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The issue of the serious problems of the financial sector in recent years is well known. Later I will give a fuller exposition on FINSAC the principal organization, which has been used in the stabilization and rehabilitation of the sector. However, apart from the work of FINSAC, there have been important developments, which would preclude a recurrence of these problems. These developments are both institutional and legislative. In terms of institution, the Deposit Insurance Corporation has been in existence now since August 1998, under the capable chairmanship of Hon Herbert Walker, a former Governor of the Central Bank. To date this institution provides coverage of up to J$200,000 on each account in a licensed deposit-taking institution.. This coverage protects just under 95% of all accounts, although the value of total savings covered is much less being 57.5%. At the establishment of the Deposit Insurance Corporation, I promised that there would be regular reviews of the level of coverage. We have recently conducted such a review. I have indicated to the Board and Management of the Deposit Insurance Corporation that there needs to be greater public awareness of the existence of the institution, the level of coverage provided and perhaps most importantly that the implied blanket 100% coverage demonstrated during FINSAC’s intervention no longer exists. Therefore, for persons who are simply depositors, please note that accounts held in deposit-taking institutions licensed by the BOJ are all insured by the Deposit Insurance Corporation up to a maximum of J$200,000 per account. I have great pleasure in announcing that this ceiling will be lifted to $300,000 as of July 1, 2001. Further, progress has been made in terms of monitoring the operations of a very important set of institutions in the financial sector – the Credit Unions. These are cooperative institutions and hence to a large extent are self-regulatory and self-policing. In that regard Jamaica Credit Union League had gone a far way towards improving its regulatory activities to ensure that member organizations adhere to stringent fiduciary guidelines. In fact, the League, on its own steam, has sought technical assistance, which will enable it to monitor member organizations with equal stringency as the BOJ regulates non-cooperative operations. However, after discussions with the League, the decision was taken that the monitoring and regulation of these institutions would be enhanced through increased cooperation and collaboration between the League and the Bank of Jamaica. My clear instructions to the BOJ were not to seem to duplicate the efforts of the League, but rather to assist them in attaining the objectives of a set of institutions regulated against the highest international standards. This collaboration has occurred with little fanfare and it means that members of Credit Unions throughout Jamaica can be assured that their institution is being monitored and regulated through the joint efforts of the League and the Bank of Jamaica. Members of the House, particularly those who sat on the Joint Select Committee on the Financial Bills would be aware of the recent passage of four new bills aimed at further strengthening the regulations governing the financial sector. Perhaps the most important of these bills is that which authorizes the establishment of the Financial Services Commission, the FSC. This institution will complement the Bank of Jamaica which has responsibility for deposit-taking institutions by supervising all other licensed financial institutions including insurance companies, securities trading houses, pension fund managers and unit trust. The FSC will incorporate the existing Securities Commission, as well as the existing Superintendent of Insurance, but will also incorporate the Pensions Commission when this comes into being. I have great pleasure in announcing that the CEO of the FSC will be Mr Brian Wynter, former Deputy Governor of the Bank of Jamaica. Insofar as additional legislation is concerned, there is one outstanding piece, which the Joint Select Committee will be examining as soon as the Budget Debate is over – this is the Insurance Act. It is of critical importance and I speak on behalf of the Committee that we intend to handle it expeditiously, but with thoroughness. Partner Operations. In recent weeks the issue of faked partner schemes has received a great deal of publicity with many persons who have contributed to such schemes reporting to the police that they have been defrauded. I feel it necessary to place formally on record the Government’s position about such schemes. Genuine partner schemes have a long history in Jamaica. Indeed Jamaica migrants abroad in England and in North America have organized the schemes in their new homelands, which are essentially compulsory savings operations. For genuine partner schemes, no one can draw more than he/she contributes. This is logical as it is a feature of the schemes that there is no interest paid or received. It would be impossible and indeed not desirable for the authorities to attempt to regulate such operations. In a genuine partner scheme there is a great reliance on trust, particularly of the banker. In a sense, the banker’s knowledge of the integrity and reliability of each partner is the basis for that person’s admission to the scheme. I draw a sharp distinction between genuine partner schemes and those which are organized on a mass basis and which promise contributors that they will be able to draw out more than they put in. These are well-known pyramid schemes and logically can only represent an attempt to defraud some of the contributors. The regulators can only warn of the dangers of such schemes, but as I have indicated before, cannot protect individuals from their own folly, nor would it be possible for them to “certify” schemes unless there were a formal application for the organizers to be licensed with the BOJ or the Financial Services Commission. Whilst there is legal recourse for persons who have been defrauded, unfortunately, this is invariably after the fact. All the authorities can do is to warn potential participants. I am appealing to the media houses to assist in this process. The real problem lies in the fact that it seems impossible to convince too many people that one cannot take out more than one has put in unless fraud is involved.
Just for the record, FINSAC was established in January 1997 following clear signs, which had emerged in the middle of 1996 when several indigenous financial companies had developed severe liquiduity and solvency problems. FINSAC began its work in earnest in March 1997 when thee was intervention in the Eagle Group of Companies and this was followed by a series of interventions over the next year. Over the period, a total of 13 financial institution groups with more than 200 subsidiaries and associated companies were intervened. In one case, the Eagle Group there were over 50 subsidiary companies. FINSAC was established with the clear mandate to protect the savings of hundreds of thousands of Jamaicans; to protect the life insurance policies held by those who were clients of the intervened companies and to protect all pension funds. However, in addition to the above, a major objective of FINSAC is to rehabilitate and rebuild the financial sector which was in dire straits. It is a matter of record that whilst the size of the problem in our financial sector, compared to the overall economy was quite significant, similar problems had 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 have those who have been charged with the responsibility for managing FINSAC. What are some of the achievements of FINSAC. To begin, they include the protection of 15 million accounts held by Jamaicans in various deposit-taking institutions. The protection of 570,000 insurance policies valued at $175 billion held by Jamaicans and the protection of pension funds most of which were managed by the insurance companies. In terms of tangible achievements FINSAC has combined and sold the individual life, group life, health and pension portfolios of Jamaica Mutual, Crown Eagle, Dyoll Life and Horizon Life. These were sold to First Life and Guardian Life. Island Life was recapitalized and sold to Barbados Mutual. These two divestments have contributed to a resurgence in the life insurance industry as underscored by statistics provided by LICA which showed improvements in every major index. Consider the following. For 2000, compared to 1999, annualized premium income increased by 43%, the number of policies sold by 19% and gross premium income by 35%. As Minister of Finance, I am particularly interested in the fact that as profitable entities these companies are now making profits and hence contributing to tax revenues. FINSAC undertook a virtually impossible task of merging and rationalizing Citizens Bank, Workers Bank, Eagle Commercial Bank, Island Victoria Bank and Horizon Merchant Bank to create Union Bank. Many critics asserted that this was an impossible venture. It was done within the agreed timeframe and as now been sold to RBTT of Trinidad. As regards non core assets, FINSAC received in return for the assumption of liabilities, 15 hotel holdings. Thirteen have been sold, one is in the process of being sold and in the case of the 15th of which Government owns 50% of the shares, efforts are being made to find a suitable purchaser. In reviewing this aspect of the work of FINSAC, the country must be very clear that the protection of depositors, holders of life insurance policies and pensioners was not a costless exercise. When the decision was taken to intervene, the Prime Minister in our first deliberation on the matter, told his colleagues that this would be the most significant economic decision ever taken by any Cabinet in the history of Jamaica. Little did we know how correct he would have been. But the fact remains that, had it not been taken the lives of virtually every household in Jamaica would have been disrupted with the failure of banks, insurance companies and pension funds to honour their obligations to their clients. Therefore, let no one, after the event, begin to question whether the correct decision was taken because there is reason enough to question whether social order could have been maintained if ordinary law-abiding citizens would have seen their life savings wiped out with no chance to recover. The step which was taken as of April 1, whereby the FINSAC notes were taken on board by the Ministry of Finance as part of the national debt represents a final important move in the process of rehabilitation. It represents a significant addition to the national debt and hence, to our debt servicing obligations. But even whilst we lament this additional burden, let us not forget the context within which it was incurred. What now of the future activities of FINSAC. They can be listed discretely and discussed in turn. First, there is the sale of Life of Jamaica. FINSAC has invited and has recently received bids for the sale of its shareholdings in LOJ. Based on the timetable which has been developed, it should be possible to determine the winner of the bid by early May with the sale completed by mid year. There will be the sale of FINSAC shareholding in NCB, which remains the largest bank in Jamaica. Contact has been made with several institutions and although it is early days yet, expressions of interest have been received. FINSAC has received, in return for the assumption of responsibility for the liabilities of deposit-taking institutions, a large number of real estate assets and our proposed approach will be to carry out the sale of these assets through Financial Institution Services Limited (FIS) - the company which was first established to deal with intervention in Blaise and Century. I turn finally to an issue, which has aroused some debate. It is with regard to the last task, which must be addressed in wrapping up the affairs of FINSAC, which is the sale of the portfolio of non-performing loans. I believe it would be useful if we spent a little time to explain to the public the genesis of these bad loans which FINSAC now has in its possession. Let us begin at the beginning. Banks got into difficulties with depositors when having accepted their deposits they made loans to customers who for whatever reason failed to service them on a regular basis. Hence, on the one hand, the banks had obligations to their depositors (liabilities) but these were not matched by assets of equal value, since the loans which they had made with the depositors’ money were not being serviced by those to whom the monies were loaned. So whilst on the one hand, the interest clock was ticking and principal plus interest was owed to depositors, on the other hand, the debts were not being serviced and so there was no money to pay out to depositors if and when they demanded payment. FINSAC not only protected the depositors by making a commitment, with full Government guarantee to pay them if and when they needed their resources, but also had to save the institutions by buying from them their portfolio of bad loans – at face value, which obviously was more than the loans were worth. The question which is now raised, is not whether we can recover 100 cents in the dollar in terms of what is owed on these loans. We know that this will not be possible or else the banks would not have sold the portfolio to FINSAC in the first place. The objective is to maximize the percentage which we can recover on each loan for the simple reason that the more which we can recover the less will be the burden on the taxpayers. Put in simple terms, we have assumed responsibility for a dollar. If we recover 30, cents then the taxpayers will have to find 70 cents. If we recover 50 cents then the burden on the taxpayers would be reduced to 50cents. Everyone cannot win and hence calls for further relief to the bad debtors translates immediately into transferring additional burden to the taxpayers in the present and in the future. That is what it amounts to, nothing more nothing less. We now come to the question of methodology. How do we attempt to maximize the collection on the bad loans even as we demonstrate sensitivity to the plight of the bad debtors. I would not claim that the officers of FINSAC have been perfect, but the attempt, which has been made to characterize them as heartless, insensitive persons seeking to destroy the lives of innocent bad debtors, is unfair, unkind and untrue. The question we face is whether the Government should maintain, for an extended period, an institution to collect on these bad loans. It would seem that this is the preferred option for many. Such an approach is not tenable, as the Government has no intention to remain in the loan collection business. Having taken the resolution of the problem to this point, it is imperative that we move to phase out FINSAC, as per the original schedule. There have been calls for greater leniency to be demonstrated, including an extreme position, which demands that all outstanding debts be forgiven. This would be a most difficult act, to justify, not only within the context of other FINSAC debtors who have made genuine efforts to settle, but moreso to all the other debtors in the financial sector who have consistently honoured their obligations. Nonetheless, the Administration remains sensitive to the plight of some remaining debtors who feel that their cases have not been fairly treated. I have therefore, asked the Board and Management to give one last comprehensive review of the proposals, which have been submitted. I give the assurance that no serious, reasonable proposal will be rejected. || Previous | Table of Contents | Next ||
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