Reforms in Banking Supervision in Fiji: a Review of Progress

PACIFIC ECONOMIC BULLETIN Reforms in banking supervision in Fiji: a review of progress Aman Chandra, T K Jayaraman and Filimone Waqabaca Based on published studies and official documents, Aman Chandra is a Policy Analyst in this paper identifies the causes of the failure of the the Financial Institutions Department National Bank of Fiji in the 1990s. It also reviews of the Reserve Bank of Fiji. various measures and reforms undertaken since T.K. Jayaraman is Associate Professor then by the country’s central bank towards in the Department of Economics at the strengthening its powers of supervision over University of the South Pacific. commercial banks. It is expected that the reforms Filimone Waqabaca is Acting Chief will ensure better supervision and contribute to Manager (Economics) with the Reserve improved functioning of commercial banks. Bank of Fiji. In the last decade Fiji, along with Tonga and No judicial inquiry or parliamentary Vanuatu in the South Pacific region, investigation, the usual practice in other witnessed banking crises of unprecedented Commonwealth countries, was conducted proportions. The National Bank of Fiji (NBF) into the causes of the National Bank of Fiji failed and there was a near failure of the crisis. Some noteworthy studies (Grynberg National Bank of Vanuatu, both banks being et al. 2002, Chand 2002, Siwatibau 1996), nationally owned. Tonga’s foreign-owned could give only indications as to what went MBF suffered losses due to a major credit wrong. The available information broadly card fraud. Fiji’s banking crisis, however, indicated that the failure was the result of was not a serious blow to Fiji’s financial political interference and that the usual system, apart from the fact that taxpayers norms applicable to loan approvals were not covered the entire shortfall. But it was followed. unfortunate that the National Bank of Fiji’s The costs of the bank’s failure were failure occurred at a time when the country immense. They included the costs of had not fully recovered from the trauma of recapitalising the distressed financial the two military coups of the late 1980s. institution, which were huge in relation to 102 Pacific Economic Bulletin Volume 19 Number 3 2004 © Asia Pacific Press REFORMS IN BANKING SUPERVISION IN FIJI the country’s available resources. These Background costs were in addition to the real economic costs of poor banking decisions resulting in There are differences between the banking bad loans for non-viable investment projects crises of the Latin American countries and and causing weak portfolios to accumulate. the Pacific island countries. The crises that This took place in the context of other poorly afflicted the Latin American countries were performing public sector agencies. more due to macroeconomic and exchange The East Asian financial crisis of July 1997 rate instability. These countries have small also had its roots in poor banking and money and capital markets. Deposits in supervision practices. Extensive studies, both commercial banks in Latin America official and private, added nothing generally tend to be short term. Depositors substantial to the already available empirical have little confidence in their countries’ literature, except for the fact that the financial macroeconomic policies, which feature large crisis was triggered by high levels of capital fiscal deficits, exposing them to risks of high mobility—a result of increased globalisation. inflation and exchange rate instability. In Unimpeded inflows of capital from the West these circumstances, banks tend to place a to emerging economies with expectations of large share of their assets in loans and the high returns were the cause of the problem, value of their treasury securities is more encouraging the banking sectors in emerging volatile. For example, when the Mexican peso countries to borrow ‘short’ and invest ‘long’. sharply depreciated in December 1994, the The latter resulted in grandiose projects of no quality of the loan portfolio of the banks substance, often in the nature of ‘bubbles’ as declined substantially and the flow of new well as in mismatching of liabilities and assets. funds to banks from depositors also dried The banking crises of the South Pacific up (Rojas-Suarez and Weisbrod 1996). had nothing to do with the globalisation of In Fiji and other Pacific island countries, markets and the associated flows of ‘hot’ commercial banks play a similar major role money. They had more in common with the in the financial sector, since domestic bond severe banking crises in Latin America, which markets, both short and long term, and equity rocked Chile and Columbia in the 1980s, with markets are very small. It has been fortunate the crises in the United States in the mid 1980s for the Pacific island countries, including and early 1990s, and with events in the Fiji, that macroeconomic conditions have Nordic countries in the early 1990s. These been relatively favourable in terms of low crises had more to do with poor regulatory inflation as well as exchange rate stability. measures, weak supervision and simple Low inflation has been due to a large bureaucratic negligence (Faruqui 1994). proportion of imports being sourced from An Asian Development Bank study Australia and New Zealand, which have (2001) on financial sector development in been following policies targeting low Pacific island countries suggested remedial inflation. Exchange rate stability has been measures. These include strengthening the due to sizeable support from aid and existing supervisory authority with remittances from overseas, which have comprehensive and effective sets of banking provided a comfortable cushion to all Pacific laws and regulations, adequate financial and island countries in the midst of persistent human resources, and independence from trade deficits. Devaluation of the Fiji dollar government. This paper reviews the in 1987 was a deliberate policy measure to measures taken by Fiji and assesses their correct the overvalued Fiji dollar, which was impact on the financial system. hurting its exports, and which in a way 103 Pacific Economic Bulletin Volume 19 Number 3 2004 © Asia Pacific Press PACIFIC ECONOMIC BULLETIN contributed to the emergence of new ienced and weak staff focused on achieving a exportables such as garments and footwear. bigger share of market, make failure more The devaluation of January 1998 was a pre- likely. The Malaysian experience shows that emptive measure to ward off the effects of the many of the smaller finance companies on the Asian financial crisis contagion. ailing list in the 1980s were new licensees The banking crises in Fiji and in other without the resources to build up experienced Pacific island countries therefore appear to staff (Sheng 1990:24). It is apparent that be entirely homemade. The banking industry deregulation of the financial sector without in the region has been dominated by foreign adequate supervision results in the collapse banks, with the handful of nationally owned of banks. banks providing some traces of competition Collateral lending with no visible cash (Fiji 1999). Nationally owned banks, however, flows in support of loan servicing and have been encouraged by politicians to play a repayment schedules have been major ‘social role of promoting growth by lending’ problems in countries where there is no (Siwatibau 2002:x). Soon after the military active secondary market. Proper asset quality coups of 1987, the newly appointed manager policies reduce the need to appraise the value of the National Bank of Fiji was bent on of a security continuously to align it to market rapidly expanding the volume of lending and prices. Distressed enterprises needing cash, market share, as he boldly assumed ‘national as in the Stinson-Pearce loan case, offer development goals could be achieved by assets at inflated values as collateral. If the throwing money’ (Siwatibau 2002:x). secondary markets for assets are thin, it is In fact, the improper banking practices of difficult to assess the value of collateral at the National Bank of Fiji have been traced back the time the loan is made (Rennhack 2000). before 1987. They began as early as the 1970s A decade ago, the Japanese banking system with the Stinson-Pearce loan, which exceeded engaged in massive collateral lending to 25 per cent of the bank’s capital. Grynberg et finance speculation in real estate. This led to al. (2002:7) note that bad banking practices a speculative bubble that brought down of the 1970s and 1980s, coupled with the many banks when the land and real estate total failure of the public sector and markets collapsed. Borrowers speculate on parliamentary monitoring processes, opened cash flows from future sales of collateral at the way for the massive lending spree on high prices to service their loans. During inadequate securities that took place in 1987 economic downturns, forced selling of land following the post-coup appointment of the and other assets triggers large borrower new chief manager. The mismanagement failures. When banks collectively lend too resulted in the collapse of the National Bank much, they cannot sell without depressing of Fiji in 1995. their own collateral. Sheng (1990) notes that banks fail under The bureaucracies of banks are often as three conditions: when they grow too fast; bloated as government bureaucracies. The when they engage in collateral lending Southeast Asian experience shows that without cash flow support; and when they banks tend to spend on symbols of prestige hire consultants to tell them how to run their and stability—prestigious buildings, public businesses. Fast asset growth is a sure recipe sporting and other events—and on benefits for bank failure. Hasty approvals without to their staff. If the bank management is fulfilling established loan appraisal inexperienced and not clear about corporate requirements and poor monitoring and objectives, their overheads and other non- documentation procedures, and inexper- essential expenses tend to become 104 Pacific Economic Bulletin Volume 19 Number 3 2004 © Asia Pacific Press REFORMS IN BANKING SUPERVISION IN FIJI disproportionate to their operations.

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