Jamaican financial system
in danger of collapse- Seaga

The fall of Century National Bank

Government could have simply taken control of the Board at Century National Bank, says Opposition Leader, Edward Seaga. The drastic measure of closing it down can de-stabalize the whole financial system.

As more details behind the fall of the Jamaican-based Century National Bank (CNB) are made public, local bankers express pessimism about the future of the financial institution when the dust settles.

''The first day that the bank reopens everybody will go for their deposits and you cannot have a bank, restructured or not, without depositors,'' says one local banker.
This pessimism has also impacted on the rest of the financial system, as the widespread occurrence of mis-management discovered at Century, has raised concerns about the slow response by Government to the crisis. Commissioned by Government in 1993 to investigate the operations of the bank, an auditing firm found widespread incidents of default loans and uncollected interest arrears, especially to the bank's subsidiaries. The report also showed inadequate loan reviews, extensive self-dealing with subsidiaries, over-statement of assets and earnings, and a weak management structure.

Finance Minister, Omar Davies claims that the takeover of the bank by his ministry was only a temporary measure to help restructure the institution. As an indication of dwindling confidence in the financial system, Government has had to step in at least three times over the past few years to restructure different financial institutions. The latest action on CNB has made Davies the prime target of critics for his handling (or mishandling) of the crisis. High on his list of critics is Opposition Leader, Edward Seaga. (See photo).

"Suspension of the operations is the most drastic of all options. This need not have been the case. The government had reached agreement with CNB to allow for a majority of appointees on the board. This would have given the government full control over the bank, without closing the doors," says Seaga. Davis disagreed, and in Parliament, he explained his decision to take-over the bank.

He said Century National Bank displayed bad management from its inception, until Government had no choice but to apply the brakes and stop the slide of the bank. The financial group comprises Century National Bank, Century National Merchant Bank and Trust Company and Century National Building Society. He said officials investigated and found the group to be engaging in unsafe and unsound business practices, which had resulted in a significant decline of operational profits and "serious infractions of the financial statutes." The final decision to take over the bank came when the Chairman of the Century National Groups, Donovan Crawford refused to step down and allow for the restructuring process to begin, says Davis.

"Crawford hindered the turnaround of the bank. He insisted in blocking our rescue plans. He would make agreements with the authorities to amend his mode of operations. But soon after, he would break his promises by continuing as before. These delaying tactics resulted in an acceleration in the downward slide of the bank. All the policies and strategies suggested by the authorities failed due to Mr Crawford's apparent reluctance to yield any control of 'his bank.'

"The takeover followed a series of recommendations for regaining viability to which the management committee agreed, but there were clear instances of contravention of these undertakings and many of the commitments were not followed through.
"The bank's operations were investigated by several auditing firms, including Coopers & Lybrand and Price Waterhouse, as well as the Bank of Jamaica. At the end of each exercise, the group, led by Crawford, wiggled itself out of the agreements made to change its operation policies.

Despite his criticism, Seaga himself has a loan from the bank of about US$22 million, which has not been repaid. The details surrounding this loan are still unclear, but reports indicate that it was contracted by one of his companies. It was expected to be the part of a re-financing package in which Seaga's debts at CNB would be consolidated and converted to U.S. dollars. But the Opposition Leader said the loan was missed, not only by the bank, but also by his own auditors and was, therefore, not included in the re-financing package.

Seaga said the incident has put the entire financial sector in danger of collapse and the Century takeover has added momentum to "a tremor which will turn into an earthquake, which is yet to come.'' He noted that one bank, reportedly the National Commercial Bank also needs J$7.8 billion to restructure its operations.

However. the Finance Minister dismissed these claims, saying that Seaga was attempting to divert attention away from the bank and his relationship with it. The Minister said that Century's temporary closure ''posed no systemic risk'' and he accused Seaga of trying to play politics with the country's prosperity.

''It is clear to me that he's prepared to gamble, even at the risk of lost personal credibility, in terms of his handling of his personal financial affairs, in order to undermine the stability of our financial institutions.," says Davies.

Century National Bank, Century Trust and Merchant Bank and Century Building Society were closed on July 10 because of bad management, Davies insists. From as far back as its opening in 1986, Davies says, the bank had exhibited deficiencies in management and control systems and a lack of attention to the requirements of its governing statute. He said that the Central Bank's Inspectorate had repeatedly brought these issues to the attention of CNB's board of directors and senior management, but remedial action had been superficial and ineffective.

He said the bank had a questionable loans portfolio and pursued imprudent credit and management practices including self-dealing and cutting deals with bank insiders. Loans were also granted which exceeded the limits and risk factors set as acceptable for normal banking operations. The bank also routinely overstated earnings and consolidated default loans to give the impression that all was well. Davies said the final straw that precipitated the takeover was the continued deterioration in the bank's financial condition which saw its overdraft with the Central Bank climbing from J$3.82 billion on April 30 to J$4.32 billion on July 10.

But CNB's major shareholder, Donovan Crawford says his bank has been felled by a conspiracy driven by political, rather than banking, considerations. ''Century has been the victim of sustained hostility from certain persons within the current government. We must not forget that the greatest breakaway of Century's stability came after that Jamaica House meeting with the honourable minister and his associates."

"In the three days following that meeting, J$1.2 billion flowed out of the bank," he said. For Crawford, the defining moment in the crisis at his bank was on July 16, 1995, when Davis tried to broker a deal which restricted the bank's ability to deal with its liquidity problem. The deal would have seen Neville Blythe, Jamaican insurance tycoon, pump J$500 million in equity into the bank over nine months. Within a month from the agreement, he would channel 300 million in deposits to the bank to be followed by another J$700 million by the end of the year.

By the next day, however, the deal fell through. What followed was a J$3 billion run on Century's deposits and a rapid escalation of a cash flow problem into a major liquidity crisis. Though Davies insists that bad management has been Century's downfall, the institution was doing pretty well in its first six years of operations. In 1992, CNB boasted the third strongest capital base in the banking sector and its assets ranked number three among commercial banks. The first indication of problems surfaced at the end of 1992, when the bank had receivables of J$337 million.

This was 30% of its loan portfolio, nearly four times as high as the industry average of 8.2 percent. Additionally, the CNB had invested J$280 million in its subsidiary companies. This is more than half of the J$449 million that all commercial banks had invested in their affiliated and subsidiary companies. For Century, this investment translated to 82 percent of its capital. In 1993, the Central Bank brought in the former CEO of Citizens Bank, Elon Beckford, to repair the damage of capital erosion and to tighten banking controls. The new measures were not followed through after Beckford left.

At the time, the financial services sector was expanding dramatically, and by 1995 its contribution to the Gross Domestic Product (GDP) grew form 11 percent in 1991 to 15.6 percent in 1994. This was higher than the other sectors and returned handsome profits to investors. Century, too, expanded quickly, setting up an island-wide retail network, which resulted in the doubling of its deposits to J$5.1 billion over the 15 month period ending December 1994. The deposits, which carried high interest costs, were used to fuel the expansion. This translated into higher-than-average lending rates which attracted higher risk borrowers.

Another problem was that these deposits were short-term in nature, while Century investments, through its subsidiaries and larger clients, were made in real estate and more long term projects. This resulted in a mis-match between source and use of funds and led to an extreme cash flow crisis. Notably while its deposit portfolio was doubling loans increased only marginally to J$1.6 billion but receivables more than doubled to J$817 million 50 percent of the total loan portfolio. By 1995 with impossibly high interest rates the real estate market was in a slump, large projects were floundering and Century's stock of bad debts was growing.

The bank had not only loaned millions for property development but through its subsidiaries it had invested heavily in real estate. Between June and December 1995 the Central Bank forced Century to reverse all the interest the bank had been accruing on non-performing loans and it made provisions to write off these loans. The result was disaster. The bank reported an accumulated loss of nearly J$1.7 billion at the end of December 1995 creating a deficiency in capital of about J$1.2 billion. Six months later after talks about restructuring the bank fell through, and the Finance Ministry "temporarily" shut down their operations.

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