A large and escalating body of theoretical and empirical literature concludes that finance matters for economic growth and poverty reduction.  When operating effectively, finance works quietly in the background but when things go wrong, the malfunctioning of the financial system can slow growth, hasten poverty levels and destabilise entire economies.

Indeed, financial crises hurt more than just those who work in finance or access the financial system.  Costly bailouts of problematic institutions can seriously undermine government’s ability to support key social objectives, including the funding of education, health and infrastructure programs.

Consequently, malfunctioning financial systems can lay the foundations for enduring economic crises; the recent GFC and its aftermath provide remarkable attestation.

Minimising and mitigating the impacts of external as well as internal shocks thus require a detailed and updated understanding and assessment of the functioning of the financial system.  Among others, it is critical for policymakers to remain well–informed about the depth, access, stability and efficiency of the banking as well as the market sectors.

A joint Griffith—Reserve Bank of Fiji study provides the first comprehensive insight into the stability and efficiency performance of Fiji’s banking system on a global scale. Comparative countries include the South Pacific, Australia, East Asia Pacific, Upper Middle Income and economies with the most developed financial systems in the world.

Financial stability

Financial stability measures the resistance of institutions and markets to internal and external shocks; it also provides an indication of how well institutions and markets are accomplishing their basic functions of intermediation, risk management and payment mechanisms. In short, it gives an indication of the level of confidence one might have in a financial system to continue investing, without significant concerns of losing their capital.

Based on comparative data availability, the study employs the following measures to assess the stability of Fiji’s banking industry: capital adequacy ratio; nonperforming loans to gross loans; liquid assets to deposits and short–term funding; and bank credit to deposits ratio.

None of the measures indicate that Fiji’s stability performance might have been concerning; in fact, overall, Fiji’s stability performance might have been comparable to some of the best and most developed financial systems in the world.

Banking efficiency

Essentially, efficiency measures the cost of intermediating credit.  Efficient and effective allocation of credit, at affordable prices, is crucial for effective operation of the finance–growth mechanism.

Policies aimed at increasing competition for financial services, technological innovation and banking consolidation, for example, are focussed on controlling costs in banking and providing services and products efficiently.

Based on comparative data availability, the study employs the following measures to assess the efficiency of Fiji’s banking industry: bank lending-deposit spread; bank net interest margin; bank return on assets; bank return on equity; bank overhead costs to total assets; bank cost to income ratio; and bank noninterest income to total income.

While the stability performance was more comparable to the world’s best and the most developed banking systems, the efficiency performance produces mixed results.  While margins and spreads have been relatively low, return on assets and equity and other measures have been relatively high.

Overall, keeping domestic political and domestic and global financial and economic uncertainties in mind, Fiji’s banking sector has done well to remain strong, stable and profitable.

Fiji’s unique and disadvantaged macro–economic and socio–political setting and yet banking performance rivalling the best and the more developed does provide important lessons for the rest of the world—a combination of prudent banking and regulation, with minimum state interference appears to work effectively.

Parmendra Sharma and Eduardo Roca (Griffith University)

Vilimaina Dakaic 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.

The original article may be accessed from the Reserve Bank of Fiji website.