IN early July 1996, the closure of the now-defunct Century National Bank triggered a collapse in the domestic financial sector, with blame for the collapse being pointed in all directions. This article is an attempt to objectively look at the situation which led to the collapse of the sector at the time as a precursor to setting the stage for discussions on the consequences, negative and positive, and to inform some of the discussions which have emerged in recent days about the crisis which started in the financial sector, but rocked the entire economy and led to a ballooning of Jamaica’s public debt to deal with the matter. Published papers on the matter were used to inform the article.

Precursor to a crisis

“The major cause of the Jamaican financial crisis was an unduly hasty liberalisation of the financial sector without prior improvement to the regulatory and supervisory framework (Kirkpatrick & Tennant 2002: 1935-1936) quoted in a 2006 paper co-authored by professors David Tennant and Claremont Kirton, both formerly of the Department of Economics at The University of the West Indies, Mona. The paper is entitled Assessing the impact of financial instability: The Jamaican case study; Iberoamericana. Nordic Journal of Latin American and Caribbean Studies Vol XXXVI: 1 2006, pp. 9-36.

“The Jamaican Government liberalised the financial sector between 1986 and 1991 as part of World Bank Structural Adjustment and IMF [International Monetary Fund] Stabilization Programmes. This involved, inter alia, removing the ceilings placed on banking system credit, the total deregulation of savings rates, and dismantling exchange controls,” Tennant and Kirton continued.

The Government, spanning the late 1980s and early 1990s, acceding to the prodding of the World Bank and the International Monetary Fund, created the conditions for dozens of new financial institutions to develop.

With the Government committed to broadening Jamaican ownership in the sector, “growth of the Financing and Insurance Services sector rose from 9 per cent in 1987 to a peak of 50 per cent in 1994, averaging 17 per cent per year in the interim…This growth was partly associated with an increasing number of financial institutions (banking entities and insurance companies) from 67 in 1989 to 105 in 1995, with the major increases being among building societies and merchant banks,” wrote the late Gladstone Bonnick, the former executive chairman of the Financial Sector Adjustment Company (Finsac) in an address delivered in October 1998, at the XXX Annual Conference of the Caribbean Centre for Monetary Studies of The University of the West Indies, St Augustine, Trinidad and Tobago. That address was subsequently captured in the book Storm in a Teacup or Crisis in Jamaica’s Financial Sector.

By September 1998, the number of institutions had fallen to 71.

Bonnick continued: “During the late 1980s and early 1990s, there were significant structural changes in the financial sector. Most noteworthy was the rising importance of groups comprising several types of financial institutions. Indeed, each group sought to include a commercial bank, merchant bank, building society, life and general insurance, investment trust, and leasing company. This form of business structure was designed to take advantage of opportunities for minimising the impact of regulations, supervision, and taxation upon the group. It was therefore a structural change that was partly a response to opportunities for arbitrage.”

There was also rapid expansion of lending to the private sector, but it is argued that this expansion was unsustainable as risks were not properly assessed, collateral was inadequate, and loans were allocated mainly for consumer-oriented activities (Green 1999: 4).

But structural changes in the financial sector apart, the wider economy was undergoing changes that helped to lead to the crisis.

The late Paul Chen-Young, former chairman of the Eagle Group of Companies — one of the financial companies which failed during the crisis — summed up the policies at the time in a paper entitled, With All Good Intentions: The Collapse of Jamaica’s Financial Sector, Policy Papers on the Americas. Volume IX Study 12, November 1, 1998.

“There is a strong case to be made that the economic climate that prevailed in the 1990s contributed to the downfall of the sector. Inappropriate and inconsistent monetary policy created hardships, resulting in the inability of borrowers to repay loans, inadequate returns on investments to cover funding costs, and falling values in investment portfolio and property values. Money supply fluctuated sharply, inflation and bank lending rates were high, and exchange rates plummeted.”

This happened as liberalisation came with the country’s foreign reserves being in a precarious position. Net foreign reserves in 1989 stood at minus US$530.2 million.

Inflation in 1991 spiked at 80.2 per cent as the value of the Jamaican dollar dipped. At the start of that year, US$1 was sold for $8.17. Twelve months later, US$1 was being sold for $21.57. To help combat that high inflation, lending rates were increased. Commercial bank lending rates rose to 40.1 per cent in 1991 and by 1993, it was at 61.3 per cent.

“Fluctuations in monetary policy and the resulting inflation, along with a 0.3 per cent average annual growth rate in gross domestic product (GDP) between 1990 and 1997, created an unfavourable operating environment for businesses and made it difficult for them to service their debts. Ultimately, the problems spilled over into the financial sector,” Chen-Young wrote.

In his budget presentation in 1998, then Finance Minister Omar Davies acknowledged the “impact of a prolonged high interest rate regime on a number of non-performing loans.” At the same time, stewards of financial institutions were also chided for “poor management practices and decisions” which were “unethical and in breach of fiduciary responsibility”.