IN the world of finance, one rule is almost sacrosanct: Rapid credit growth is a precursor to pain. Lending booms, from the subprime crisis in the United States almost two decades ago to China’s recent real estate woes, inevitably sow the seeds for a harvest of non-performing loans and banking crises. Jamaica, it appears, never got the memo.

An in-depth analysis of Bank of Jamaica prudential data from 2017 to 2025 reveals a startling anomaly. The island’s financial sector has engineered a 132 per cent explosion of its gross loan book over eight years, pushing the total stock of credit to over $1.56 trillion at the end of June 2025.

This growth was far from linear. After a period of steady pre-pandemic expansion when lending grew at a consistent 10-16 per cent annually, the pandemic triggered a sharp slowdown, with growth falling to 13.8 per cent in 2020. However, lending accelerated markedly from 2021 onwards—a classic “catch-up” phase during which pent-up demand and economic reopening spurred a borrowing boom. This surge peaked at 12.9 per cent growth in 2023, injecting over $356 billion in new credit into the economy in just three years. This robust expansion has continued, sustaining a strong pace of over 11 per cent annually through to 2025.

Yet, against all orthodox economic models, the rate of loans turning sour has barely budged. The system-wide non-performing loan (NPL) ratio has held in a miraculously tight band between 2.4 and 2.9 per cent for nearly a decade.

This defiance of financial gravity is a masterclass in regulatory prudence, engineered by strict, forward-looking loan loss provisioning that forced banks to build fortresses before the storm. According to the BOJ in responses to the Jamaica Observer, the most critical policy decision was its 2017 adoption of a “forward-looking, risk-based, supervisory framework”, which replaced a backward-looking system and “ensured that potential weaknesses… were identified and corrected well before they could threaten stability”.

But dig deeper into the data and a second, far riskier story emerges. The engine of this growth — and its potential single point of failure — isn’t the island’s conservative commercial banks, but its building societies. BOJ data confirm that while commercial banks maintained a safe loan-to-deposit ratio (LDR) between 71 and 76 per cent from 2020 to 2025, the building societies consistently operated at a staggering 90 per cent or higher. They peaked at 98.7 per cent in 2022, a level indicating that for every $100 deposited, $98.70 was lent out. This left a perilously thin buffer to absorb withdrawals, as they lent out nearly every dollar they held in deposits to fuel a lending surge that hit 11.8 per cent in 2025.

This is the double-edged sword of Jamaica’s financial miracle: a system whose impressive overall strength is matched by a high-stakes, high-growth bet concentrated in a single, vulnerable niche.

The Prudent Majority: A Regulatory Masterclass

The overarching narrative is one of remarkable resilience. The secret to Jamaica’s stability lies in a single, powerful metric: the provision coverage ratio. For the entire period from 2017 to 2025 this ratio has consistently exceeded 100 per cent, peaking at 122.7 per cent in 2023. This means that for every dollar in non-performing loans (NPLs) on their books, banks have set aside between $1.03 and $1.22 to cover potential losses. This formidable buffer wasn’t accidental — it was the direct result of the Bank of Jamaica’s decisive implementation of the IFRS 9 accounting standard. This forward-looking framework forced a paradigm shift from recognising losses only after they occurred to a more prudent model of forecasting and provisioning for them upfront, at the point of loan origination. This disciplined, pre-emptive approach built a financial fortress that has successfully insulated the broader system from the inherent risks of a massive credit expansion.

This forced a fundamental shift in how banks operate. Scotiabank, responding to queries from Sunday Finance, detailed this change: “We moved away from provisioning losses at the time of occurrence to a more conservative and prudent approach of setting aside provisions at origination of each loan.” This involved investing in “new models, systems, and policies to enhance our forecasting capability, and became more data driven in making decisions on loan origination quality and risk appetite”.

This prudence has made the commercial banking sector, which constitutes over 90 per cent of the system’s $2.9 trillion in assets, a picture of stability. Their disciplined approach is quantified in two critical metrics. First, their loan-to-deposit ratios have been managed within a conservative 71 to 76 per cent range over the past five years. This means they hold a significant buffer of un-lent deposits, ensuring ample liquidity to meet client withdrawals without resorting to volatile external borrowing. Second, and more crucially, their capital adequacy ratios (CAR) — a measure of a bank’s capital buffer against losses — have not just met but consistently exceeded the regulatory requirement of 10 per cent, staying robustly above 14 per cent. This indicates that even while fuelling the economy’s credit boom, these institutions have maintained capital levels that are more than sufficient to absorb unexpected financial shocks, effectively acting as the system’s shock absorbers.

The Risky Engine: Building Societies’ High-Wire Act

However, the aggregate numbers mask a tale of two sectors. While commercial banks grew steadily, the smaller, niche building societies — representing just 7.5 per cent of system assets — became the system’s growth rocket ships, and its primary risk. Their contribution to the system’s explosive credit expansion has been disproportionate; for instance, in 2022 they posted a loan growth rate of 12.1 per cent, significantly outpacing many of their larger counterparts. To achieve this, they have operated with staggering leverage. Their loan-to-deposit ratio frequently breached 95 per cent, hitting 98.7 per cent in 2022 — a level that signifies an extremely aggressive, risk-on strategy with minimal liquidity buffer.

Economist Keenan Falconer notes that this aggressive thrust “is not entirely surprising”, given the lack of competition in their segment and their specific role. However, he adds that, “the systemic importance of each banking institution… confers on them a different set of obligations”.

Their risk is compounded by intense concentration. Their business is overwhelmingly focused on one asset class: real estate. This makes them a powerful driver of development but also hyper-exposed to a correction in the Jamaican property market. If unemployment rises and mortgages default, their loan book and the value of their collateral would fall simultaneously — a dangerous feedback loop. However, this risk is partially mitigated by the BOJ’s stringent oversight, which subjects them to international liquidity standards and strict capital requirements on their mortgage portfolios. Furthermore, as economist Falconer noted, a strong domestic economy with low unemployment helps expand their deposit base, providing a more stable funding source for their high-risk strategy. Sunday Finance reached out to one of the building societies for comment, but it declined to provide a statement.

The Regulator’s Dilemma

The BOJ states that its framework ensures licensees, “remain prudent” through liquidity coverage ratio requirements, prudential limits on large exposures, and, “tighter provisioning and standards for managing delinquent mortgage portfolios [which] reduce solvency risk from concentrated mortgage books while allowing lending to continue”.

The central question is one of contagion. While the building societies are small, a crisis of confidence in their sector could quickly spread to the broader, healthier financial system. The Jamaican model proves that stringent regulation can allow an emerging market to have its cake and eat it too: unleashing credit for growth while building a fortress to contain the risk. But it also serves as a warning that even within a success story, pockets of high-stakes betting can thrive, presenting regulators with their most delicate challenge yet.

FALCONER…the systemic importance of each banking institution… confers on them a different set of obligations,