The Gleaner - April 17,
When Finance Minister Dr. Omar Davies
announced the establishment of the Financial Sector Adjustment Company
(FINSAC) in January, 1997, it was envisaged that this entity would be in
existence only as long as it would take to clean up the books of the
ailing financial entities and to get rid of the non-core assets acquired.
The Finance Minister in yesterday's presentation of the 1998/99 Budget,
acknowledged that the extended period of high interest rates had an impact
on the viability of the sector, but repeated his stance that management
was largely to blame.
He said FINSAC's operation would be in three phases - intervention,
rehabilitation and divestment. The intervention and rehabilitation phases
have so far cost $62.4 billion, financed through FINSAC bonds, with
interest rates ranging between 25 per cent and 29 per cent, and an
estimated annual debt service cost of $16 billion.
According to two Ministry Papers tabled by Dr. Davies, some $73.5 billion
has already been expended in public sector assistance to the ailing
private sector companies. For fiscal 1998/98, the Minister said $16
billion, is the debt servicing requirement faced by FINSAC, with some $3.4
billion being cash. '
To the extent that it is possible to meet these obligations through the
issuance of additional paper, this will be done and cash will be utilised
only as a last resort.' Dr Davies said: '
It may be useful to note that FIS is itself managing a substantial amount
of cash, at present approximately $1 billion.'
FINSAC has [intervened in] Caldon Finance Merchant, Fidelity Finance
Merchant Bank and Horizon Group at an estimated cost of $3 billion.
The possibility of merging the operations and shares of Eagle Commercial
Bank to Citizens Bank is being reviewed. FINSAC's intervention phase has
also involved working with temporary managers, appointed by the Ministry
of Finance to take over ailing banks. FINSAC is [currently] involved in
providing support for depositors of Corporate Merchant Bank, Capital
Assurance Building Society and Workers Savings and Loans Bank. Assistance
to these three institutions total $8.5 billion to date', according to
Ministry Paper No. 13.
It pointed out that Government's support of the financial sector through
FINSAC had resulted in the production of 1.5 million deposits, with a
value of $68.7 billion and 569,000 individual policies with a sum assured
of $174.4 billion.
Lessons learnt, according to the Ministry Paper include:
* much more stringent 'fit and proper' criteria should be applied to
owners and managers of financial institutions;
* there should be a clear
demarcation in respect of ownership, management and control of various
types of financial institutions in order to avoid contagion;
framework must be clear, precise and transparent, with provisions being
made to reward good management and to penalise poor management.
At the end, a set of strong, well-capitalised institutions, adequate to
the size of the national economy, will evolve which must include a
significant reduction of the number of deposit taking institutions.
In future, where fiscal capacity permits, further reductions in the cash
reserve ratio, applied to commercial banks, will be effected until they
equate with that of merchant banks. This will prompt mergers between
existing commercial banks, achieving yet further rationalisation in the
number of institutions, the Ministry Paper said, adding that the Deposit
Insurance Scheme will be in full operation to deal with institutions that
face insolvency problems.
It concluded that overcoming the problems of the financial sector will
depend on the availability of persons skilled in 'work-outs' and
divestments to work under the direction of FINSAC in implementing the
latter's Strategic Plan; the availability of competent management
personnel, monitored and controlled by effective boards of directors and
the continuing vigilance of the supervisory authorities. According to Dr.
Davies, intervention in the financial sector was necessary because of
adverse macroeconomic conditions; managerial incompetence; incompetence
and laxity of professional support groups; corruption/fraud; regulatory
inadequacies and incompetence.
The Finance Minister once again saved his ire for the sector's management.
The fact is that on an average, the management in Jamaican financial
institutions is very well paid, even by international standards. As such,
the test of good management is the ability to guide a firm through
difficult times. It cannot simply be that when huge profits are being made
this is a demonstration of managerial brilliance, but if losses are made,
the cause is Government policy.'
He continued: 'Now that we have had the benefit of closely examining the
work done by such accountants and auditors for institutions which are
facing problems, there are several instances where the adherence to basic
professional standards must be questioned.'
In a submission to Parliament, during last year's presentation Dr Davies
FINSAC is expected to have a life of about seven years. Support is
provided to solvent companies on the basis of rehabilitation plans to be
implemented in five years. FINSAC expects to be fully repaid by the end of
the fifth year; assuming successful work-outs of the existing problems.
Interventions are likely to take place within the first year of FINSAC's
existence. Components which can be restored to viability will be
rehabilitated and returned to private ownership within a year, while other
components will be liquidated or sold for merger with other institutions
as soon as possible.'
He continued, 'After the initial period of interventions and assistance
activities, the role of FINSAC will be narrowed to primarily supervision
and monitoring of work-out plans of institutions that have been
financially assisted by FINSAC; and themanagement of the 'investment'
portfolio of the assistance activities.
Recently he announced that the operations of FINSAC were to be merged with
those of another entity set up to deal with failed financial companies -
Financial Institutions Services (FIS).
The adjustment company is being financed by the government, through
borrowing in the domestic market, the full extent of which will not be
known for some time. At budget presentation time last year, some J$1.5
billion had been raised. The Bank of Jamaica has also loaned funds to
FINSAC, while its housekeeping expenses have been borne out of advances
provided by the Agricultural Credit Bank (ACB).
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