Assessing the Impact of Financial Instability: The Jamaican Case Study

By Tennant, David; Kirton, Claremont | Ibero-americana, January 1, 2006 | Go to article overview

Assessing the Impact of Financial Instability: The Jamaican Case Study


Tennant, David, Kirton, Claremont, Ibero-americana


(ProQuest Information and Learning: ... denotes obscured text omitted.)

I. INTRODUCTION

The disastrous effects of recent financial sector crises in South East Asia and Latin America have generated lengthy debates on the causes and appropriate responses to such crises. The almost exclusive focus on these issues has, however, led to a dearth of systematic and thorough studies of the impact of financial instability and crises on financial sector intermediation, and on the finance-growth relationship. It is now widely accepted that financial institutions can facilitate economic growth by mobilizing savings, allocating these savings to the most productive investments, and by enhancing the smooth flow of trade required in any market-driven economy (Levine 1997: 692-701). However, the sector's ability to effectively and efficiently perform these functions is heavily dependent upon the stability of the financial system. The theoretical literature strongly suggests that financial instability can undermine the intermediation process by reducing funds available for investment (Bernanke 1983: 257 and Stiglitz, 1993: 26), by causing inefficient allocation of investments (Williamson & Mahar 1998), and by precipitating a crippling of the payment system with the onset of financial panic (Diamond & Dybvig 1983: 403).1

This paper seeks to estimate the extent to which these theorized impacts of financial instability impeded the ability of Jamaican financial institutions to facilitate economic growth. Conclusions are made regarding the major channels through which financial instability affects the real sector, and the types of institutions that are most harshly affected by financial instability, and therefore necessitate closer scrutiny by financial regulators and supervisors.

The paper will proceed as follows: section 2 introduces the Jamaican case study by describing the financial sector crisis that occurred in mid to late 1990s; section 3 highlights the methodology, data and control group countries used in this study; section 4 estimates the effect of financial instability on financial sector intermediation in Jamaica, by examining the impact of instability on three major channels through which the sector facilitates economic growth and on the operational efficiency of the financial institutions; and section 5 summarizes and concludes the study.

II. THE JAMAICAN FINANCIAL SECTOR CRISIS

The major cause of the Jamaican financial crisis was an unduly-hasty liberalization of the financial sector, without prior improvement to the regulatory and supervisory framework (Kirkpatrick & Tennant 2002: 1935-1936). The Jamaican government liberalized the financial sector between 1986 and 1991, as part of World Bank Structural Adjustment and IMF Stabilization Programmes. This involved, inter alia, removing the ceilings placed on banking system credit, the total deregulation of savings rates, and dismantling exchange controls.

Following liberalization, the Jamaican financial sector experienced rapid expansion and deepening in early to mid 1990s. The operations of commercial banks and nonbank financial intermediaries (NBFIs) increased significantly, and new large financial conglomerates emerged (Stennett, Batchelor & Foga 1998: 12). These conglomerates ventured aggressively into more innovative financial activities and into acquisitions and operations of many real sector projects. There was also rapid expansion of lending to the private sector, but it is argued that this expansion was unsustainable, as risks were not properly assessed, collateral was inadequate, and loans were allocated mainly for consumer-oriented activities (Green 1999: 4).

It is therefore not surprising that private sector credit, which grew by almost 70% in 1993, slowed significantly to 25% in 1996, and non-performing loans as a percentage of total loans by commercial banks grew from 7.4% in 1994 to 28.9% in 1997. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Assessing the Impact of Financial Instability: The Jamaican Case Study
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.