Bailing Out the Banks

The government set up Finsac, or the Financial Sector Adjustment Company, in January 1997 to clean up the mess left by a colossal banking crisis. Among Finsac’s assets are 24,000 non-performing loans worth J$52.6 billion ($2.2 million). Critics say Finsac is the product of the government’s half-baked attempt at liberalization, but Minister of Finance Omar Davies says, “Similar problems occurred in over 100 countries worldwide including the US, Japan, Mexico to name a few. The objective reality is that very few countries have addressed these problems as competently as those who have been charge with the responsibility for managing Finsac.”

When the government liberalized the financial sector in 1996 it failed to implement adequate regulations or supervision. The result was a mushrooming of often poorly managed institutions. In 1990, Jamaica had 43 financial institutions. Six years later, there were 187. “Just about anyone could get a loan in those days,” says Donovan Perkins, managing director of local investment bank Pan Caribbean.

High interest rates, excessive lending and fraud strained the banking system. When Century National Bank, a commercial bank, declared bankruptcy with a J$5 billion overdraft with the central bank, and insurance companies such as Jamaica Mutual Life went under, the government stepped in to guarantee the deposits and pensions of 30,000 Jamaicans.

The crisis has cost close to $2 billion, pushing public debt up to 125% of GDP. The government hired Ernst&Young and KPMG, the auditors, to recommend action to rehabilitate the financial system.

Patrick Hylton, the head of Finsac, says “Selling insolvent institutions and transferring liabilities to rehabilitating institutions removed the cost of restructuring the financial sector from the government’s balance sheet.” In the last four years, Finsac has merged and sold J$13.6 billion in assets.

Finsac also created a centralized collection unit to recover and restructure non-performing loans. This has collected J$4.82 billion in non-performing loans and restructured or rescheduled J$9.7 billion in loans. Finsac has also sold repossessed hotels and more than J$1 billion-worth of real estate.

If Finsac was widely criticized in Jamaica for its rapid divestment of insolvent financial institutions at fire sale prices, its planned auction of a portfolio of remaining non-performing loans and underlying assets to foreign distressed debt institutions in June is causing uproar.

Many Jamaicans fear up to 10,000 small businesses could close as buyers of the portfolio demand repayment. Critics argue that if the government plans to sell the portfolio to foreigners for an equivalent of 30 cents on the dollar, it should give the debtors the chance of repaying 30% of the value of their loans. But Finance Minister Omar Davies says, “Everyone cannot win, and hence calls for further relief to the bad debtors translates immediately into transferring additional burdens to the taxpayers in the present and in the future.” Hylton says debtors have had the opportunity to reschedule or restructure their loans since 1998 and will have one more chance in June.

The June sale has generated 23 interested bidders, including investment banks, accounting firms and funds dealing in distressed debt. “Finsac’s work in rehabilitating the financial sector is not the manifestation of an incompetent and vindictive government,” says Hilton, “Jamaica can no longer operate in a protectionist environment.”