By R. Grynberg, D. Munro & M. White
Listener 26 April, 2003
Keywords: Macroeconomics & Money;
Those involved – including Fijian coup leader and subsequently Prime Minister, Sitiveni Rambuka – were anxious not to have too public the story of the financial crisis of the National Bank of Fiji (NBF). Instead the authors – then academics at the University of Fiji although two have since left – pieced it together from the public record and the investigative reporting of a few courageous journalists. Their story goes like this.
The NBF was established as a government-owned commercial bank in 1976, taking over from the Savings Bank of Fiji founded in 1907. The transition from taking people’s small savings and recycling them as mortgages and other safe investments, into investing in and offering commercial services to businesses is tricky. In the four years after the 1987 coup, the NBF introduced new services, trebled staff (mainly indigenous Fijians) and quadrupled advances (mainly to indigenous Fijians). Rapid expansion always involves a relative growth of bad debts, while the lending criteria favoured privileged groups.
A bank can easily disguise losses in the medium term. The likelihood that an advance will be repaid is a matter of judgement, which has to be incorporated the bank’s balance sheet. If the assets are inadequately discounted for that risk then the bank will appear more profitable than it is. This can be largely disguised until the bank runs out of money, for non-performing loans dont provide the cash inflow which depositors’ interest and withdrawals require. By 1996 NBF’s bad and doubtful debts were estimated at over 8 percent of GDP – equivalent to a $10 billion mistake, had it been in New Zealand.
In principle the depositors in the NBF should have lost their money. In practice the Fijian government took over the bad debts. In a small ethnically divided nation, there was much bitterness. Those who carried the tax burden were not the same as those who benefited from the poor quality lending. Indian Fijians pay taxes too. The banking expansion delayed the impact of the coup, but the additional government debt is a heavy burden to an already staggering economy.
If there be lessons, they are that a financial system needs to apply rigorous standards of accounting, especially when lending to high risk business. Better the government does not get too involved – the Kiwibank needs to confine itself to the low risk lending of a savings bank. And those who advocate a bank to support some minority – a Maori Bank for example – must insist on the rigorous application of lending rules. There will be no government guarantee, and any losses will be borne by equally worthy depositors.
We think of Pacific’s Islands as holiday retreats with the innocence of paradise. The book tells a tale of some pretty grimy financial and political dealings – no worse, perhaps, than what has been going on in the US, but closer.