Case Studies

Above: Palauans selling fish and traditional foods and delicacies.

PSDI works with government-owned banks in the Pacific to strengthen their financial positions and increase their ability to provide much-need finance to Pacific businesses.

Finance is critical for private sector businesses to invest and grow—but accessing it can be challenging. In the Pacific, every Asian Development Bank (ADB) Developing Member Country (DMC) has either a government-owned development or commercial bank, and in some cases both.  These banks can play a significant role in overcoming the constraints Pacific businesses face in accessing finance. The Pacific Private Sector Development Initiative (PSDI) works with Pacific state-owned banks to clarify their roles, strengthen their foundations, and improve their performance.

PSDI’s 2019 publication, Finding Balance 2019, profiled 13 government-owned banks in 10 Pacific DMCs. The study identified the need for state-owned banks to demonstrate additionality, either by providing financial services (on commercial terms) that the private banks in that financial system are not providing, or making their respective banking systems more competitive. It also highlighted that state-owned banks must operate according to commercial principles to achieve higher returns on investment and reduce fiscal drain on governments.

National Development Bank of Palau (NDBP) Chief Executive Officer, Claire Harvey, notes that Finding Balance will help the bank understand its performance against benchmarks.

“It will help us look at our key metrics—we have some inconsistencies in some of our key metrics. We used to talk to PSDI about this, but there was no key data for us to compare against. What should our return on equity look like? What should our interest margin look like? Now, PSDI has done the benchmarking report and that’s given us a stake in the ground. We can look at our projections models and see if our current interest rate provides interest margins that are sustainable.”

Developing financial strength and risk management capabilities is essential in strengthening a state-owned bank’s structural foundations. Strong capital positions allow these banks to manage risks, absorb losses, and reduce their reliance on constrained government budgets. A comprehensive and up-to-date understanding of a bank’s capital position, at any time, is essential for high-level management and decision-making.

PSDI has developed a capital projections model tailored to its partner banks in the Pacific that captures historical and current borrowing, lending, business data, and strategic assumptions and produces key metrics and analysis to support decision-making. The model can be maintained internally, allowing bank management to review specific scenarios and test the impact of changes to operational settings, such as interest rates, lending composition, and variations in nonperforming loans. This supports high-level strategic decision making for CEOs and boards, affording banks greater control and providing critical information to support policy discussions with the shareholding ministry and finance sector regulator.

The capital projections models build on PSDI’s long-running engagement with government-owned banks in the Pacific and, to date, have been developed for the Bank of the Cook Islands (BCI), Development Bank of Samoa (DBS), and NDBP.

PSDI has worked with BCI since 2015, helping develop risk management policies, improve risk assessment, and supporting the CEO and board, including by facilitating discussions on strategic direction and opportunities for agricultural value chain lending products. Most recently, it helped develop the central bank’s capital projections model.

Since 2017, PSDI has helped DBS to increase its commercial orientation and introduce agricultural value chain lending products. PSDI’s support initially focused on the development of policies, such as credit and risk management policies. PSDI later trained directors and staff, assessed the impact of nonperforming loans and helped develop plans for their resolution, and supported the development of a strategic plan and associated business plans. Building on this work, PSDI is developing a capital projections model to help DBS align its financial strength with its strategic direction.

PSDI has also helped NDBP, since 2016, to strengthen its commercial focus. It has helped broaden NDBP’s funding base to support lending to Palauan businesses, and, most recently, to develop a capital projections model. Ms. Harvey anticipates that the model will be used to review key metrics, support risk management, and assist capital planning.

“During COVID-19, for example, we have people on payment holidays and customers who have moved from principal and interest loans to interest only loans for a short period of time. It’s been really helpful for us to see the impact on our financials. It’s an easy model to use. I’m a person that wants to work on something that is intuitive and makes sense.”

Ms. Harvey says that while NDBP produces sound financial reports and annual projections, “one of the things we always have issues around was being able to persuade government that we may need an injection of capital and that we can’t keep borrowing. The bank has grown hugely over the last 5 years, but we can’t keep borrowing all the time to sustain that level of growth. It doesn’t allow us to be flexible when we’re borrowing at fixed rate terms over long periods of time when the market has really low interest rates. But we always struggle to show the government what happens to our lending portfolio if we amend our interest rates.” The capital projections model will allow NDBP to easily provide this information to government.

Reflecting on the role of development banks in the Pacific, Ms. Harvey stated that “there is an attitude that we should lend to everyone that walks in the door, whether it’s a good idea or a bad idea. To me, a development bank adds to the economy by assisting good businesses to be more economically sound and ensuring any new businesses are economically sound. The definition of development banks needs to change. I think our role is to help businesses grow the economy and to encourage people, especially start-ups, into the private sector.”