit report. It converts qualitative data into a numerical score. This number represents the risk asso-ciated with extending credit to an applicant an applicant based on their credit history.
Bank of Jamaica (BOJ) Governor Brian Wynter has rubbished arguments put forward by some economists of a central bank depreciation policy that, they claim, places Jamaica in a worse-off economic state by allowing the local currency to reach its fair value.
“First, let me say this, the central bank does not have a depreciation policy. The Government’s policy, which is the policy we operate, is for there to be a flexible market-determined exchange rate, which means that the price of the US dollar will change based on supply and demand conditions like any other good,” Wynter said.
He was speaking at the Jamaica Chamber of Commerce Breakfast Conversation on Wednesday at Knutsford Court Hotel in Kingston.
In July, BOJ introduced the Foreign Exchange Intervention Tool (BFXITT) as a new system to facilitate the buying and selling of foreign exchange. It is aimed at levelling the playing field for all market participants by being a competitive multiple-price tool and has been touted by some as the reason for depreciations in the local currency.
In fact, some economists consider the system to be predictable, which, in the case of heavy market demand and limited supply, drives the rates higher and at a faster pace of devaluation. The background noise is that the system has been introduced with insufficient supply and a guarantee of selling to the highest bidder, both of which lead to a one-way bet.
But the governor argued that the market has clearly moved away from a chronic one-way system to a more normal and flexible market that is characterised by two-way movements.
Up until Friday, Jamaica had experienced appreciation in its local currency for 10 consecutive days. Wynter, in further defending the new system, said for the 12 months to October 13 the exchange rate had appreciated by .04 per cent, compared with a depreciation of 7.7 per cent for the same period a year earlier.
Still, investment strategists hold that the increase in local currency was due to a one-time event involving the portfolio repositioning of a financial institution which sold large quantities of currency to the market.
“We know that Jamaica has postponed adjustments in the exchange rate in the past. It has done so by borrowing the money that it needs to make up the shortfall, but we need only glance at our history or study the current experience of some of our neighbours to remind us of the consequences of trying to dictate an exchange rate that is at odds with underlined economics or market conditions,” the governor said.
He added that while there is no debate that depreciation benefits exporters and hurts importers, if a larger proportion of businesses in the economy are importers then, certainly, business in the country will at first suffer when depreciation occurs.
“Improvement for business comes later from a change in behaviour that leads to a reduction in the proportion of import-dependent businesses,” he said.
Wynter noted that numerous media reports have suggested that the change in behaviour has already occurred, as businesses that were once uncompetitive are now able to produce profitably for the domestic market or penetrate export markets. He contended that some have even replaced foreign inputs with local substitutes, or in some cases, import raw materials and finish the goods locally before using those goods in productive processes.
“Those companies must have contributed to the more than 30,000 net new jobs created last year and more than 20,000 created this year. Therefore, for the first time in our independent history we can sustainably earn enough to pay our bills instead of perpetually borrowing money,” he reasoned.
“If we are seeing high quality export in goods and services and competitive import substitutions, then do you think it’s working? We are partners and stakeholders in this transformation and therefore we must be careful of the messages that we send. We need to have frank and open dialogue of where we are, where we are going, how we are going to get there, the remaining challenges we face and how we are going to address them,” the governor warned.
He reckoned that what has distinguished economic management for the last two years, compared to the periods before, has been the genuine participation of our stakeholders in the dialogue which will also create the atmosphere for the country’s success going forward.
“The central bank remains committed to consulting with you,” Wynter said.
WarrenBuffet, the world’s successful investor, has famously said that in pursuit of wealth we should always try to avoid borrowing. But for the average person, is this realistic?
Without borrowing, how could many of us afford to buy a house, a car and other assets with our own cash while also ensuring that we have enough savings to cover any eventualities such as illness, or to ensure that we have enough cash saved for our retirement? For most of us, debt is a necessary tool to help us acquire basic assets.
Michael Lee-Chin, in an interview with Forbes magazine, has posited that one of the many ways billionaires acquire wealth is to “use other people’s money”. It so happens that getting a loan from a financial institution is essentially a way of using other people’s money. The key to borrowing is to make sure you do so responsibly by actively employing another one of Warren Buffet’s investment tenets: “Never lose money.”
If you are going to take a loan, I find that it helps to use the following guidelines to determine whether this loan will actually be beneficial in helping to achieve your long-term goals, including wealth generation and planning for retirement:
1) What is the purpose?
If you are going to borrow, you must think seriously about what the loan is being used for. Ideally, if you are paying interest on borrowed funds, it should be in pursuit of acquiring an appreciating asset. In other words, funds you borrow should be used to purchase or invest in something that will increase in value over time.
If, for some reason, your loan is being used to buy a depreciating asset such as a car, you should consider the long-term value that it will bring to your life. Will it enable you to get a better job, improve or increase your income opportunities, or improve your standard of living in a quantifiable way?
2) Earn more interest than you pay
Now that you have ensured that you are borrowing for the right reasons, you need to ensure that your loan makes financial sense in the big picture of your long-term financial goals. When you borrow, you pay interest to your creditor. Which means that even though you are well on your way to owning a valuable asset, you will be losing cash while making your loan payments to your creditor. The cash you will lose while repaying a loan will be significantly higher than the original cost of the asset itself. That is, you will inevitably pay your creditor a lot more than you originally borrowed.
Therefore, when borrowing you should:
*Ensure that after your loan payments you will still have disposable income for saving or investment.
*Find investment options that will give you a higher return on your investment than it will cost you to borrow. For example, if you can borrow at 10 per cent but invest at 11 per cent or more, then you will earn net income that will help you to efficiently build wealth over time.
3) Earn positive cash flow
Another option for building wealth with debt is to ensure that your debt helps you to earn positive cash flow. That means you should be earning more cash from your assets or investments than you are paying out to the bank.
The method to achieve this is much more simple, but may be slightly more elusive for some borrowers. This option involves borrowing to purchase an asset that will generate cash flow such as rental property, investment in a company, or purchase of bonds or dividend paying stock.
This is one of the central investment tenets of the book Rich Dad Poor Dad by Robert Kiyosaki. This philosophy is simple: Only borrow if it will help you to earn more money. For many of us this is challenging, as the biggest loans we have are usually for the car we drive to work and the house we live in – neither of which tends to generate cash. If, however, you are able to leverage those assets to generate cash which can then be reinvested, you would be well on your way to building sustainable wealth
BE CAREFUL OF UNSECURED DEBT
With interest rates in Jamaica being the lowest they have been in many years, and competition between banks at an all-time high, it is easier than ever to get credit. Banks are basically begging you to borrow. They entice you by lowering fees and offering you unsecured loans and credit cards, pre-approved of course, so that way you don’t have to go through all the usual hassle of trying to get a loan.
As consumers this is great for us, because that means we have power in the market.
On the other hand, we must be careful of how we accept these offers and how we use borrowed funds. Unsecured debt and credit cards carry the highest interest rates in the market. They should not be taken lightly or used frivolously. Unsecured debt must always be used in accordance with rules 1, 2 and 3 above.
Needless to say, there are several other considerations to make when borrowing or investing that will be discussed in future columns. For most of us, borrowing is inevitable. However, if we try to consistently apply the rules above, then borrowing can be a great tool for building wealth instead of being a financial burden.
Claudja Williams works as a consumer advocate in the financial sector. The views expressed are her own.
The Lascelles Employees & Partners Co-operative Credit Union (LEPCCU) and the Nestle Jamaica Co-operative Credit Union (NJCCU) have combined their operations.
The ‘transfer of engagement’ from NJCCU to Lascelles was approved on September 30.
The merged business will continue to operate as Lascelles Employees & Partners from two branches – the head office in Kingston and the other at the Bybrook Condensery in Bog Walk, St Catherine.
General Manager of LEPCCU Sherie Nash-Seymour told the Financial Gleaner that the entities merged “to benefit from an increased capital and asset base, economies of scale, to address regulatory challenges and to widen the membership base”.
She said the credit unions’ bond has been opened to include a much wider cross section of past and present members from companies aligned with J. Wray & Nephew Limited.
Under the merger, the union now holds assets of $1.05 billion, to which Nestle contributed $107 million. Its loan book is valued at $740 million, less than a tenth or $62 million of which was contributed by Nestle.
The staff and management teams remain intact.
“Prior to the merger, Nestle operated with a very small staff complement, which will be transitioned accordingly,” Nash-Seymour said
She said the merger makes available to all members – including previous members of Nestle Jamaica Credit Union – a wider cross section of products and services that includes online banking, high-yielding investments and more affordable loans”.
That was echoed by treasurer of Nestle, Richard Hutchinson.
“This would also include former members, who were not able to maintain their membership status as a result of discontinued employment with Nestle, being able to renew their status as members under the merged entity,” Hutchinson said via email.
Nestle’s service was predominantly geared towards Nestle Jamaica employees, but last year, the Swiss-owned company sold its production operations to Musson Jamaica.
Lascelles Employees & Partners catered to mainly employees of the Lascelles deMercado group, which was renamed J. Wray & Nephew Limited after its acquisition by Campari Group of Italy in 2012. The new bond will cater to core employees as well as industry members.
The merged entity has approximately 5,000 members, of which Nestle contributed 200.
Nash-Seymour said there are no immediate plans to rebrand, although she noted, “the possibility does exist that rebranding may occur as the entity continues to grow from its operations or through other mergers.
Lascelles Employees & Partners will be celebrating its 50th anniversary in September 2018, while Nestle turned 60 this year.
“Combined, we have more than 100 years of experience in service to offer our membership,” the general manager said.
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