Reforms have been a common feature of the financial landscape across countries and regions, including developing, emerging and developed nations during last few decades. Efforts have spanned all facets of the landscape—outreach, depth, efficiency, and stability. The motivation appears equally multi-faceted, as alluded to by the imposing large body of literature illustrating positive and strong financial development vis-à-vis economic growth and welfare nexus. As well, greater outreach or financial access has significant beneficial effects, especially for traditionally underserved segments, such as small and medium enterprises (SMEs) and the socio-economically disadvantaged. Deep financial systems are perceived to be more resilient to shocks and less prone to volatility and financial crises.  Policy efforts have involved, among others, improving access to banks (for savings, credit, and financial transactions in general) and developing capital markets as an alternative and competitor to the banking model, which is usually viewed as more costly. Overall, the reform pace and efforts globally have been impressive. 

Nonetheless, trends and efforts in some parts of the world have largely remained little known, mainly for reasons of lack of time-series and comparative data, making targeted policy debates and outcomes challenging. One such part of that world is the Pacific Island Countries (PICs), located East to North-East of Australia. Reform efforts here have not been any less venturous or purposeful. In fact, they have been quite broad and comprehensive, including enactments and significant regular revisions to relevant acts, including Banking; reviews of the payment systems and monetary policy frameworks; adoption of BIS recommended, international standard policies and guidelines and revisions to these as required, including post-2007 GFC, such as capital adequacy, liquidity and asset quality. As well, government and central banks have been highly proactive in advancing the global financial inclusion agenda.

Yet, the PICs remain largely growth and poverty-challenged, with the usual unique socio-economic characteristics—small scale, scattered, remote, and vulnerable, suggesting that, foremost, financial service providers would not be allowed to reap the benefits of scale economies. The anticipated limited demand for savings, insurance and credit, as well as simple payment transactions would make large parts of the population commercially unviable—in any case, the provision of service outside urban centres would not be cost-effective. Transaction costs and risks are amplified in the absence of proper documentation such as enterprise registration, land titles and even formal addresses, exacerbated by the shadow financial operators—the informal sector. Exclusion becomes the apparent candidate. Costs and risks are further amplified by volatile conditions such as informality and the consequent fluctuations in the income streams of many microenterprises and households, making them even less attractive to formal financial institutions. At the macro level, vulnerability to internal and external shocks, together with political and social instabilities, make the situation more challenging. And then there’s the governance issue—private and government institutions alike are victims, which is likely to undermine market-based provision of financial services as well as reform attempts and government interventions aimed at fixing market failures. 

Against this backdrop, the case of the PICs becomes an intriguing lab test—how has outreach, depth, efficiency and stability fared in this part of the world over the years and against comparative economies, regions and averages. And, that is precisely the aim of this study.  In doing so, the study focuses on a PIC least studied not only in the financial literature but across several disciplines; nonetheless, equally desired by the respective central bank—Vanuatu. Having properly documented the trends, with explanations, this study will provide a basis for testing numerous relationships such as finance vis-à-vis economic growth, education, income inequality and health in the case of Vanuatu. 

Using the 4 x 2 financial development matrix indicators, data covering the 1980-2016 period, and comparative regions—Lower Middle Income (LMI), East Asia Pacific (EAP) and PICs—this study finds that banks in Vanuatu have comparatively greater geographical outreach. However, efficiency and stability performances have been relatively weak indicating a need for more robust collaborative policy approach between financial institutions, the Reserve Bank of Vanuatu, the Vanuatu Government and relevant stakeholders to improve the linkages between macroeconomic and financial sector policies in Vanuatu.

AUTHORS

Cynthia Moli and Gloria Siri, Reserve Bank of Vanuatu, Samsul Alam, De Montfort University and Parmendra Sharma, Griffith University.

This joint Reserve Bank of Vanuatu-Griffith University working paper is part of an ongoing extensive research capacity building program led by Griffith University for the South Pacific central banks. The views and opinions expressed in this study are those of the authors and do not reflect those of the Reserve Bank of Vanuatu or its Board. 

Please click here to read the full working paper, “Outreach, depth, efficiency and stability: Vanuatu on a global scale”.