Policy makers and researchers have long been interested in the cost, productive, allocative, operational and other efficiencies of industries.  For a number of reasons—including the notion that banks are vital for a country’s growth and development prospects, and that the safety, soundness and stability of the banking industry is crucial for economic stability—interest in the banking industry has always been paramount.  More efficient banks are deemed to supply greater amounts of intermediated funds at more affordable prices, and at the same time remain profitable, safe and sound—a win–win for the wider economy.

Fortunately, research on efficiency of banks has a relatively long history, dating back to the 1960s.  Studies now span many countries, regions and methods.  Yet, the experience of Pacific Island Countries remain little known.  While the region’s banking history dates back to 1870s, is widespread with foreign banks, particularly Australian, and the quality of regulatory practices equal the world’s best, policy makers remain relatively ill–informed with respect to how far the banking industry can be expected to increase its outputs by simply becoming more efficient, without absorbing additional resources, increasing costs, and becoming less stable.

Nonetheless, this huge gap in the literature is gradually being filled.  A recent joint Griffith—Reserve Bank of Fiji study, forthcoming in the Journal of the Asia Pacific Economy, uses Fiji as a case study to provide fresh evidence on how efficient the PICs banking systems might be.  It is the first study to estimate technical efficiencies and total factor productivity growth and its components, using a distance function stochastic frontier approach and three single-output models.  The study finds that there is substantial scope for improvement of productivity and efficiency, especially in producing more deposits with the same level of inputs such as general expenses including labour, and capital.  For small island developing economies such as Fiji and the rest of the region, with their unique and disadvantaged socio-economic conditions, more savings would be indeed be useful for economic growth and development as well as enhancing prosperity and reducing poverty.  There is scope for Fiji’s banking system to mobilise more savings without absorbing more resources, increasing costs, compromising profits or becoming less stable.  It appears also that banking institutions in Fiji have limited exposure to global financial markets compared to institutions in other parts of the world and thus efficiencies have not really been affected by the recent global financial crisis.

Parmendra Sharma and Son Nghiem (Griffith University)

Seci Taleniwesi and Savaira Manoa (Reserve Bank of Fiji)

NB. The views and opinions expressed in this study are those of the authors and do not reflect those of the Reserve Bank of Fiji or its Board.