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KINGSTON – Former Bankers Association of Jamaica president, Elon Beckford, told the FINSAC Commission of Enquiry into the 1990s financial meltdown on Thursday March 24, that the initial sign of trouble was the Bank of Jamaica’s (BOJ) first intervention into a major financial institution in 1995.

Mr. Beckford said that the intervention was a “game changer”, and most of the indigenous financial institutions started experiencing liquidity challenges to varying degrees.

“Most of the indigenous financial institutions started experiencing increases in the levels of withdrawals of deposits, which is referred to as a ‘run on deposits’,” he told the Commission, which is meeting at the Jamaica Pegasus Hotel, New Kingston.

“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 policy makers, being fully aware of the long term implications, would not have maintained the high interest rate policy for any prolonged period,” he said.

He said that the construction and manufacturing sectors were hardest hit by the high interest rate policy.

“It will take generations for us to fully understand what the destruction in then 90s of several enterprises built by the blood sweat and tears of hardworking, honest trustworthy and creditable Jamaicans have done to the psyche of our nation. Lives were destroyed-many lives. We are producing a new generation of professionals who are frighteningly risk averse. The period weakened our entrepreneurial spirit, energy and passion,” Mr. Beckford testified.

“The rumours continued as to which institution would be next. The environment became more and more sensitive and depositors more cautious…It was painful to journey with hard working, honest, creditable, trustworthy and, up to then, successful entrepreneurs, who lost the will to fight,” Mr. Beckford said.

He said that, realizing the trend, Horizon sought a meeting with the Governor of the Bank of Jamaica.

“We met with the Governor and his team. We presented the facts relating to the trend and discussed strategies for BOJ’s support, if this were to continue. The BOJ advised us not to panic and encouraged us to maintain even higher levels of liquidity,” he said.

“After the BOJ meeting, we decided to be more aggressive in our deposit pricing to try and ensure higher levels of liquidity. At the same time, the Government had reversed their interest rate policy direction, increasing interest on BOJ instruments to a high of above 50%. This sharp increase in our cost of funding made it necessary to increase the rates on our loans, so as to maintain a positive net interest margin. At this time, the break-even interest rate, that is the effective rate taking into consideration cash reserves, was in excess of 76%,” he explained.

“As the rumours became stronger, in late 1997, that further BOJ interventions were likely, our institutions started experiencing higher than normal levels of withdrawals. Subsequently, BOJ intervened in the Workers Bank – our principal bankers. Immediately this was announced, we started experiencing an unusually high demand for withdrawals,” he went on.

“We asked for a meeting with senior officers of the Bank of Jamaica to apprise them of the developments. It was clear from that meeting that the Bank of Jamaica would not have been able to provide the appropriate assistance,” he added.

He added that recognizing the “force” of the development, Horizon called an emergency meeting of its board of directors, and it was decided that the company should approach FINSAC for support.  FINSAC’s response was a counter proposal to effect a merger with Citizens Bank Group, which was already controlled by FINSAC, and for Horizon Life’s portfolio to be administered by Crown Eagle Life. Eventually all the assets and liabilities of the Horizon’s building society, securities limited and merchant bank were transferred to Citizens Bank, including all the records.

The enquiry continues next Tuesday at 9.30 a.m.

                                                                            

By BALFORD HENRY, JIS Reporter & Editor