South Pacific defies credit crunch with crop and livestock guarantees
SYDNEY — On the islands that dot the South Pacific Ocean, low-risk banks are weighing unusual forms of collateral to help revive local economies: vanilla beans, cows and fishing canoes.
The region, prone to cyclones and covering an area equivalent to about 15% of the world’s surface, is a white spot in global finance. The largest economy, Papua New Guinea, is estimated at $ 16.8 billion, roughly equivalent to that of Montgomery, Ala.
Land on several thousand islands in the region is largely tribal owned, cutting off small businesses from a common source of security and bank financing.
Credit to the private sector is less than 50% of gross domestic product in much of Oceania, compared to an average of 107% in low- and middle-income countries around the world, according to data from the World Bank Group .
This credit crunch has hampered economic growth and pushed aid-dependent island nations, from Papua New Guinea to Samoa, into a strategic rivalry between Western powers like the United States and Australia, and the United States. China.
In Tonga, an archipelago heavily indebted to the Chinese government, the situation is acute. “All the land belongs to the king, so it is very difficult for small businesses to get money from the bank unless they have a mortgage,” said Simon Thompson, a financial consultant based in New Zealand who recently went on a mission to make a difference. .
On a recent visit, wild pigs crossed the dirt road to some 300 farms in the once thriving heart of Tonga’s vanilla industry. Falling prices and lack of credit made production unsustainable for many producers. Lately, however, workers with machetes have started cleaning up the tangle of vines and coconut palms, as Mr Thompson helps implement new lending rules in Tonga on behalf of the Asian Development Bank and governments. Australian and New Zealand.
This is the problem of movable securities: they move
Known as the Secure Transactions Reforms, the overhaul is modeled on U.S. laws and attempts to overcome land constraints by allowing farmers to use movable property, from canoes to crops, as collateral. Similar legislation is being rolled out in nearly a dozen South Pacific countries in a broad effort to unlock millions of dollars in business financing.
“It’s a higher risk, of course,” said Leta Kami, managing director of the Tonga Development Bank. “But vanilla vines are good security because you can replant them even if the business fails.”
While a few large companies are already able to list heavy vehicles or machinery as collateral for high-risk loans, officials hope the changes will make loans against personal property much more popular and cheaper for anyone who does. hope to open an island business, from taxi drivers to roadside chicken rotisseries.
Ms. Kami has already agreed to loan more than two dozen Tongan farmers the equivalent of US $ 45,000 against their crops. The loan, which is part of a pilot project starting later this month, carries an interest rate of 10%, less than half of what local pawn shops or microfinance companies charge. usually.
Not everyone is so enthusiastic. Skepticism is high after the collapse of the state-owned enterprise
of Fiji in the mid-1990s under a pile of bad debt. Central bank investigators found all kinds of securities in its loan books, including musical instruments. When they tried to seize this property, it was gone.
“That’s the problem with movable collateral: they move,” said Parmendra Sharma, a finance professor at Griffith University in Brisbane who was part of the investigative team. He said the call for larger loan volumes must be matched by the need for stable banks in an economically vulnerable region.
Others doubt the reforms could be a game-changer in remote islands, where villagers sometimes walk for days over rugged terrain to reach the nearest shore.
Fiji is one of the next countries in the process of passing the new laws, which for the first time will allow the use of more sophisticated movable assets, such as contracts of sale, as collateral.
In the Solomon Islands, a nation of 570,000 inhabitants,
oration PNG Ltd. accepts cars and office equipment as collateral, but refuses anything readily available to borrowers. It remains suspicious of loans in remote areas. Tony Langston, local managing director of Credit Corp., recalls his attempting to sell an excavator that an insolvent construction company used as collateral. It took a year-long legal battle to get the money back as essential documents were missing.
Addressing these hurdles, the overhaul includes new online registries of borrower collateral data.
“The move to a centralized registry is positive,” said
Westpac Bank Corp.
an Australian company with branches in the Pacific, including Papua New Guinea. “We expect that once the registry is established and operational, there will be an increase in lending, particularly in the small business sector.”
Bank South Pacific, Papua New Guinea’s largest lender, has already increased its lending volume by almost 42% in the two years since 2012, when the country’s laws changed. It plans to reduce the interest rate on secured small business loans by around 28%, once the official collateral registry goes live next week.
Standard & Poor’s Financial Services said the review was positive and would not threaten Bank South Pacific’s creditworthiness, despite an increase in high-risk lending.
Back in Tonga, large Australian importer Queen Fine Foods has promised to buy virtually all of the island’s vanilla pods, securing a market for Tonga Development Bank in case it needs to sell the produce it has. accepted as collateral. After joining the villagers for the week-long New Year’s celebrations, Ms. Kami from the bank thinks she has all the contingencies covered. Together, they prayed for cyclones to spare the island this year.
Write to Vera Sprothen at [email protected]
Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8