Contributor: James Ogunleye
Jamaican Banking System In Crisis
Omar Davies, the ebullient finance minister of Jamaica is a veteran of many economic battles. Since he took over from Hugh Small at the Treasury in 1993, he has had to battle high inflation, high interest rates, exchange rate instability and negative GDP growth. But of all the battles he has fought, none has threatened to overwhelm him more than the festering crisis in the finance sector, a crisis that has for the past two years hung around his neck like a millstone.
Since the collapse of the Blaise Financial group in 1994, Davies, a PhD holder, has been left guessing which of the island?s banks or finance houses would be the next to fold up. Added to his nightmare is the low public confidence in the sector. When he is not bailing-out banks, he is brokering take-over agreements.
How did a normally buoyant industry sleepwalk into the crisis? The problem started in the late 1980s and the early 1990s, when bank floatation became the order of the day. Driven by an International Monetary Fund-aided liberalisation policy that saw interest rates on government papers (like Treasury Bills) sky-rocket, commercial banks, Building Societies, insurance companies and other finance houses quickly mushroomed all over the island?s landscape. Operators fell over themselves to cash in and the finance industry attracted a rash of new operators, many with little experience and low management expertise. All the while, the Bank of Jamaica (BoJ), the supervising bank, simply assumed the role of onlooker.
Eventually, its mission to ?ensure the soundness and development of the financial system,? was put to the test, and found wanting. Vayden McMorris, chairman of Victoria Mutual Building Society, the island?s oldest, was charitable when he described the BoJ?s inefficiency as ?institutional oversight.? But it was that oversight, coupled with what Wolspang Grawssl, an eminent professor of management from the University of the West Indies, called ?lackadaisical government attitude? on fiscal policy, that quickened the pace of the finance sector to the precipice. In the early 1990s, virtually every macro-economy indicator in Jamaica was flashing red and the rate of inflation had crashed through the 50 per cent stagflation barrier to reach 77.3 per cent by 1992. The government, taking its cue from the IMF, saw the solution in high interest rates. It raised the rates on government papers like the Treasury Bills to a mouth-watering 40 per cent and kept it above this level until 1995. The result? The financial sector was awash with money (aggravated by high money supply in the economy). It was this bait that attracted hordes of new operators to the sector. But the policy soon to backfired: not only was the sector bloated with excess cash, no investment took place in the real productive sectors of the economy like manufacturing. The tourism industry continued to show some promise but its share of the largesse amounted to no more than crumbs.
The stage was prepared for the crash in the finance industry and all that remained was for the banking operators to press the destruct button. They did, via their lending policy. ?The investment policy by the financial sector was not very wise,? explained Grawssl. ?Very often, investment is driven by [white elephant] projects, or by giving money out to friends and associates. Huge amounts of money went to owners of the banks.?
David Wan, executive director of Jamaican Bankers Association agreed with Grawssl. ?There?s problem internally,? he told Black Perspective. ?There are unscrupulous bankers who loaned themselves money and couldn?t pay back.? Indeed, loans and advances by commercial banks in 1995 rose by 40 per cent to J$45.9 billion. The growth in banks loans, even the BoJ would admit, ?was at the expense of loan liquidity, with loan arrears [of six months plus] increasing at a faster rate than loan book by 50 per cent [to J$4.79 billion] as at December 1995.?
Besides the indiscriminate loan advances, some financial institution dabbled in real estate, in anticipation of a buoyant housing market. The legacy of such ill-judged investment policies is, today, manifested by the gigantic buildings adorning Kingston, the country?s capital, rotting away with no buyers in sight. It was only a matter of time before the government began picking up the corpses of banks in body bags.
In 1995, the government, realising its error, abandoned its policy of high interest rates and clamped down heavily on money supply in the economy. It began to mop up excess liquidity in the banking sector with a requirement that financial institutions maintain special deposits of about 50% of their cash reserves with the BoJ. This, in effect, curtailed the banks? ability to advance new loans and credit, and forced them to raise lending rates on existing borrowings. With lending rates rising as high as 60 per cent, new borrowers took to their heels, while the existing ones defaulted in droves. At the end of 1995 the value of commercial bank and building society overdue loans were J$6.4 billion and J$9.2 billion respectively. Bad debts alone accounted for 14 per cent of the commercial bank loan portfolio during the same period.
It was these high proportion of non performing loans - itself a product of management laxity, fraud and maladministration - that became the Achilles heel of the finance sector. First to sink, in 1994, was Blaise Trust and Merchant Bank, after it was unable to meet J$866 million depositors? demand. Century National Bank (CNB), the island?s third largest in terms of assets, followed suit in 1996. The CNB balance sheet as at the end of 1995 showed a net loss of J$39.2 million; its net realisable assets was J$4.6 billion, compared to liabilities of J$10 billion. By the time the ashes of its remains were sprinkled over the Caribbean sea, on July 10 1996, only J$25 million of depositors? money was found in its vaults, out of a total of J$25 billion!
The collapse of the CNB sent ripples through the Jamaican establishment. And no one demonstrated this disappointment more than Omar Davies himself. He told the Parliament in July 1996: ?The heart of the [CNB] problem is the extent to which its affairs have been badly managed. There are innumerable instances of injudicious investment decision with high-cost short-term deposits used to finance long-term investments. Those bad management decision were further complicated by the manner in which non performing loans, particularly to selected individuals, were handled.?
Those ?selected individuals? include opposition Leader Edward Seaga, said to owed J$22 million, and the ruling Peoples National Party (PNP), which had arrears of J$19.8 million. The CNB loans to the PNP was guaranteed by five cabinet ministers - including the Prime Minister P. J. Patterson and Peter Phillips, the leader of the House and Minister of health.
Other casualties in 1996 include Tetrarch Investments and Universal Investments - both of which left their depositors holding the shorter end of the sticks. And in March 1997, one of the doyens of the sector, Eagle Financial Network, was on its knees when the government bought it off for J$1. Shortly afterwards, First Metropolitan Buildings Society, a leading operator, was taken into temporary administration, before it was sold to Jamaica National Building Society (JNBC). JNBC itself is not in the best form, having made loan loses of J$42 million in 1996.
Of the remaining institutions, balance sheets for 1996, were generally discouraging. National Commercial Bank group, for instance, posted loses of J$857.6 million, while Citizens Bank incurred losses of J$592 million. In May this year, the government came to the latter?s rescue by acquiring a 60 per cent controlling interest in it. there were no cheers, too, for Life of Jamaica Group, a leading insurance company, which made a loss of J$322 million. The group which, until recently, included the aforementioned Citizens Bank, submitted its 1996 audited reports to the Jamaica Stock Exchange (JSE) in June 1997 ? some three months late. The group was on the verge of expulsion from the exchange when Camile Facey, its vice president, wrote in a grovelling letter of apology.
Workers Bank, which has a London subsidiary, recorded a loss of J$456 million in 1996. It?s provision for doubtful debt was J$187 million, 240 per cent increase over 1995 figure. Worse still, it suffered a J$1 billion drop in deposits, and owed the BoJ J$1.9 billion. It, too, had been racked with non-performing loans, with some J$1.5 billion alone owned by sister companies. Managers of Workers are now shopping around for capital injections.
Bruce Golding, the outspoken leader of National Democratic Movement lamented, ?Jamaica is facing a crisis of monumental proportions in the financial sector - worse than anything we have experienced in the recent history.? It is a crisis that has costs the government very dearly, chewing public finances with a vengeance. For instance, between January 1996 and July 1997, according to the Ministry of Finance, the financial sector gulped down a tidy J$24.2 billion of tax payers? money, and the bill is rising. Some observers say that by the time the smoke clears, the government would have sunk into the sector a mammoth J$30 - J$40 billion. And that is money Jamaica hasn?t got. Already the country is groaning dangerously under a mountainous debt. Overall budget deficit (including government debt) was equivalent of 14 per cent of the GDP in the fiscal year 1995/96. In cash terms, that?s a cool J$22 billion. But the effects of the government?s bail-outs has been more telling on the stock of domestic debt, which rose from J$145 in 1995 billion to a disturbing J$180 billion in 1996 - equivalent of 36.4 per cent of the GDP. This fiscal year the government has had to balance the books by borrowing about US$300 million from the international financial market. The result? Of J$100 billion projected revenue for fiscal 1997-98, debt repayment would swallow J$80 billion (US$2.3 billion), leaving a measly J$20 billion to spend on social and economy-supporting infrastructures that are crying for development.
Many Jamaican analysts who spoke with Black Perspective in August could not rationalise the decision to use debt finance to prop up inefficient banking and non banking institutions. They see the government?s measures as futile. ?My own proposal,? said Professor Grawssl, ?is that let a few of these companies and banks go bankrupt. It?s not wise [for the government] to bail out every single troubled organisation.? In David Wan?s view, the government should ?have allowed the shareholders of the [failed banks and companies] to carry the financial burden and not the savers.?
Will the government ever recover its huge investment in the finance sector? ?Impossible,? claims Delroy Alexander, editor of the respected Financial Gleaner, who spoke to with Black Perspective in August. ?I have no doubt that they [the government] would make the argument, but the vast amount of money that they?ve put into [propping up the industry] would be largely unrecoverable.?
But the government sees the issue differently. ?It?s not a matter of the money being recouped,? a Prime Minister aide told Black Perspective. ?There?s a misunderstanding here. Government has not handed these companies money freely. What it has done is take on shares and real estates assets in exchange for money.? He said the government?s decision to intervene in the sector was informed by its duty to protect public interest, ?particularly the interests of small savers, pensioners and insurance policy holders.?
?I?m sure you?re aware of what happened in Albania a few months back, when government inaction led to civil riots. Do you want people to rip Jamaica apart? No! The government had to come in and defend the interest of small savers and depositors and [ultimately] restores public confidence in the sector,? said the aide.
Indeed, the battle to restore public confidence in the banking sector began in earnest in 1995 and it is being waged on two fronts - internally by the banking operators and externally by the government. Internally, banks have sought to introduce control systems, among other checks and balances. And institutions like Victoria Mutual Building Society (VMBS), have introduced a ?tour programme? to meet the public and discuss their concerns. Last July, the VMBS tour group was in Britain to meet the concerned Jamaican nationals. ?The society has been enlightening the public about its strength and allaying public fear in the wake of the problem in the sector,? said Ann Foga, a manager with the VMBS British subsidiary, Victoria Mutual Finance.
Amongst the government measures: improved supervision of the financial institutions by the apex bank, with methods such as physical on and off-site examination of books; and a tough cash reserves requirement with the BoJ, designed to mop up excess liquidity. There is also a new requirement for the building societies to maintain a register of loans to officers, directors and members; so too is the requirement on the apex bank to publish the list of authorised financial institutions on its register. ?The [aim] of the list is to educate the banking public so that persons can make clear decisions about where they invest their hard earned income,? explained Errol Ennis, assistant minister of finance.
Another key measure was the establishment, in February 1997, of Finsac - acronym for Financial Sector Adjustment Company ? to, amongst other aims, channel financial assistance to the distressed banks and other institutions, including non-banking companies, and to assist them in the restructuring of their operations. The agency is headed by a tested technocrat, Gladstone Bunnic, one-time deputy governor of the BoJ and a former trouble-shooter with the World Bank. Finsac is now the conduit pipe through which the government pumps money into the sector. And since February when the agency began operating, the list of ailing companies and financial institutions it has taken over or part-owned reads like who?s who in the island?s corporate sector. They include: Eagle Financial Network, Citizens Bank, CIBC Building Society (licensed only two years ago), Jamaica Grande, Holiday Inn, Navy Island and Carib Cement.
Another welcome government recipe for the sector is the proposed Deposit Insurance scheme, to protect small savers and insurance policy holders. The legislation - Depositors Bill - is among the six financial-related bills that are being hustled through the Parliament. Government sources in Kingston told Black Perspective that the scheme would become law before the end of the current parliament.
But the jury is still out as to whether the measures taken so far are adequate enough to put the sector back on a sound economic footing. Firstly, analysts say there are contradictions in the government?s policy, and that if care is not taken it may end up doing more damage. For instance, the new regulation on banking institutions are said to be ?unnecessarily rigid.? Analysts say it fails to draw a clear line between the commercial banks (which specialise in short-term finance) and the building societies, which cater for the longer term. The imposition of a cash reserves requirement on the building societies is another sticky issue. Industry bosses say the new rule could deprive the societies of a large pool of funds, ?in a housing finance market which depends on the mobilisation of low-cost long-term money.?
Also under the analysts? microscope is the afore-mentioned insurance scheme. ?While [the scheme] will offer some measure of protection to the smallest savers, it will be unwise to think that deposit insurance can compensate for poor management practices and bad judgement [on the part of operators], or that it will ensure the health of financial institutions,? warned VMBS? McMorris.
There is also a question mark on the government?s ability to maintain macro-economic stability over a long-term period. According to Grawssl, ?Some of the positive gains [like low inflation, low interest rates and stable exchange rate] which the government policies have produced could be offset, if not reversed, by negative budgetary policy, that they are pursuing - particularly with respect to the bail out [of banks] which [the government] has to borrow money to finance.?
All said, the Jamaican banking sector is like a proverbial cat with nine lives and many believe it will survive the rolling tribulations and come out much stronger as it enters the new millennium. Such future growth, many say, lies in mergers and acquisition. ?What you are going to see happening now [and in the future] is a leaner and meaner banking sector,? said David Wan, of the Bankers Association. This view is supported by others like Ann Foga, of Victoria Mutual. The key to that future lies in the banking sector?s moving from dependence on trading on government papers to other sources of income. But it?s unclear whether that is feasible in the short-term. What is clear, says Alexander, of Financial Gleaner, is that: ?There?s a level of expertise [in Jamaica] that knows the problems of the sector, whether politically [the government] can deal with these problems remains to be seen.?
Tough Luck for UK Depositors
The collapse of the Blaise Banking group and Century National Bank (CNB) was a major blow to thousands of British-based Jamaican depositors. Some of them - especially investors in the Blaise group - watched in horror as lifetime savings disappeared before their eyes, ?These people have lost money twice and they are now very cautious of the Banking sector? said Wolspang Grawssl, Professor of management at the University of the West Indies.
Grawssl notes that if the Jamaican government had acted much earlier, the collapse of the banks could have been prevented and thousands of investors could have been saved from unnecessary heartbreak. It is a view shared by Percival Latouche, president of the Association for the Resettlement of Returning Residents to Jamaica, who out of rage, described the government?s handling of the crisis as ?reckless, careless, incompetent and cavalier.? This outburst must have been very worrying for the Derick Heaven, the Jamaican High Commissioner (pictured above) who, in an interview with Black Perspective earlier in the year, outlined his country?s plans to attract investment from the returnees.
What got Latouche angry was a graduated ?bail-out? plan announced by Finance Minister Omar Davies. Davies had disclosed at a public meeting of the Jamaican community in London, last November, that small investors in the CNB would get a maximum of 90 per cent of their savings. His plan Would have left the majority of the biggest savers - who collectively invested over J$5 billion in the CNB - worse off. Latouche did not find this funny. Said he: ?It?s an insult for Davies to come to England and face people who have worked for many years, saved and sent money home to be offered a mere pittance of their hard-earned cash.?
The government has since amended its pay-out plan. Prime Minister Patterson announ-ced in July that all 43,000 investors in the CNB would receive 100 per cent of their savings back, albeit without interest. Even though the government would not disclose the number of British-based investors who will benefit from the proposed plan, independent observers say it runs into thousands.
Remittances from Jamaicans overseas, particularly from Britain, is big business and the Jamaican authorities have always been very careful not to upset the flow. ?The savings of our nationals abroad is a significant source of capital accumulation and must be kept high on our list of priorities,? Patterson warned at the opening last November, of the Workers bank?s subsidiary in London.
Indeed, in 1994, remittances from these Jamaicans reached US$328 million, almost equal the US$341) million generated by private investment in the same period. This perhaps explains why shortly after the collapse of the CNB last July, Davies, along with Derick Latibeaudiere, governor of Bank of Jamaica, and his deputy, Bryan Wynter- crisscrossed European and North American cities to assuage the fears of the nervous Jamaicans that the island?s banks are still good to do business with.
The banks, too, are taking measures to complement those of the government. British-based subsidiaries like Victoria Mutual have opened up their books for public inspection and have held face-to-face public meetings with the Jamaican community to discuss their worries.
Ann Foga, a senior manager with Victoria Mutual told Black Perspective that her group has been focusing more on its strengths. Also, Workers bank - which opened its doors to British customers last November - sees wisdom in opening up contact with its customers. ?Customers have been very appreciative of the opportunity to discuss developments within the banking sector.? the bank said, in a statement to Black Perspective.
For now, worried Jamaicans in the UK can only hope that sanity is soon restored in the banking sector.