Commercially oriented, state-owned banks can help provide much needed financing for Businesses in the Pacific, according to a new Asian Development Bank report, ‘Finding Balance 2019, Benchmarking the Performance of State owned Banks in the Pacific’.

The report, an Asian Development Bank initiative, in partnership with the Governments of Australia and New Zealand, was produced by the Pacific Private Sector Development Initiative PSDI.

 The report highlighted a financing gap in the Pacific that hinders business growth.

Private Banks in the region, according to the report are not meeting the demand for much needed financing. This unmet demand affects small and medium sized enterprises; and important sectors such as agriculture and fisheries, which could be successfully addressed by state-owned financial institutions – if they can strengthen their balance sheets and adhere to commercial principles.

The report says this is critical, as state-owned banks are essentially financing risks that other banks have chosen to avoid.

Tonga Development Bank

Tonga’s State owned bank, the Tonga Development Bank was established in 1977 then it was incorporated as a Commercial Bank in 2014 under a new Tonga Development Bank Act, which repealed the 1977 Tonga Development Act.

Though the Tonga Development Bank TDB became a Commercial Bank in 2014, it was still called the Tonga Development Bank, and 100% owned by government.

According to the PSDI report, the profitability of the Tonga Development Bank (Commercial Bank) averaged 2.1% Return On Assets (ROA) over the 2010-2017 period. It was the highest of the six commercial banks that they investigated in the region, but there had been a steady decline in the ROA from 2011-2017.

The future sustainability of the TDB depends on its ability to operate commercially and price risk accordingly. This will require on going skills development and full independence from political influence over credit decisions, stated the report.

New shareholders in Tonga

However, even though the report refers to development of state owned banks to address the needs of small and medium businesses the Tongan government has recently brought in new shareholders, making it possible for them to offer big loans to government enterprises.

Matangi Tonga reported that in early June 2018, the Minister of Finance, Hon. Pohiva Tu’i’onetoa signed a Deed of Agreement with Manu ‘Akau’ola for the Public Service Retirement Fund Board to purchase 15% shares in the Tonga Development Bank.

Then on 26 July 2018 Hon. Pohiva Tu’i’onetoa approved for the National Retirement Benefit Fund Board to take up 15% unsubscribed shares at the Tonga Development Bank, and the shares were transferred on 28 August 2018.

So by the end of August  last year, the three shareholders of the Tonga Development Bank (Commercial Bank) were the Tongan Government 70%, and 15% shares each for the Public Service Retirement Fund Board and the National Retirement Benefit Fund Board.

At the time, according to the Chief Executive Officer of the Tonga Development Bank, Leta Kami that with government selling its shares, it would enable the bank to lend out bigger amounts of money, “particularly to government enterprises which demand multi-million pa’anga loans for some of their construction projects.”

The Tongan government during the past decade has viewed the Tonga Development Bank as an increasingly critical part of Tonga’s finance sector, and a safeguard against the possible retreat of foreign owned banks.