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Address to the Jamaica British
Businessmen Association

Speaker: Patrick Hylton, Managing Director
Le Meridien Jamaica Pegasus, 31/03/99

I am delighted to have the opportunity to share with you today some of my thoughts, and I dare say optimism, on the future of the financial sector.

It may give little comfort to remind you that failure in the financial sector is a global phenomenon, and as, such Jamaica is not unique among developing economies, or indeed more developed countries.

While the recent crisis in some economies may have been generated largely by the structure of the world financial system rather than internal micro and macro-economic issues, the result of financial sector collapse is fairly uniform with common characteristics of massive non-performing loan portfolios, decapitalisation of financial institutions, insolvency and liquidity difficulties.

At the same time, the sociology of the crisis is usually illustrated in contraction, in employment opportunities and the attendant decline in purchasing power; accompanied by general impoverishment which negatively affects whether directly or indirectly the standard of health, education and welfare provision. As a nation, Jamaica is certainly experiencing some of these sociological effects of the banking and insurance sector fallout.

I believe, however, that some comfort may be derived from the fact that the impact of the crisis on the country’s social framework is not nearly as dramatic or severe as it has been in several other developing countries.

Ladies and Gentlemen, analyses of the financial sector crisis have centered on the causes which may have contributed to the near collapse of the indigenous banking and insurance sub-sectors. These analyses are important not just in accounting for and documenting the experience, but also in charting rehabilitative strategies in order to generate and sustain growth again in the financial sector. I believe, however, that Jamaica is at peril of over-dwelling on the negatives, and as such, may not extract the lessons to be learnt, or strike at the opportunities that are being presented by the experience.

I will attempt to outline a few of those opportunities for your consideration.

Firstly, the difficulties of the past eighteen months could facilitate entry into the financial marketplace of new players who may bring innovation, creativity, international standards, and, of course, private capital to the sector. It is satisfying to observe the interest displayed by regional companies in acquiring the insurance portfolios available for divestment. This is encouraging as it signals some measure of confidence in the sector and the local economy by regional investors and also indicates that some persons evaluation of the risks associated with investment in Jamaica may be far too severe.

Some of the current players who are doing well could also take advantage of these opportunities.

Our successful rehabilitation and appropriate divestment of these institutions and portfolios will facilitate sustainable viability and the recreation of a robust and vibrant banking and insurance sub-sector.

There are or will also be available opportunities for existing players, and, or new entrants in the divestment of non-core holdings, such as hotels and equity positions in non-traditional real sector entities.

The sale of some hotel properties will give investors the opportunity to earn reasonable returns on their investments through ownership of these entities. Investments in the tourism sector are capable in many instances of being gainful business concerns. The fact that FINSAC owns or controls these non-financial assets by virtue of having taken over their insolvent or distressed parent companies, is not necessarily indicative of their lack of financial viability.

Financial institutions experienced problems largely because:-

  • Far too much was paid for some of these properties, and as a result; these companies were not able to make returns commensurate with their initial excessive investment; very often these purchases were also made with high cost debt thereby compounding the problem.
  • Even when reasonable returns were made, there were still difficulties because of the extremely high cost structure on the liability side of the financial institution holding the asset.
  • Banks and insurance companies entered into or inherited contractual arrangements specifically in terms of management and shareholder agreements that were two onerous.

Another opportunity arising from the crisis is the ability to engage in real sector restructuring through the workout of non-performing loans.

The successful rehabilitation of many real sector businesses in agriculture, tourism and manufacturing will require capital injections to facilitate retooling, joint ventures and debt restructuring.

If the necessary restructuring is successfully completed many of these companies will be capable of competing successfully against regional and international competitors.

Perhaps one of our most significant undertakings is the regulatory reform project. Banking and insurance regulations are being amended or revised in such a way as to ensure that Jamaica adopts, at the very minimum, prudential requirements which are in tandem with international standards, or adopts best practices which are aimed at encouraging proper risk management. The regulatory reform initiatives will also have the effect of creating a more level playing field and reducing the scope for abuse, thus fostering a climate of disclosure and more meaningful reporting. This will in turn lead to more transparency and better analyses of the sector by all participants including the investing public.

Government intervention in the financial sector has also brought into sharp focus issues of corporate governance and the importance of adopting an appropriate governance culture. This will facilitate effective supervision on the part of non-executive directors of the affairs of their companies and the avoidance of undesirable practices, by some managing or executive directors. There has been a loud demand for reform in this regard. Recent revisions to the country’s financial legislation have treated with certain corporate governance issues concerning the competence and suitability of persons for senior managerial appointments in financial institutions as well as setting limits on lending between connected parties. Specific legislation in the proposed Companies Act will also strengthen director accountability.

In restructuring the sector, we are also faced with technological challenges, particularly of Y2K compliance and the implementation of new systems. This again creates opportunities.

Companies are being forced again to retool and revamp systems, not only to meet Y2K deadlines, but also ensure more efficiency, automation and modernization in financial sector transactions. This should facilitate the reduction in lending margins which are currently high partially due to inefficiencies in banks operations.

Perhaps linked with the technological challenges is the need to increase our capacity for research, particularly market research within the financial sector. It is important to develop a profile of the demands and desires of the market particularly as they relate to the risk appetite of customers so as to position the company more competitively in the business environment. At the end of the day, improved customer service and satisfaction will be a significant component in the scheme for redevelopment.

I have also taken note of the fact that the crisis has facilitated the process of reassessment on the part of companies themselves. They have taken a fresh look at their operations and have identified inefficiencies, areas for improved productivity, inappropriate contractual arrangements, inordinately risky investments or transactions, improper resource allocation and opportunities for improved cashflow management and customer service. As painful and self-critical as such an examination and assessment may be, it is a key feature in corporate planning and reorganization and is an essential step in the move towards restoring and sustaining growth.

Having regard to the foregoing I am sure you will agree with me that there may be significant benefits to be derived from the process of intervention, rehabilitation and divestment. In our quest for sector revitalization we have been driven by the desire to maximize value on a sustainable basis.

In closing I leave you with these thoughts.

Some people see the world the way it is and ask "why", others see the world the way it could be and ask "why not"? Our efforts at successful and sustainable rehabilitation of the financial sector are based on the latter perspective. It is important to remember that between tomorrow’s dream and yesterday’s regret is today’s opportunity.

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