A new approach to development banking in Jamaica

Abstract

Abstract This document analyses development banking in Jamaica, identifying its weaknesses and proposes solutions to address its shortcomings. The first part of the document provides an overview of development banking in developing economies. The second part, "The Jamaican Experience of Development Banking" examines the modus operandi of all Jamaica's post - Independence developmental institutions. The Jamaican experience substantiates the conclusions as to the desultory performance of development banking in the developing world. The third part "Financial Deepening in Jamaica", seeks to address the question "how to rectify this situation" Accordingly, it considers first how Jamaica's development banks might access the international capital markets and hence raise fresh capital in the same manner as their counterparts in developed countries. A condition precedent to such a step would be the need to "clean up their balance sheets". However, it should be borne in mind that it would be impossible to keep their balance sheets clean, operating on the high risk/ low return principle. In making suggestions for the expansion of the range of financial products offered by the development banks, the document points out the need for legislation to make it easier to transfer financial ownership to creditors and for the establishment of a credit bureau to improve access to financial information. It also identifies new financial products. More importantly, to illustrate a proposal that Jamaica's main development bank assume the role of a corporate financier, it likens the institution to a multi-story building, each of whose floors represents a particular level of appetite for risk. Thus, the top floors represent "secured debt" whilst, at the other end of the scale, the ground floor represents equity. The intervening floors represent "Mezzanine or Quasi Equity Financing" including commercial loans, preference shares etc. This illustration sets the stage for what the paper argues in "The Way Forward for Development Banks". In short, the proposal is that the development bank should switch its modus operandi to that of a Venture Capital Corporation (VC);.