The Development Bank of Samoa can lead the private sector’s recovery from the COVID-19 economic crisis and needs help to do so, new research says.

Senior Financial Sector Expert Dr. Peter Dirou said with state-owned development banks being so prevalent in the region, they must be leveraged to do what commercial banks avoid doing and step into the risky post-COVID-19 marketplace.

Dr. Dirou is a researcher in the Asian Development Bank’s Pacific Private Sector Development Initiative, which released this month a review into the region’s state-owned banks.

In an interview with the Samoa Observer, he said COVID-19 has magnified the longstanding problem in the region where small and medium businesses struggle to get the finance they need.

New research from the Central Bank of Samoa and the United Nations only half of Samoan businesses who want finance get access to it, with women-owned businesses even worse off.

“If we are going to talk sensibly about recovery from COVID we have to be able to talk about the trajectory of recovery for private businesses,” Dr. Dirou said.

“Those businesses are going to need financing, but governments now, because of how they have had to deal with the pandemic, are stretched fiscally and they are not able to borrow much more.

“You want to avoid more pressure on the Government budget, so these government-owned banks are going to be even more important in the scheme of things.”

Dr. Rup Singh is the Acting Head of the School of Economics at the University of the South Pacific in Fiji, and specialists in economic growth and macroeconomic policy.

He told the Samoa Observer that commercial banks are unlikely to relax their risk profiles to take on smaller clients, or even make new loans at all under the current economic crisis, and agreed that development banks can fill that gap. 

“That is what they are supposed to be doing in the first place,” he said, adding that the development bank could also help commercial bank clients who are not getting enough support from their own bank, though he urged commercial banks to do more.

“Immediately I think the development bank could start subsidising payments of loans or undertake those loans as support to small and micro enterprises,” he said.

“Commercial banks too will have to be more realistic on small and micro-enterprises. If they are not coming forward trying to help them with interest-only repayments or deferments and the like, then things can become worse.

“Risk profiling is important but at this point in time the banks have to support these enterprises.”

He said if the Government wants the development bank to do more, given that it largely controls the enterprise it could speed up the process by directing it to act faster.

“If they are to provide any support it has to be now,” the senior lecturer said.

“We can’t wait for two to three years because by then many of these enterprises will be gone.”

Samoa’s economic response to the COVID-19 crisis has largely been focused on redirecting its own, or its state-owned enterprises' funds to people or businesses in need, like money from the Samoa National Provident Fund or Accident Compensation Corporation. 

Earlier this month the Government approved a $1.21 million package for $300 and $200 payments for people who lost their jobs in the tourism industry. 

The Samoa Chamber of Commerce and Industry estimates it will reach 1,200 people. 

Since the beginning of the pandemic response, Samoa has received grant or loan funding from the Asian Development Bank, the World Bank, the International Monetary Fund, and the Governments of Australia and China totaling US$63.2 million (T$165.3 million). 

This is according to data compiled by the Australian National University. 

Dr. Dirou says Samoa has to start getting more out of its Development Bank, which means a significant investment into the bank’s skills, which will generate profitability.

“If these banks are important, Governments have to find a way to strengthen their performance,” he said.

“You have got to put them on a strong foundation, and that is making sure they have enough capital to absorb risk and finance their lending, and they have to be regulated.   

“With that profitability consistency comes sustainability, and with that, you remove the need to rely on the Government balance sheet.”

He said the Development Bank has to strategise carefully around how to grow that skill set and invest in making those improvements happen.

He was loath to say how long it would take for the D.B.S. to be able to fulfil this role, but said how quickly it happens depends on the investment made.

"The more resources you throw at the exercise and the more committed you are to those outcomes the quicker it will happen. 

"It’s not an exercise you can do in bits and pieces."

But the commercial banks have to play their role too. In Samoa, private banks have given their clients the option to defer their loan payments or pay only the interest on their existing loans for a given period, but Dr. Dirou said they need to participate more in the financial sector. 

With the majority of businesses in Samoa being medium-sized or smaller and not the usual client base of the commercial bank, financial regulators need to help the private sector get involved with incentives.

“The role of the regulator is to incentivise the providers of finance to get into this business and do it well and at the same time protect those who are the users.

“The job of finance, of the financial system, is to provide finance to the predominant business form. 

“These businesses are important to the social fabric and the economic wellbeing of the country.”

 The Development Bank of Samoa has been approached for comment. 

Last year, D.B.S.s' "poor financial performance" was highlighted by an earlier Asian Development report, that revealed it had among the highest reliance on debt infusions of any government bank in the region. 

D.B.S. was also found to have made a high proportion of "non performing" loans (or loans on which repayments are more than 90 days past due), rising to as much as half of its portfolio in 2016. 

"The bank cannot go on like this," said Dr. Neelesh Gounder, a Senior Lecturer at the School of Economics at the University of the South Pacific said at the time.

"It is not going to work in a sustainable way and then that will be the key here now, and that’s why the report says that the current form of the Development Bank of Samoa is not on a sustainable path"

By client size, the D.B.S. loan portfolio is dominated by large corporations (82 per cent), with micro, small, and medium-sized enterprises at 18 per cent  and staff with 1 per cent.

Dr. Gounder said the high representation of large corporations in the D.B.S. loan portfolio raised questions. 

"What we also see here is that the majority of the loans are to large corporations, and if we are talking about concessional interest rates then it is important that the interest subsidy on loans should be used to target specific sectors, mainly micro, small and medium enterprises," he said.  

* Soli Wilson contributed reporting.