Jamaica - Banking, Financial Services, and Currency
In the 1980s, Jamaica had a well-established financial system that was expanding. Since 1962, the number of financial institutions had more than doubled to over forty, including the country's central bank, development finance banks, commercial banks, trust companies, merchant banks, building societies, insurance companies, peoples cooperative banks, finance houses, and credit unions. The government's economic policies in the 1980s favored greater use of monetary factors to influence the economy and tighter credit policies than previously used so as to restrain inflation.
The Bank of Jamaica was established in 1960 as the country's central bank. It was formed to replace the Currency Board, whose lack of authority to control the money supply had prevented the use of monetary policies. The bank issued currency, regulated the banking system, set minimum reserve ratios, adjusted liquid reserve ratios, established discount rates, and generally controlled credit. As part of the government's economic policies in the 1980s, the bank pursued a restrictive credit policy to lower aggregate demand in the economy. The tight credit policy was accomplished through higher reserve and liquidity ratios, which in 1985 required commercial banks to retain 50 percent of their assets in a liquid form. Likewise, the prime lending rate was maintained at high levels, reaching 23 percent in December 1985, or more than 10 percentage points higher than the prime rate in the United States. Another monetary policy of the bank was the devaluation of the Jamaican dollar to adjust the real rate of exchange to more realistic levels. The bank devalued the Jamaican dollar numerous times in the 1980s, lowering the exchange rate several times over its value in the 1970s. These policies were designed to help reduce the balance-of-payments deficit by making exports more competitive.
As a result of the historical reluctance of many commercial banks to make medium- to long-term loans, several government banks were created to finance economic development. The most important such government-sponsored bank was the National Development Bank of Jamaica. Other government banks supplying credit to specific sectors of the economy included the Jamaica Mortgage Bank, the Agriculture Credit Bank, the Jamaican Industrial Development Corporation, the Small Business Loan Board, and the Workers Savings and Loan Bank. These banks generally offered favorable interest rates and some technical assistance where appropriate.
There were eight commercial banks in Jamaica in 1985, all of which were originally or remained foreign owned. The British Barclay's Bank was the first commercial bank on the island, established in 1836 to finance the sugar industry. It was followed by three large Canadian Banks, which eventually came under local ownership and were renamed the Bank of Nova Scotia Jamaica, the Royal Bank of Jamaica, and the Bank of Commerce Jamaica. In the 1960s, American banks such as Citibank and Chase Manhattan Bank also entered the island. Barclay's Bank, later named the National Commercial Bank, was bought by the government in the 1970s; the government returned the bank to private hands in 1987, however. In 1985, 63 percent of all private-sector assets in major financial institutions were found in the commercial banks. Throughout the 1980s, commercial banks made three to four times more loans to the private sector than to the public sector. Loans were distributed approximately as follows: 25 percent to manufacturing, 20 percent to construction and land development, 16 percent to agriculture, 12 percent to transport, storage, and communications, and the balance to various other sectors.
Life insurance companies, building societies, trust companies, and merchant banks were other prominent financial institutions in Jamaica. Their share of private-sector assets ranked 19 percent, 7.4 percent, 7 percent, and 4 percent, respectively. In 1985 there were over twenty insurance companies in Jamaica, most of which held assets in large foreign firms. Insurance companies played an important role in building savings for investment in the economy. Building societies, all locally owned, were less numerous than insurance companies and generally attracted smaller savings to finance mortgages. Trust companies lent to commercial banks, provided trustee services, and held time deposits. Merchant banks functioned to underwrite securities, finance external trade, and offer managerial advice to industry. Several new merchant banks were established in the 1980s, including the Falcon Fund and the Export-Import Bank.
The Jamaican Stock Exchange, the oldest in the Caribbean, was established in 1969 under the direction of the Bank of Jamaica. Only a small percentage of the country's capital assets were traded on the original exchange, as most companies were either foreignowned or purely family-run businesses. The number of shares traded grew rapidly in the mid-1980s; these included the shares of some new publicly owned companies. As of early 1987, only thirty-nine companies were listed on the exchange. The exchange's performance in 1985 quadrupled the performance of 1984. In 1985, 37.6 million shares were traded for US$21.3 million compared with 9.7 million shares for US$7 million in the preceding year. From 1981 to 1986, the exchange's composite index increased 129 percent, standing at 1,499.87 by the end of 1986. A major cause of the rise was the increasing number of companies that issued public equity shares, rather than relying on commercial banks, to raise capital.
The Jamaican dollar became legal tender when it superseded the Jamaican pound in 1969. Because of tourism, United States, Canadian, and British currencies also circulated, and illegal black markets were common. Many of the tourist hotels listed prices only in United States dollars because of the greater stability of that currency. Eastern Caribbean dollars (EC$ (the joint currency used by members of the Organization of Eastern Caribbean States (OELS-- see Glossary) and pegged to the United States dollar at ES$270 equals US$1.00) were also visible. The value of the Jamaican dollar was tied to the British pound sterling until 1973, when it became pegged to the United States dollar. In the process, the Jamaican dollar moved from being the strongest currency in the Commonwealth Caribbean to being one of the weakest. After experiments with various types of exchange rates in the 1970s, exchange rates were unified in November 1983. Beginning in 1984, foreign exchange was allocated through a twice weekly foreign exchange auction system.
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