DESPITE many analyses and studies, there is much controversy regarding the main cause of the problems in the financial sector.

While it may be impossible to reach a consensus on this, there is an ample menu of contributing factors about which most persons would agree. The late Gladstone Bonnick, the former executive chairman of the Financial Sector Adjustment Company (Finsac) outlined what he called a partial list, “the content and ordering admittedly reflect my own perception and biases”. But he put them down to the mindset of domestic entrepreneurs.

Here are some predominant characteristics of the indigenous entrepreneur that Bonnick wrote were responsible for the rapid expansion of the financial sector during the mid-1990s:

• Too eager to get rich.

• Too bullish in risking other people’s money.

• Too eager to start at the top.

• Too competitive with one another in demonstrating the trappings of success – reflected in the rush to form larger and more complex groups; the penchant to build large high-rise head office buildings – the edifice complex;

• Too prone to bend prudential norms and regulations.

Bonnick’s observation was summed up by Paul Chen-Young in his paper, With All Good Intentions: The Collapse of Jamaica’s Domestic Financil Sector; November 1998.

“While the harsh economic climate adversely affected the direct investments made by the domestic financial entities, blame must also be placed on the directors and managers of the failed entities based on their poor management decisions, outright mismanagement, and, in certain cases, alleged financial irregularities,” said Chen-Young.

He continued: “How could so many directors sitting on the boards of various financial entities have made so many ‘bad’ and untimely investments? It is necessary to note the mood of the 1980s and the early 1990s, when there was official government policy support for the expansion of the domestic financial sector into the productive sector, eg tourism and agriculture, in the absence of significant foreign investment in those areas. In the case of agriculture, the most notable examples were National Commercial Bank’s investment in citrus, papayas, and mangoes, and the Manufacturers Merchant Bank’s investments in sugar.

The financial institutions even extended their attention and energies as well as investment portfolios toward expansion of the tourism infrastructure and construction of office buildings and shopping malls.

“Until the crisis emerged, there was little understanding of the full extent of the inadequacy of the government’s overall capacity to police the links between the banking, securities and insurance institutions. Only when forensic auditors were introduced, in an attempt to unravel some of the transactions, did the extent to which these linkages had been abused became evident,” Patterson said in his book My Political Life: Jamaica’s Sixth Prime Minister.

Century National Bank, which could not meet its obligations, was initially provided relief through a $4-billion overdraft at the Bank of Jamaica. Later on it was put under temporary management by the minister of finance and was closed in early 1996.

“By April/May 1996, a group of CEOs of several life insurance companies (representing financial groups) approached the Government to discuss assistance in dealing with their liquidity problems. In August 1996, the Government appointed a small working group assisted by a noted intemational financial consulting firm to look into the problems and advised troubled institutions to prepare work-out plans on the basis of which support could be considered.

During the next few months, preliminary analysis showed that what was described as a liquidity problem due to mismatch of assets and liabilities was in fact a problem of insolvency — potential, borderline and in some cases substantial.

It also became clear that whereas insurance companies had made the approach to Government, several commercial banks had been contaminated through their inclusion in groups with troubled insurance companies and other institutions. This was the case with Eagle Commercial Bank, National Commercial Bank and Workers Savings and Loan Bank, which had lent considerable sums to members of their groups. Both Workers Savings and Loan Bank and Eagle Commercial Bank slipped into an overdraft position of about $6 billion with the Bank of Jamaica, which was covered by drawing on Government’s balances which had been sterilised in the interest of monetary policy.

Patterson wrote: “The annals must record that the same multilateral financial institutions which had advocated the granting of new banking licences, most of which went to a group that dubbed themselves the ‘indigenous banks’, sought to persuade the Government not to intervene. They urged us to accept the failure in the banking system as a risk outcome of the operations of a market economy.”

The advice he said that was given, was to “put receivers in the failed institutions who would eventually pay the creditors and depositors a percentage of their investment, calculated on the value of the assets eventually recovered”.

Noted, too, was the performance of foreign-owned banks during the period. The Bank of Nova Scotia, Canadian Imperial Bank of Commerce (now CIBC FirstCaribbean) and Citibank encountered no difficulties. Other institutions such as locally owned credit unions and building societies such as Jamaica National Building Society and Victoria Mutual Building Society maintained sound policies and suffered no adverse consequences. “The main reason for their continuing success obviously lay in their operating within strict guidelines and avoiding questionable loans.”

Patterson, in reflection, later said: “It is the sad reality of political life that those entities who made the early call for help and received it have so far failed to utter one positive word for the action taken to protect the interests of policyholders and depositors. It is not the financial institutions that have been pilloried for imprudent management practices but the administration instead.”