Letter of the Day | The financial sector: striking the right balance

THE EDITOR, Madam:

The Gleaner’s editorial on Monday, April 13 made a timely and important intervention by examining the appropriate role of Jamaica’s financial sector in advancing the country’s development prospects. It rightly observed that as the economy underwent a structural shift towards services and away from goods production, finance expanded rapidly in both scale and social importance. Before the financial sector collapse of the late 1990s, the number of financial institutions rose from 67 to 105 by 1995, while financial sector output reached 14.7 per cent of GDP by 1994, leaving Jamaica “overbanked.”

This historical context is sometimes overlooked in discussions of the period’s financial meltdown and serves as a useful reminder. As policymakers sought to stimulate economic activity, rapid financialisation outpaced the capacity of existing regulatory frameworks to govern the sector effectively. Liberalisation occurred not only through the removal of capital and foreign exchange controls at the start of the decade, but also through the aggressive issuance of licences to operate. The country subsequently had to play regulatory catch-up, introducing a series of reforms and new oversight institutions at the turn of the century.

The central lesson from these events is clear: policy and legislation must evolve continuously alongside developments in the financial sector and, where possible, anticipate them. Today, Jamaica continues to grapple with complex reforms, including the adoption of Basel capital requirements, the implementation of a Special Resolution Regime for non-viable institutions, and the ongoing transition to the Twin Peaks model of risk-based supervision.

At the same time, tighter regulatory standards introduced in response to the 1990s crisis may have dampened risk appetite over time. Capital has tended to flow towards the safest investments with guaranteed returns, which are not always aligned with productive economic activity. Combined with heightened risk perceptions and sectoral volatility, this has encouraged a tilt towards consumption rather than transformation, leaving a system that prioritises passive intermediation and fees.

Although the financial sector’s share of GDP has halved since the 1990s, recent reforms–such as gradual increases in investable limits for pension funds and insurers–may help unlock capital in a prudent manner. Ultimately, if finance is to catalyse stronger and more resilient growth, regulation must strike a careful balance between safeguarding stability and fostering innovation.

KEENAN FALCONER