Prepared by: Wesam Awashreh – Assalam Consulting Group
Globally, economists predict that financing channeled to expedite recovery from the economic shock caused by coronavirus, will be granted at minimal interest rates (nearly zero). The fear of bankruptcy and importance of immediate recoveryare pushing policy makers to facilitate through grace periods, exemptions and ensuring low-interest bearing finance is accessible to corporates and individuals.
On the local level; bouncing cheques have had a detrimental effect on the Palestinian economy, and in 2019, the total of bounced cheques reached $1.277 billon USD. This year, as a result of the Corona pandemic and the subsequent lockdown, the situation has deteriorated even further with bouncing cheques reaching 35 percent (figures not published), as compared to 10 percent during the same period last year, according to the Palestinian Monetary Authority (PMA).
Though some of the actions made by PMA have clearly had a positive impact on Palestinian citizens in reducing the overall tension of ongoingthe financial crisis, certain instructions regarding bouncing cheques mustmodified to avoid injustice for the majority of citizens financially affectedas a result of this pandemic.I applaud the emergency actions made by PMA and the unquestionable efforts they have made to offer solutions,though; I believe further comprehensive solutions could be released in response to corona crisis.
In this article, I will suggest a number of applicable measures and actions that can be taken by the Palestinian Banking Sector, all of which could work to shrink the negative socio-economic impacts of bouncing cheques throughout this extraordinarily difficult period.
With large amounts of cheques continuing to bounce without payment, not only will the economy be paralyzed, but individual cheque holders will continue to struggle – this is in no one’s favor. Since the announcement of a national emergency and lockdown, society has continued to bleed financially, and, as reflected by economic indicators, the income of a majority of citizens has been affected, leaving them unable to pay issued cheques.
Even more, the PMA, urged by a minority who has benefitted financially from the pandemic, has recently announced the enactment of strict measures on bouncing cheques that were highly opposed by citizens. Where this minority group made a purposeful choice to bounce its checks, we cannot neglect the fact that many law-abiding citizens have been forced to bounce their own cheques due to a lack of funds.
My proposed solutions, as outlined below, covera variety of banking facilities with calculated risk. The fundamentals are exceptional and exclusively tailored to avoid the significant socio-economic impact of this extraordinary situation:
1. Provide revolvers and overdrafts (Sharia compliant in Islamic banks) with a ceiling of four times the monthly salary of employees, keeping in mind the ILS 2000 monthly income of daily workers. These provisions will be executed in two stages, with twice the salary at each stage to avoid issuing new cheques. This special overdraft will be exclusively utilized for cheques that are due throughout the emergency period and the following months.Interest on these facilities will be at the lowest rate possible, and may be increased in the last third of 2020. These special assistance facilities will allow cheques to be collected, while preventing citizens in adequate financial positionsfrom benefitting from to avoid interest.
2. Award MSME owners and companies an extra 20 percent of their existing overdraft ceiling and issue new overdraft facilities to thosewithout them. The extra facilities will be free of charge and at minimum interest. The interest rate on facilities existing since the beginning of the pandemic will also be decreased. This move willempower the private sector to reboot, despite accumulated losses, and the decrease in interest expenses will work to offset a portion of the losses.
3. Extend the exemption made by the PMA for individuals and businesses on the bouncing cheque penalty charge of ILS 60 through the end of 2020, considering the force majeure nature of the pandemic. This exemption works as a supportive tool that can be measured in tens of millions, with banks recording earnings in tens of millions ILS from this fee last year.
4. Upgrade the credit rating system for citizens. A classified citizens & corporates (zero cheques bounced) could be upgraded to A+, and B graded (up to 5 cheques bounced in lifetime) could be stretched to 8 cheques or upgraded to A class. Though I am certain that public panic is not so much a result of drops in credit classifications, but a result of looming legal issues, this move will help to ease existing tensions.
5. Banks will be urged to consider the historical performances and classifications of clients, rather than recent unfair indicators. The historical assessment reports may also be provided to clients to defend their positions in courts in the event of unfortunate legal conflicts.
6. A decrease in the interest rates shall be reflected on existing facilities before new facilities are put in place. The total debt facilities portfolio is nearly US $8 billion in Palestine, while interest rates dropped internationally to reach almost zero. For example, “a citizen has a house mortgage of US $150k against a 5.5 percent interest rate over 25 years. The monthly payment would drop from US $920 to US $670 if the interest rate is reduced by 2.5 percent, so the variance would be US $250.” Not only will this difference increase the ability of citizens to settle cheques, but it willalso increase their purchase power. In such a case, citizens are automatically feeding the Palestinian economy, and left feeling financially empowered to contribute more to their society.
7. I also suggest providing grace periods for collateralized loans while considering the value of the collateral, taking into account drops in global interest rates. This grace periods will help to offset the financial consequences of accumulated interest expenses, while simultaneously providing citizens and businesses with resilience tools to overcome this tough period. Banks will be assured of their safety, while citizens will be empowered to cover their existing cheques and other financial commitments.
8. Extend PMA’s conservative policy of minimizing the number of issued cheque books(especially for individuals) to minimum possible, till the end of 2020. Furthermore; the newly printed cheque books shall have the first bearer pre-printed, to avoid its socio-economic complications.
9. Extend the exemptionsput in place by the PMA throughthe end of this year, for the benefit of all citizens – including all extra charges and fees associated with rescheduling loans, issuing new debt facilities, and other banking services. Because the banking sector has always collected those earnings, now may be the right time to pay back customers,given the emergency.
10. I’m keen on implementing these solutions with calculated risk, as deposits also refer to citizens. In response to COVID-19, I suggest thatemergency banking facilities work against a sovereign warranty from the Palestinian Authority. At a later stage, policies will be made for non-performing citizen (who could face penalties and restrictions on governmental services).
It’s clearly observed that the public debt has significantly increased in various countries around the globe, aiming to provide incentive finance packages for businesses impacted by the lockdowns, improving citizens spending on consumables, and upscaling purchase power which is the backbone of economic growth. There is no doubt that a sovereign warranty from government in such recession is an aggressive move but the situation has exceptionally burdened our economy.
I am confident that the above solutions will not be received enthusiastically by many bankers. However,we cannot deny that this pandemic has put a majority of citizens and businesses under increasing financial stress, in hopes that our solid banking sector acts as a heroic savior. Here, I emphasize that a loss inprofits is far better than the loss of civil peace. The proposed solutions will have less effect, in terms of risk (affecting deposits), but could potentially affect profits that reached ILS 700million in the Palestinian banking sector in 2019.
As the banking sector shall be better equipped to enter this stage, the decline in interest earned from facilities could parallel a drop inthe interest paid on deposits through a governmental enforcing exception. Several positive impacts may result, including the fact that the new banking facilities proposed (overdrafts to settle cheques) will be profit-generating for banks. Additionally, the load of ILS surplus that local banks have been suffering from in past years will be reduced. Furthermore; the investment portfolio in foreign stocks and bonds became riskier than the local facilities portfolio.
In conclusion, the emerging economic crisis is knocking on our doors. In order to bypass it, we must work collaboratively to provide solutions that may save our society from such a disaster. Finally, I hope those solutions will not be evaluated from a banking perspective only, as its impact is aimed to maintain civil peace post this crisis, fuel the economy, and reduce poverty and unemployment.