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Caribbean Islands 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.
Data as of November 1987
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