A painful journey
Finsac enquiry archives shed more light on Beckford’s claim that débâcle caused by prolonged high interest rate policy
THE just-released Financial Sector Adjustment Company (Finsac) Commission of Enquiry Archives has shed more light on the claim by former banker Elon Beckford that the extended high interest rate regime of the PJ Patterson Administration in the 1990s was the main cause of the financial sector meltdown.
This has been repeatedly rejected by then Minister of Finance Dr Omar Davies who, in his submission to the commission, pointed to several other factors which led to the meltdown.
Davies also pointed out that other countries, which did not have high interest rates, suffered failures in their financial sectors during the period.
“Many persons who assert that high interest rates represented the fundamental cause of the crisis fail to take into consideration, either deliberately or unwittingly, the context in which these rates were applied,” argued Davies.
“There is the legitimate question as to whether the policy ought to have been pursued as aggressively, and for as long, as it was. The reality is that during that period, attempts to move gingerly had borne very limited results. The twin challenges of rapid devaluation and high inflation had sowed the seeds of an impending social explosion.
“In the present discussion, this background to the decision to tighten liquidity has been conveniently forgotten. Nevertheless, the question of the pace and extent of increase in interest rates is one on which reasonable people may differ,” added Davies.
But Beckford, the former president of Jamaica Bankers Association and chairman of the collapsed Horizon Group, who appeared before the commission in March 2011, and was subpoenaed to return in May of that year, was adamant that the Government’s interest rate policy was to be blamed.
In his witness statement — which is part of the archives released by Finance Minister Dr Nigel Clarke last Thursday after the commission failed to produce a final report despite $160 million being spent on it — Beckford said while the introduction of the high interest rate regime was initially understood, it was maintained for much too long.
“When the interest rates were raised to real levels to support the exchange rate and reduce the level of ‘overheating’ in the economy, several persons, including the presenter of this submission, stated that he understood the rational for the policy shift.
“It was generally believed that this ‘shock treatment’ would have been for a short period, maybe a few months, but lo and behold this was not to be. It went for years and years, resulting in safe investment fixed deposits interest rate increasing in excess of 50 per cent and BOJ’s [Bank of Jamaica] overdrafts to lending rate prime customers exceeding 120 per cent,” said Beckford.
“No honest and objective person can argue against the view that the high interest rates were sustained for far too long a period. As a result, many institutions, organisations, companies, individuals and lives were destroyed,” added Beckford.
He argued that while Horizon was properly managed and experienced solid growth and attractive profitability it, like many other locally owned financial institutions, did not have a strong enough capital base to survive the high interest rate regime.
“Horizon, like most of the other indigenous institutions active in the lending business, had too low a capital for the risk of operating in the high interest rate environment. With higher capital ratios, institutions such as Horizon would have been able to more comfortably ride through the vagaries of time,” admitted Beckford.
The veteran banker told the commission that the collapse of the financial sector in the 1990s has resulted in a new generation of Jamaican business operators who are risk-averse, with a weakened entrepreneurial spirit, energy and passion.
“Good loans became marginal, although most loans were repayable on demand; calling a loan would not have produced any real change as there were only a few willing and able buyers. In several cases, standby overdraft facilities were not renewed, due to no fault of the borrowers but due largely to the inability of the bank to fund the continuing exposure, thus removing the liquidity support from some borrowers.
“It was painful to journey with hard-working, honest, creditable, trustworthy and – up to then – successful entrepreneurs who lost the will to ‘fight’. It will take generations for us to fully understand what the destruction in the 90s of several enterprises built by blood, sweat and tears of hard-working, honest, trustworthy and creditable Jamaicans have done to the psyche of our nation. Lives were destroyed, many lives,” charged Beckford.
According to Beckford, the continuing high interest rate forced Horizon to exit the lending market for regular new loans and focus on facilitating borrowers who could qualify for National Development Bank and Agricultural Credit Bank loans.
“During this period it was our considered opinion that the high interest rate policy was not sustainable. This position was influenced by the fact that we were of the view that the policymakers, being fully aware of the long-term implications, would not have maintained the high interest rate policy for any prolonged period.
“In hindsight, if we honestly believed, even for a brief moment, that the policymakers — knowing and understanding the implications for collapse of businesses and the disruption of lives — would have maintained the high interest rate policy for such a long period, we would not have pursued lending as the major strategy of our business model,” added Beckford.
As part of the restructuring of the financial sector the assets and liabilities of Horizon Merchant Bank, Horizon Building Society, and Horizon Securities Limited were transferred to Citizens Bank in 1998.