Jamaica National(JN) goes for commercial banking licence

Sabrina Gordon, Business Reporter

With the government calling for new players and and more competition in the commercial banking sector, Jamaica National (JN), the building society-led financial services group, has signalled an aggressive push for the commercial banking licence for which it applied more than a year ago.

"What I am going to do to expedite the process is to update and re-submit the business plan for the current realities," Earl Jarrett, JN's general manager told the Financial Gleaner in the margins of the building society's annual general meeting on Wednesday.

At the same time, JN ishoping to soon launch a life insurance company called Blue Sapphire Limited, for which it has a licence application before the Financial Services Commission which Jarrett seemed confident that JN will get.

"That one is making a lot more progress," he said in the interview. "So, over the next few months you will hear more about our entry into the life insurance market."

Jamaica's life insurance market is dominated by Sagicor Life Jamaica, with the other significant player being Guardian Life.

JN's wish to acquire a commercial bank licence, however, seems less certain than the acquisition of an insurance licence, despite recent policy sounds from Finance Minister Audley Shaw of the need for additional players in this market.

One other financial services company, Jamaica Money Market Brokers, is known to have a commercial banking licence application before the central Bank of Jamaica (BOJ). It, however, was not immediately apparent whether they, too, were pursuing the request or the disposition of the regulators to that or any other application.

Jamaica currently has seven commercial banks with combined assets of $579.8 billion and deposits totalling $373.7 billion.

The number of commercial banks is down from the 11 that existed prior to the financial sector collapse in the late 1990s, when several financial-services institutions, including commercial banks, merchant banks and insurance companies, collapsed under the weight of a mismatch of long-term assets and short-term liabilities.

At the time, the authorities accused the financial institutions, which operated in a sector that had expended rapidly during the decade, of exploiting weak regulations to manipulate portfolios. They put in place regulators to make it more difficult to establish banks and demanded greater oversight.

But more recently, Shaw, who became finance minister with the change of administration in September 2007, has been calling for more commercial banks in the market. Shaw is peeved at banks for what he considers to be their tardiness in narrowing the gap between the interest they charge on loans and what they pay on deposits, at a time when the central bank has been aggressively lower its signal rates.

For instance, since February, when the government rescheduled more than $700 billion in domestic debt, rates on the Bank of Jamaica 30-day certificate of deposit have fallen from 10 per cent to eight per cent. On the other hand, base lending rate by commercial banks have fallen to 17.75 per cent, the lowest in the market now.

Shaw believes that the behaviour of the banks is curtailing investment and slowing economic recovery and, last week, said in a speech: "Greater competition would lead banks pricing their products more competitively, reduce stickiness in lending rates and overall lowering of interest margins to more sustainable levels."

To get around capital adequacy requirements and to have the cushion to ride out market volatility, Shaw suggested the Jamaican institutions seeking commercial banking licences might find it prudent to bring in foreign partners.

Under Jamaican banking law, lending by commercial banks is restricted to 25 times capital; and they must maintain a reserve fund of 50 per cent of capital.

It was not immediately clear whether JN was considering a outside partner for the venture, which has been at the BOJ long before Shaw's signal that Jamaica, at least at the political level, may be ready to further open the banking market.

Said JN's Jarrett: "The application was submitted early last year. We put in a business plan setting out the kind of infrastructure that we are going to require.

"We do have an existing network. We do have the tools to do it. In fact, our software is really a banking software."

$1.2 billion in profits

Indeed, with assets of $121.7 billion at the end of the fiscal year in March, Jamaica National is already a broad financial-services entity, that includes the country's largest building society, money transfer services, small-business loan facilities, money management services, general insurance and information technology services.

It has 33 branches across Jamaica.

In its last fiscal year, when the JN group returned a profit of $1.2 billion - down 40 per cent on 2009 - the company experienced a decline in its core area of operation, a symptom of Jamaica's stressed economy.

Mortgage disbursement, at $6.54 billion, dropped 17 per cent down from the $7.84 billion recorded in the previous year. Like other companies, JN also suffered from the implementation of the government debt restructuring under which interests on government borrowings were slashed and maturities extended.

sabrina.gordon@gleanerjm.com