The much-anticipated bid for Westpac Pacific (PNG and Fiji) operations by Kina Securities (the owner of Kina Bank) was finally confirmed last month. The offer did not come as a surprise as Westpac moved its Pacific assets into a specialist business division in May 2020, and Kina Securities undertook a capital raising in October. The proposed deal is still pending regulatory and shareholders’ approval.
Currently, only four commercial banks – Bank of South Pacific (BSP), Kina Bank, Westpac and ANZ – operate in PNG with ANZ focused solely on institutional banking. BSP owns more than 50% of the total assets of the commercial sector and has a market share of 63% of loans. If the acquisition goes through, Kina Securities will have nearly all the remaining market share.
Unlike its acquisition of ANZ retail, commercial and SME operations in 2019, Kina Securities says that it intends to maintain Westpac’s commercial banking licence and run the branch network separately. It claims therefore that there will be no lessening of competition. However, this is unconvincing. Despite being run separately, there will be ample opportunity for the two banks, which serve the same shareholders, to collude for strategic purposes. In addition, there is no guarantee that any separation will be permanent.
A further weakening of banking competition in PNG would be a bad thing for several reasons.
There is already a massive spread in PNG between the very high rates at which funds are lent out by the banks and the very low rates depositors receive on their savings – in fact, one of the highest interest rate spreads in East Asia and the Pacific.
Banks are already not incentivised to transmit interest rate adjustments by the central bank (the KFR policy rate) to their consumers as there is little need to compete for loans and deposit base. If banking competition reduces further, banks will possess even more market power to set their own lending and deposit rates, and monetary transmission will be further weakened.
The two remaining bank owners may engage in anti-competitive behaviour by manipulating interbank and other market interest rates to maximise returns. For instance, they may collude to set a common interest rate floor for their lending products and promise not to undercut each other to avoid direct competition. The same applies to deposit rates.
In other countries, banks with high market concentration have been found to fix prices and rig bids in the foreign exchange interbank market to boost profits. PNG is unlikely to be an exemption.
In addition, PNG banks are already some of the unfriendliest in the region. Consumers are often required to pay for basic banking services such as account opening, ATM balance enquiries and cash withdrawals but receive poor service delivery. As banking competition decreases there will be less economic incentive to improve service delivery, and rip-offs like these could get even worse.
Further reducing banking competition will also lead to heightened risk aversion, and less lending to the private sector. There are already signs that PNG banks prefer lending to governments rather than firms. Having private investment crowded out by public investment is detrimental to economic growth and development, and will make it harder for smaller firms especially to access credit.
Financial inclusion is also at risk. Lesser banking competition has been found to reduce the supply of financial products, increase the rates and fees paid, curtail financial innovation and decrease the quality and variety of products offered.
That said, Kina Bank made a commitment to expand its financial inclusion effort in PNG in 2019 via its investment in MiBank, a microfinance institution. The Asian Development Bank (ADB) is also currently the second largest shareholder of Kina Securities, following its $10 million investment in the company in 2019. They may use what shareholder power they have to encourage decisions that align with their own inclusion goals.
Though these are positive signs, greater profitability and expanded financial inclusion do not always go hand in hand, and economic theory would suggest that healthy competition is more likely to create sustainably lower prices and better access than does relying on the benevolence of banks.
PNG’s financial regulator should take its fair share of the blame for not making the PNG banking sector more entry friendly. A recent study by ADB shows that regulatory barriers and high costs have discouraged the growth of the banking sector. The study pointed out that the increasing compliance with regulations related to consumer registration has led to increasing documentary requirements and high compliance costs. While strong oversight is necessary to guarantee financial stability, financial regulators must tread carefully to avoid their actions leading to financial exclusion.
Of course, if Westpac wants to exit the Pacific, it needs to find a seller. But PNG needs new entrants into its banking sector. The central bank should consider encouraging new entrants from the existing non-bank financial institutions.
A competitive financial system is vital for high and sustained growth. The people of PNG will find themselves worse off if one day they wake up to just two companies serving their retail banking needs.
This article appeared first on Devpolicy Blog (devpolicy.org), from the Development Policy Centre at The Australian National University. Accompanying graphs can be viewed on that page.
Dek Sum is an Associate Lecturer at the Development Policy Centre, based at the University of Papua New Guinea, where he is a Visiting Lecturer and Project Coordinator for the ANU-UPNG partnership.
Westpac says it will not respond to speculation in Australian media this week that it is on the verge of selling its Pacific businesses.
A Westpac Fiji spokesperson says the Bank “is currently undertaking strategic review of its specialist businesses, as we shared with the market in May. This includes wealth platforms, superannuation products, investments, general and life insurance and auto finances well as Westpac Pacific.
“Given this, there is going to be ongoing speculation circulating – as there has been since Westpac sold some Pacific operations in 2015. Westpac does not respond to speculation and, as always, if there is news to share about our business, our people and customers will hear it from us.”
On Monday, The Australian newspaper [paywall] reported that it had information Westpac was close to selling its Pacific banking operations, and that while the buyer’s identity was unclear, “logical acquirers” would be either the Papua New Guinea-headquartered Bank South Pacific (BSP) or France’s BRED.
Westpac sold its Samoa, Cook Islands, Solomon Islands, Vanuatu and Tonga operations to BSP in 2015. It retains operations in Fiji and PNG.
In May this year, Westpac announced statutory net profit was down 62% (A$1,190 million) for the first half of 2020, compared to the first half of 2019. In a statement to the Australian Stock Exchange it said it was clear that Westpac needed to “simplify and focus on its Australian and New Zealand banking businesses,” and that a Specialist Businesses division under the leadership of Jason Yetton would review Westpac’s Pacific businesses, superannuation, wealth investments, insurance and auto finance.
“Over the coming months we will conduct a detailed strategic review on the best option for these businesses. This will include considering whether they would ultimately be more successful under different ownership” the Bank said in May.
Meanwhile in Fiji, “customers can be assured that we are here to help and continue our support to people and communities across Fiji, including through our COVID-19 customer assistance package,” the Westpac Fiji spokesperson says.
A major bank in the Pacific region has recommended that Fiji put the brakes on civil servants wage increases as a major step towards bringing the national budget back to balance in the medium to long term.
In its Pacific Economic Outlook for Fiji released today, the ANZ Bank offers an independent analysis on the Fijian economy, highlighting some weak areas that the Fijian government could look into.
Fiji’s total national debt and the need to bring the national budget back to balance were among the areas that needed attention.
“Since 1992, the government of the day has run a budget deficit in all but two years (1998 and 2008). As a result, the nominal outstanding debt level has climbed. Although this is not the time for austerity, we would advocate that the budget be brought back towards balance over the medium to long term, especially as the interest cost is likely to increase when the interest rates rise,” the report said.
“History suggests that expenditure close to 30 per cent of GDP generally yield the smallest budget deficit. With payments as a proportion of GDP estimated at 39 per cent for the 2017/18 financial year, our view is that expenditure needs to be cut by around 1.5 per cent a year, in order to wind it back to around 30 per cent of GDP over the next five years. This includes showing restraint on public sector wage increases. Public sector employees have received large double digit wage increases in recent years. We understand that budgets have to balance commitments, deficit implications for credit ratings along with political consequences. However, even allowing for some catch ups in wage increases, the hefty wage increases recently awarded appear excessive. The public sector wages bill now accounts for nearly a third of total expenditure from just over 23 per cent in 2011,” the report said.
In the last few years, civil servants have called for what they believed was a long overdue rise in salaries and in response, government undertook a pay review exercise last year followed by pay increases in various ministries.
Now with the civil service wage bill accounting for almost a third of government expenses, the ANZ is cautioning the policy makers to go slow with the pay rises.
“We’re not saying that the wages should be cut back. We’re saying that there should be some restraint in wages growth because wages growth has escalated over the last two, three years,” ANZ International’s Pacific Economist and author of the report Kishti Sen told Islands Business.
“I agree that there should be some catch up payment to the public servants because they actually haven’t had enough increases to compensate for cost of living. But going forward, we’re not saying this is something they need to do over the next two years; austerity is not something that the economy needs at the moment, the government has to continue to do some of the capex projects in order to keep people in employment. What we’re saying is over the medium to long term, it’s necessary for any government, or even a household, to not continue to spend more money than they bring in. You have to have a plan to bring your budget back towards balance. And we think that expenses at around 30 per cent of GDP gives you some sort of a balance of your budget so over the long term, that’s something that government could think about,” Sen said.
On Fiji’s debt level, the ANZ Bank noted that total public debt stood at F$4.85 billion (US$2.32billion) in 2017 - a new high but its serviceability was still manageable, considering that the debt to GDP ratio of the current debt cycle was still lower than Fiji’s debt peak in the mid-1990s.
SIX months after successfully expanding its business to Solomon Islands, the European bank-BRED Bank- will open a second branch in Honiara by the end of the year and a third branch in the provinces in the next 24 months. BRED Bank CEO in Solomon Islands, Owen Thomson, told Islands Business they would now focused on improving the quality of their services by implementing mobile banking through Mobile Application and USSD – banking through text messaging “This is very important for us to deliver banking service to everyone as most of the population live in remote rural areas with no banking access,” Owen said.
He said they would work with NGOs and government agencies to promote saving groups and financial knowledge for the people in Solomons. With the successful establishment of operations throughout the Pacific (Vanuatu, Fiji, New Caledonia and French Polynesia), the BRED Group began operation in Solomon Islands in August last year with one staff member. By opening day, it has installed eight ATMs and opened over 830 accounts.
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By Mereseini Marau-Totoka
Growing up in a settlement just on the outskirts of Fiji’s capital Suva, the newly appointed Deputy Governor of the Reserve Bank of Fiji Esala Masitabua saw the 18-storey building located on Pratt Street in the city being built.
Little did he know that the same magnificent building he witnessed starting to take shape from its foundation to the roof- the Reserve Bank of Fiji- would be his work place for most part of his career life.
Taking up his new post as Deputy Government of Fiji’s central bank in the New Year, Masitabua was reflective and humbled as he looked back in his life journey and how he had fared thus far.
He also shared his plans for the central bank.
Life in that Nauluvatu Settlement along Suva’s Reservoir Road was not easy for him and three siblings of two sisters and a younger brother.
He attributed his achievements to the extreme hard work of his police constable dad originally from Wailevu in Ravitaki, Kadavu and his mum a seamstress from Vava’u in Tonga.
“Life was tough and living conditions initially squalid but my parents worked extremely hard to improve our quality of life. They also instilled in us children the value of hard work, being honest and knowing the Lord. We are so grateful for their sacrifices. My dad was a special constable and security officer at Burns Philp and mum was seamstress at Tiki Togs.”
They both earned near minimum wages. He reminisced that when business got tough, his parents would work reduced hours forcing them to struggle to make ends meet. The struggles included going to bed hungry, walking in the rain to go to school, patching school bags and sandals until his parents could afford to buy new ones.
After he completed his secondary education at Marist Brothers High School in 1988, he wanted to work and earn his own money because he wanted to “have the autonomy to buy and enjoy the things I could not have growing up.” His dream of becoming a pilot was put on hold indefinitely.
“Working for Fiji’s own commercial bank appealed to me, I applied successfully and worked there until I decided to further my education in 1991.”
In 1994, Masitabua returned to the National Bank of Fiji and three years later the bank collapsed. Following the bank restructure, where he was part of the asset management team, he resigned and became part of the unemployment statistics for a while. In 1997 he came across a vacancy advertisement in the newspaper for a Clerical Officer Ledgers in the Reserve Bank of Fiji. He joined in July 1997 as a ledgers officer just when the Bank celebrated its 25th Anniversary. That was the birth of his career as a central banker.
“I may not have initially aspired to be a central banker but when I joined the Reserve Bank in Fiji in 1997 I truly felt that I had found my calling in life.”
Masitabua worked his way up the ladder in Reserve Bank before becoming the Chief Manager Financial Markets in 2013. Like in any other career, Masitabua said there were challenges and obstacles along the way but he have been blessed with a loving wife Omeri Ravula and family to support him, as well as friends and workmates.
“I have enjoyed the past two decades immensely benefitting from specialised training and exposure and I look forward to the new chapter. The accumulation of development and experience I have had in the Bank will be put to good use in this new role.”
His plan as second- in- charge at RBF is simple.
“I need to continue to build on the legacies of my capable predecessors which include the current Governor. Like any other leader I will bring my own personal style of leadership and I look forward to continuing to grow and develop as I hope I will be able to contribute to the development of others I come into contact with.”
He shares that the central bank has a strategic plan in place that provides a guide for all facets of their annual work plans linking up to the mission and vision of leading Fiji to economic success. Acknowledging that the exciting and challenging part of working at the bank is that while the mandate of the Reserve Bank of Fiji is constant, the environment and circumstances change constantly. In his new role Masitabua will play a supportive role to the Governor with key areas of defined responsibilities.
“We will be grappling with similar but nuanced challenges compared to my predecessors.”
An example he offered is what he labels the ‘period of recent unprecedented economic growth’ the country is experiencing.
“This is extremely positive but does introduce a whole new set of challenges compared to the period when the challenge was to stimulate or kick start the economy like that faced in the early then late 2000s. “
He said past Governors would have dealt with changing technologies and demographics of the labour force, those broad challenges remain but are slightly different now.
“With the increasingly younger and relatively more transient workforce, there are adjustments that need to be made to policies, processes and in my view, leadership styles. Likewise technological innovation is presenting opportunities as well as challenges for all including central banks.”
Up to the Challenge
“I can assure the people of the country that I am excited, keen to embrace the challenges of the new role and ready to give it my absolute all.”
Masitabua reminisced on one of his favourite memories back in the early 2000s where he and a team from the bank led by the then Deputy Governor who later became Governor Sada Reddy went to donate computers to Wainiyavu Village School in the upper reaches of Namosi on Fiji’s main island.
He recalled boarding the punt from just past Navua Town up the Navua River to Namuamua Village where they had to get off and walk the rest of the way to Wainiyavu, traversing difficult terrain. After zig zagging and crossing a tributary 23 times over two and half hours, they finally reached their destination.
Marvelled at the natural surroundings and waterfalls, they never thought working for a central bank would take them to such a place. It was the joy on the faces of the students, teachers and parents that was the consolation for that difficult trip.
“I could not help thinking that one of those little children would perhaps be a future Governor, or Minister or Prime Minister.”
Masitabua said his work at the Reserve Bank has taken him to countries abroad as well as over Viti Levu, Vanua Levu, his home island of Kadavu, Taveuni and other maritime islands. From his humble beginning, Masitabua knew there was no substitute for honesty and hard work.
His advise to youth is to listen to their parents and elders.
“Whatever task you are called to do, do it to the best of your ability, and take no short cuts. We cannot all be executives, general managers, doctors or pilots but we can all be successful and be an inspiration to others in whatever we do.”