Wholesale review of Development Bank of Samoa's loans strategy long past due
Government involvement in the financial sector is ultimately about striking a fine balance.
Banks exist to turn a profit. Governments exist to provide services that the private sector can or will not.
The shabby truth about the Development Bank of Samoa (D.B.S.) is that in pursuit of both these aims it has delivered neither.
The frank acknowledgement of these shortcomings and a promised wholesale review of the bank’s strategy by Finance Minister Sili Epa Tuoti on Thursday, in a story titled "Minister pledges to review Bank loans strategy" was very welcome news.
“[We] need a development bank for Samoa focusing on a developmental aspects of [the economy],” the Minister said.
“Now that we have good commercial banks, we should leave all the large commercial loans to the commercial banks. We will be a lot more strict and selective.”
After years of tying up capital and resources operating a portfolio of increasingly bad loans skewed towards big business, the Minister’s comments sound like a welcome first step towards creating an accountable public bank.
But the truth is anything short of a drastic change of tack no longer looks like an option for D.B.S..
Luckily, we don’t have to look very far for a model of a well functioning public bank.
The slow erosion of both D.B.S.’s resources and its ability to achieve a mission of securing Samoa’s social and economic advancement was made plain in a report from the Asian Development Bank earlier this month. .
Even compared to other Government-owned lenders in the Pacific, the D.B.S.’ inability to turn a profit for six of the eight years from 2010 to 2018 represents uniquely consistent poor performance.
On the criterion of what proportion of its loans are “non performing” - a bankers’ euphemism for loans on which repayments are more than 90 days past due - D.B.S. runs a close second to the National Development Bank of Papua New Guinea.
And despite the increasingly feeble quality of the loans on its books, the D.B.S. also leads the region on the unfortunate measure of dependence on debt.
All of this presents an inescapable conclusion: that the bank is teetering.
As with any serious outlay of public money, we must look at the money expended on the bank’s operations, the capital it ties up to stay afloat and the up to $7.7 million a year it foregoes in concessional interest and ask what these resources could have been better spent on.
As it stands, the bank’s heavy orientation toward large tourism sector operators - who in turn represent the majority of its bad loans - does not adequately satisfy the community service mission which the bank was established to uphold.
Development banks should go where the private sector fears to tread.
Increasing access to financial services throughout the economy is a quintessential reason for Government involvement in the banking sector. Dispensing loans to large operators with less accountability than private banks is not.
In Tonga we see a model for public finance that we should be eager to adopt.
Agriculture, especially on the small to medium scale, is a classic example of a sector of the economy all too often neglected by the private sector.
Farmers and fishermen have long been plagued by a lack of access to credit because while bricks-and-mortar businesses can easily provide collateral, valuing a farmer’s future crop is a tricky undertaking.
The Tonga Development Bank has, since 2010, helped small agricultural businesses secure finance, particularly through a scheme geared at vanilla bean farmers. By letting them use their plantation as collateral, the bank gives them access to credit to grow their businesses that would have otherwise been impossible to secure.
More generally its client base is much more diverse, with just over one-third of all loans going to large corporations, compared to 85 per cent for the D.B.S. and its corresponding loan size is much smaller, too, at about USD$2,500 on average.
And the results show that a focus of this kind of financing need not be mutually exclusive with commercial rigour.
The Tongan bank consistently registers a bad loan rate of somewhere between three and six per cent, which compares to D.B.S.’ portfolio which had a nonperforming rate of 50 per cent in 2016.
Similarly, the Tongans have demonstrated no problem delivering returns on equity. They consistently bring in returns of between six and nine per cent. Despite being set a target of seven per cent a year, the D.B.S. has failed to escape the red for much of the past decade.
The A.D.B. argues that Government-owned banks should be commercially oriented.
We agree and we applaud the Minister for signalling that this advice will be front and centre in the D.B.S’s forthcoming review.
The profit motive imposes discipline and accountability on financial institutions run that an abstract mission statement can never match.
The unwanted economic side effects of poorly performing state banks have been clearly demonstrated overseas and run the gamut from distorting the development of efficient markets to the downright cronyism that marrs public finance in the former Soviet Union and parts of Asia.
But as the experience in Tonga shows an efficiently run bank needn’t be divorced from a sense of public purpose.
As it stands Samoa is being shortchanged.