Banking crisis and reform: the case of Jamaica
| Published date | 24 July 2007 |
| Date | 24 July 2007 |
| DOI | https://doi.org/10.1108/13590790710758495 |
| Pages | 279-298 |
| Author | Allison C. Rattray |
| Subject Matter | Accounting & finance |
Banking crisis and reform:
the case of Jamaica
Allison C. Rattray
Corporate Secretary/Legal Counsel for
First Caribbean International Bank (Jamaica) Limited, Jamaica
Abstract
Purpose – The aim of this paper was to trace the development of the banking sector from post
independence (1962) Jamaica to 2002 when the last major revisions were made to banking legislation.
Design/methodology/approach – The paper focuses mainly on the banking crisis that the
financial sector suffered from 1992 to 1997. It examines the legislative and regulatory framework that
existed during that period and the shortcomings that the financial crisis revealed. The impact of the
financial crisis on the development of the legislative and regulatory framework and the resultant
changes are also examined. The paper provides a comprehensive analysis of the regulatory and
legislative framework existing in the banking sector in Jamaica. Investigative research was done
through interviews, newspaper articles and reviewing papers written on this area in conjunction with
the analysis of the banking legislation during this period.
Findings – The present banking and regulatory framework in Jamaica developed in response to the
financial crisis and not in a structured and planned way. This conclusion is drawn from the fact that
there were three amendments to the banking legislation in five years crisis primarily to close the
loopholes and weaknesses the financial crisis revealed that the regulators did not have the legislative
power to remedy.
Originality/value – While papers have been written examining the financial crisis from an
economic perspective this paper provides a comprehensive legal analysis of the banking and
regulatory framework in Jamaica. This paper will be of interest to regulators and the legal community.
Keywords Banking, Legislation,Jamaica
Paper type General review
Introduction
Jamaica has experienced a rapid series of changes in the last 20 years that include
deregulation and liberalization of the economy that has spurred rapid growth and
innovation by financial institutions. Banks have also undergone mergers and
acquisitions with other domestic intermediaries giving rise to a large number of
financial groups (Arner and Lin, 2003). Additionally, Jamaica experienced a full-blown
financial crisis, coming to a head in 1996/1997, where all five of Jamaica’s indigenous
commercial banks failed[1].
In the past 14 years, Jamaica has seen the complete overhaul of the legislative
framework of the financial sector as legislators and regulators have been under
pressure to ensure that our regulatory framework has the flexibility to can respond to
these situations. For the most part the regulatory framework has lagged behind the
changes that have occurred in the financial sector. In this paper, we will examine these
developments and how the present regulatory regime was developed.
The current issue and full text archive of this journal is available at
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This paper is based on a dissertation submitted by the author for the LLM in Commercial Law at
the University of the West Indies.
Banking crisis
and reform
279
Journal of Financial Crime
Vol. 14 No. 3, 2007
pp. 279-298
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590790710758495
The Jamaican banking sector: 1960-1992
Prior to independence[2], the financial regulatory structure in Jamaica consisted of only
a loose collection of laws affecting banking business[3]. The Banking Act 1961 which
sought to consolidate these laws was in effect a skeletal framework of statutory
guidelines with loose prudential standards. At that time, however, the banks in the
sector were foreign owned and operated within the prudential regulations and
standards of banking legislation of their home countries. This possibility accounts for
the fact that though the legislative framework appeared weak and inadequate, “on the
whole ... the commercial banks have been found to be efficiently and profitably
operated over the years” (Bank of Jamaica, n.d., pp. 49-50) Indeed, of the eight (8)
commercial banks operated in Jamaica between 1960 and 1977 only one (1) was locally
owned and operated[4].
Thereafter, there were several rapid changes in the economy of Jamaica, which put
increasing pressure on the existing financial regulatory structure. In the 1970s most
major sectors of the economy were government controlled. In the mid 1980s the new
government undertook a strategy of reducing its role in the public sector. This included
the banks that had been acquired in the 1970s. These banks were sold to the private
sector and the public. As a result of this, domestic entrepreneurs gained increasing
importance in the ownership and control of the sector, as the privatisation favoured
indigenous investors[5].
During the 1986-1991 period, the Jamaican government also undertook a program of
financial liberalization. This financial reform and liberalization process had far reaching
implications for the development of the Jamaican financial structure. This was
responsible for the emergence and increasingly important role of the bank-affiliated
financial group in the late 1980s and early 1990s. These groups, which typically included
more than one type of deposit taking institutions as well as an insurance company,
offered a wide range of financial and non-financial services (Langrin, 2000).
Juxtaposed against these developments was the creation in the Caribbean of a
regional Group of Bank Supervisors[6]. Their mandate was the development and
implementation of regional supervisory standards. This group played a major role in
the introduction of minimum regulatory and supervisory standards for the banks. It
works closely with the Basle Committee and other international regulators to keep
supervisory and regulatory practices in the region abreast of international standards
and make recommendations for reform (Worrell et al., 2001).
It was recognised by the government that the financial regulatory structure as it
existed then did not have the legislative capacity to effectively supervise and monitor
the risks that could arise from the developments in the financial sector. This
underscored the need to implement the reforms recommended to bring our legislation
up to regionally and internationally acceptable levels.
Following extensive consultations by the Bank of Jamaica with the financial sector
on the proposed new legislation, the Banking Act 1992 came into effect on 31 December
1992. At the same time, the Financial Institutions Act was introduced to replace the
Protection of Depositors Act under which all other deposit taking financial institutions
were regulated. All provisions found in the Banking Act 1992 are mirrored in the
Financial Institutions Act 1992. The Bank of Jamaica Act was also amended to give
inter alia statutory recognition to the Bank of Jamaica’s Department of Bank Inspection
as Supervisor for the banking sector.
JFC
14,3
280
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