Strengthen Government-owned Banks To Help Finance Covid Recovery: Report

SYDNEY, AUSTRALIA (30 September 2020) — Improving the ability of government-owned banks to finance businesses will help rebuild Pacific economies in the wake of COVID-19, says a policy paper published today by the Asian Development Bank’s Pacific Private Sector Development Initiative (PSDI).

Pacific governments have moved quickly and boldly to respond to the coronavirus pandemic, but fiscal constraints and limited borrowing capacity will make maintaining that response difficult, says Peter Dirou, Finance Sector Expert with PSDI.

The new paper, Government-Owned Banks: Their Role in Pacific Financial Systems, argues well-run government-owned banks can play an important role in providing business finance in the Pacific, which would help fund the next stage of economic recovery.

“Government-owned banks are prevalent in the Pacific, and it is timely to revisit their role,” said Dr. Dirou.

“Financing private businesses will be critical to rebuilding Pacific economies from the impact of COVID-19. Businesses in the Pacific have long been constrained by difficulties accessing finance. Now, the pandemic response has placed additional fiscal pressure on Pacific governments and further highlighted the challenges faced by Pacific financial systems as they work to address these constraints.”

“Clarifying the role and improving the performance of government-owned banks is a key part of addressing these challenges.”

The paper provides recommendations to help Pacific policymakers strengthen these banks to increase their ability to finance economic recovery, as well as to broaden available financing options and strengthen countries’ overall financial systems.

The paper argues that, to be relevant, a government-owned bank must demonstrate “additionality”, meaning it profitably provides financial services that would not otherwise be available, or it makes the banking system more competitive.

Playing down the distinction between commercial banking and development banking, the paper emphasizes the need for government-owned banks to operate at the standards expected of commercial banks, particularly for credit assessment and risk management. It says lending rates cannot be isolated from risks and the cost of funding, particularly as government-owned banks are lending to sectors that private banks in the Pacific have been reluctant to finance, such as agriculture and small business.

The paper also highlights the importance of attracting more private investment into Pacific banking systems as private investors bring skills, capital, and an understanding of business financing needs.

“Government-owned banks can play an important role in providing business finance, particularly to underserved sectors, but they won’t be a long-term solution for most Pacific countries,” said Dr. Dirou. “The task for regulators is to incentivize local, private participation while building the institutions needed to protect consumers and the wider financial system.”

Government-Owned Banks is the first in a series of papers PSDI is publishing to stimulate discussion around how to better equip Pacific financial systems to provide business finance. Upcoming papers in the series will address the role of retirement funds in providing domestic finance, opportunities for alternative financing models, and the design of a finance sector architecture that meets the financing needs of Pacific economies.

PSDI is an Asian Development Bank technical assistance program undertaken in partnership with the governments of Australia and New Zealand. PSDI supports ADB's 14 Pacific developing member countries to improve the enabling environment for business to achieve inclusive, private sector-led economic growth.

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