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THE EARLY DAYS

The Jamaican financial sector saw rapid growth in the 1980s. By the mid-1990s, however, the system collapsed resulting in a massive government bailout to the tune of some J$80 billion. Many argue that the process of financial sector liberalisation that commenced in 1985 is largely to be blamed. The aim of this paper is to examine the process of financial sector liberalisation and the role it played in the demise of the Jamaican financial sector.

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LIBERALISATION DEFINED

Liberalisation, in the general sense, means making less strict. From a financial perspective, liberalisation, often used interchangeably with deregulation, is the freeing up of established government rules and a move towards an environment determined more by market forces. Market discipline is substituted for the hand of the government with the aim of creating a more efficient marketplace.

Liberalisation is achieved by deregulation and through the process of privatisation; privatisation being the exposure of the public sector production process to free market forces. The emphasis of this project is on the process of deregulation of the Jamaican domestic and Foreign Exchange (FX) market designed to remove market distortions and improve efficiency.

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THE GENERAL CONTENTS OF THE DISCUSSION

To put the Discussion in proper perspective, liberalisation that commenced in 1985 is contemplated against the historical background of the financial sector going back to the 1960s. Close attention is also paid to economic environment preceding liberalisation and its evolution over the years.

The process of financial sector liberalisation was embarked upon with good intentions in mind but today the debate rages on as to its role in the collapse of the Jamaican financial sector. While there are compelling arguments linking liberalisation to the decline of the financial sector, others argue that other factors, such as the ineptitude of managers and directors were solely responsible or played just as important a role.

The purpose of the study is to examine whether the objectives of the Financial Sector Reform Program (FSRP) were achieved, to outline the impact of liberalisation on the system and to look at other factors that could have contributed to its decline.

The massive ‘fallout’ in the financial sector saw the intervention of the Jamaican Government through the Financial Sector Adjustment Company (FINSAC). With the important role played by this organisation, its projected impact on the Jamaican economy and its budgetary resources in the years to come, the paper would not have been complete without an appreciation of Government’s ‘bailout’ plan.

Many other countries (developed and developing alike) have undergone the process of the financial liberalisation. To establish some parallel with the Jamaican experience, similar reforms in other regions (mainly Japan) have been examined.

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REASONS FOR THE DISCUSSION

Presently, there is very little literature documenting in a very structured way, the liberalisation process. Further, since the collapse there has been no formal investigative structure to look into the crisis and the causative factors. The discussion will not only prove useful in providing a better understanding of financial sector liberalisation in Jamaica and its role in the banking crisis, but also in developing appreciation of current trends in the sector and broader macro-economic environment. The information will prove useful to academics, bank personnel, and even to the regulatory bodies.

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FOCUS ON THE BANKING SECTOR

Finally, the discussion contemplates financial sector liberalisation from a broad perspective and its impact on financial intermediaries and markets. However, for focus and clarity, particular emphasis is placed on the analysis of its effect on the Jamaican banking sector. The emphasis is on its state prior to liberalisation, its subsequent growth, the collapse and the aftermath.