Reserve Bank Governor Adrian Orr says banks can't justify the very high interest rates they charge and 'super-returns' they're extracting from the islands.
EXCLUSIVE: New Zealand's central bank is working to stem an exodus of international banks from Pacific Island nations, which is leaving their populations vulnerable to predatory finance operators.
Governor Adrian Orr says cross-border banking relationships have declined rapidly over the past decade; SWIFT BiWatch stats show that worldwide, one in five active correspondent bank services has been cut.
And in the Pacific it's been double that rate, he tells Newsroom.
The reduction in international connections is, in part, because of the rising risks and costs in relation to anti-money laundering and countering financing of terrorism requirements. But Orr says the consequences of an unchecked withdrawal of correspondent banking services could be significant for many small Pacific island nations.
Many countries are heavily dependent on the international payments from tourism and remittances from Pacific people around the world sending money back to their home countries.
Westpac has sold its banks in five Pacific Islands nations, and ANZ's Cook Islands boss has said she is regularly asked whether her bank will be next to go. (The answer is no). Even where there are banks, they're not connected. Until recently (and it may still be the case) staff from the three Cook Islands retail banks would meet in the carpark between their buildings to swap bank cheques at the end of each day.
Orr says it's not his Cook Islands heritage that drives him, it's simply the facts of the vulnerability of people in small island nations trying to transact with the world. He sees how hard it is to earn foreign exchange and remittances and how vulnerable Pacific Islanders are to financial predators as banks pull out at an unprecedented rate.
In Tonga, families rely for 38 percent of their income on money remittances sent home from loved ones who are mainly in New Zealand, Australia and the US. The figure for Samoa is 19 percent, and 7 percent for Fiji, according to World Bank data.
Three other countries – Cook Islands, Niue and Tokelau – use the Kiwi dollar as their currency and rely on this country for jobs and economic security.
Orr says the Reserve Bank is tasked with being kaitiaki of a payments and settlements system that has international connectedness at its heart, and with enforcing international anti-money laundering regulation. And in setting monetary policy around sustainable employment, about 8 percent of New Zealand's population is Pasifika.
"So it is a huge connectedness," he says. "And we've seen incredibly recently, in the absence of these labour flows and capital flows, economic deprivation both here in sectors of New Zealand, plus across in our Pacific neighbours. So it's real."
Understanding the Pacific
As borders reopen, Adrian Orr and his family are itching to get back to Rarotonga and to his grandfather's home island of Atiu. When he returns to the Cooks, it's always for a holiday. He's not there to talk shop.
Yet on one of his last trips back to Cook Islands, Adrian Orr disembarked the flight with his family – only to be met at the door of their motel by two uniformed police officers. They had been sent by his uncle, former Cook Islands deputy prime minister and Parliamentary Speaker Norman George.
"They said, can you come with us – one of the ministers wants to chat. And Norman is going to Atiu and is keen that you come with him. I was whisked away and found myself on Atiu two days later – much to the disgust of my wife and children."
Despite his best efforts to keep a low profile, he can't help learning of the impact of high bank charges and interest rates and difficulties transacting with the rest of the world. "I don't rush round looking for financial information," he says. "I'm there to hang with the cousins. But I can't help hear all the time from people. Sometimes word gets out I'm on the island...."
"I am personally proud to be of Cook Islands descent." – Adrian Orr, Reserve Bank of NZ
Working with the Ministry of Foreign Affairs and Trade, the Reserve Bank set up a project two years ago to reduce the costs of sending home remittances to the Pacific.
Now, Orr is renewing his call for banks to "act with courage" by staying and providing banking services, including remittances, to the Pacific Islands. And he's doing so at every opportunity.
He spoke this week to the Mindful Money Awards, in Auckland, where he emphasised the role of the bank, as kaitiaki of New Zealand's currency, to promote strong regional economies that support the bank's financial stability mandate. "We believe that it is our duty to act as a responsible regional citizen particularly in today’s economic environment."
Pacific Island countries are facing "tough times" caused by climate change and the severe economic impacts of Covid-19 travel and trade disruptions, he said.
"I am personally proud to be of Cook Islands descent," he explained. "Pacific Island countries are some of the most remittance-reliant jurisdictions in the world. We recognise the economic importance of Pacific people in New Zealand being able to send money back to their home countries through remittances, and maintaining financial corridors and services into the South Pacific countries continues to be of importance."
His officials are working with other agencies in New Zealand, Australia, the Pacific and internationally, such as the Asian Development Bank and International Monetary Fund, to make remittances more accessible, safe and cost effective.
And critically, along with other central banks in the region, they are developing a regional 'Know Your Customer' facility to help remitters and other businesses meet their compliance needs. "Ultimately we hope that it will enable access to financial services for sectors of the Pacific region that are in danger of being financially isolated."
"The banks may then choose to say if I'm only going to get normal returns, not super-returns for my effort, then there's the threat of leaving.... The cost of finance seems to be very high relative to the risks." – Adrian Orr
Pacific peoples are pinged by the banks on two fronts: fees (especially for international transfers) and interest rates.
"They are very high," Orr tells Newsroom. "The remittance costs are some of the highest in the world. You can put that at the top end of the outrage.
"Can you justify those costs, by any additional risk they're compensating for? Not that I can see. Generally it comes down to a lack of competition, a lack of economies of scale, and asymmetry of information about different ways of accessing these services.
"There are different lessons from this. What you generally find in history is that the more you try to shine a light on this, the more competition, the more better behaved these markets can become. That's a big issue for the Pacific region, to really get the sunshine on the activities that are going on there to make sure what we see can be justified in any sensible, competitive, risk-reward equation.
"The banks may then choose to say if I'm only going to get normal returns, not super-returns for my effort, then there's the threat of leaving."
He says it's important to look at the underlying costs of finance in the region, comparing the risks and the returns. "If the returns are in excess of the risks, then that reflects a lack of competition. The only specific risks I can see for the region are weather risks, and instead of everyone paying for that, is there are regional weather insurance-type contract that can be struck?
"Other than that, the cost of finance seems to be very high relative to the risks."
The three realm countries – Cook Islands, Niue and Tokelau – use the New Zealand dollar and are vulnerable to its rise and fall on global markets. But their banks have no access to Reserve Bank of NZ funding, nor to programmes like Funding for Lending that are intended to drive down interest rates.
This means that New Zealand has hit the realm countries' tourism operators with a double whammy: not only has it effectively shut down their economies by turning off the tourism tap, but it has left their businesses and homebuyers paying extortionate interest rates and bank fees.
Cook Islands is a good example, and not just because that's where Adrian Orr's family comes from.
Difficulties doing business
Adrian Orr worked for a while with Westpac in Cook Islands, and then behind the scenes as a consultant. "I was really digging in behind and around some of this stuff," he says.
"And that was quite an awakening around what the Cook Islands didn't have. What the level of understanding was, and what they were being fed by some of the banks. And what some of the banks were doing. That was in the early 2000s. I'd like to think things have moved on somewhat since then, but nowhere near enough."
He worked in the same financial sector as Tata Crocombe, owner of The Rarotongan Beach Resort, a former Bank of Cook Islands chairman and consultant to the Royal Bank of Scotland and Asian Development Bank. Like Orr, Crocombe pulls few punches when he talks about the difficulties doing business in Cook Islands and the Pacific – and those tear-inducing interest rates.
Subsequently, Crocombe went on to lead discussions with New Zealand’s previous National Government about the Reserve Bank of NZ acting as central banker to the Cook Islands and the other realm nations of Niue and Tokelau.
Crocombe says John Key was personally supportive.
This week, he recalls Key telling him: "We would be only too happy to help but the request has to come from the Cook Islands Government and it would be great to sort this out.”
"Interest rates as well as loan terms and conditions in the Cook Islands are eye-watering to anyone involved in business in New Zealand. If my hotels were in a tourist town in New Zealand, say Queenstown, we would be paying interest rates of less than half of what we are paying in the Cook Islands.” – Tata Crocombe, The Rarotongan Beach Resort
Crocombe acknowledges there is a slightly higher level of risk associated with lending in the Cook Islands than New Zealand, but said the additional risk premium charged by the banks in the Cook Islands was difficult to justify.
"Interest rates as well as loan terms and conditions in the Cook Islands are eye-watering to anyone involved in business in New Zealand. If my hotels were in a tourist town in New Zealand, say Queenstown, we would be paying interest rates of less than half of what we are paying in the Cook Islands.”
The core strategic change that would really make a major economic difference in the Cook Islands would be for the Cook Islands banking system to operate under the auspices of the New Zealand Reserve Bank, he says. "It just makes sense on many levels for New Zealand to incorporate the three realm countries, who together make up less than 20,000 people, into the New Zealand central banking system, particularly as we all use the New Zealand dollar."
Adrian Orr says New Zealand is looking at enabling realm nations to join the New Zealand banking system. "What we are saying is, how can they become part of our payment and settlement system network? And how can that take some of the cost out of the banking activities in the region?
"Because these countries are so small, they don't even have formalised domestic payment settlements within their countries. They're literally doing it bilaterally with each bank at the time."
"We have got a lot of fixed investment to do, and infrastructure to build in those countries, if that is doing to happen. That means there are costs involved. And these countries are not in a good financial position, that's not exactly their highest priority at the moment.
He acknowledges stories of the Cook Islands retail banks reconciling payments in the carpark.
"So that's why we're working with the Ministry of Foreign Affairs and Trade to say this is part of the solution – it's not just about Covid recovery, it's a long-term resiliience issue. Where does that sit in your pipeline, Government, around fixed investment? We can manage the engineering of it."
Feeling the pain
Crocombe argues that the "vastly higher interest rate structure" in Cook Islands has a massive impact on constraining economic development. "Covering any investment on current interest rates is prohibitive except for the most profitable investments. High mortgage rates and loans terms and conditions that are much more onerous than NZ are a significant contributor to outbound migration as many people cannot get loans for housing or have to go and work overseas to pay the mortgage.”
He's not the only resort owner feeling that pain. Indeed, many Cook Islanders have interest in accommodation businesses on their family land.
After a year of empty rooms and empty loungers on the white sands in front of her resort, Muri Beach Club general manager Liana Scott has finally been able to welcome back the Kiwi tourists – but much of that long-awaited revenue is going to the bank.
She says Cook Islands businesses are paying high rates on their debt. "Current market interest rates are 8.5 percent to 11.5 percent depending on business and risk," she says.
And Fletcher Melvin, president of the country's Chamber of Commerce, says banks' so-called "de-risking" has been happening since after the country's 1996 economic crisis, but has accelerated from about 2017. "I do believe Cook Island banks are now in a good position and have found corresponding international banks to deal in foreign exchange trading which was one issue."
The Cook Islands Ministry of Finance and Economic Management has commissioned a report into the country's high interest rates but, echoing Adrian Orr, Melvin says the risk factors influencing those rates need to be independently analysed.
"The Chamber will always support lowering interest rates," he says. "Our concern is that we must ensure that the two overseas banks are still profitable and do not leave the jurisdiction, which would leave a monopoly."
"Whatever means of cheaper financing that is made available should not be at the expense of a stable long-term banking environment." – Fletcher Melvin, Chamber of Commerce
"I applaud the Cook Islands government's efforts to lower interest rates and ask for help from their partners. In saying that, we also need to ensure our decisions are based on rigorous research. Whatever means of cheaper financing that is made available should not be at the expense of a stable long-term banking environment."
The country has three retail banks – the Government-owned Bank of the Cook Islands, Papua New Guinea-owned Bank of the South Pacific, and Melbourne-based ANZ, as well as one international trading bank, CSB.
"They are good employers and support a lot of projects," Melvin says. "So it is not just about finding short-term funding, if we don’t have competition and international corresponding banking systems."
Dealing with the banks
BCI chief executive Vaine Nooana-Arioka declines to answer questions about their interest rates and charges, as does BSP country manager David Street. When Westpac sold out to BSP and skipped the country in 2015, Street settled in and was one of the few expats to stay with the new regional operation.
By contrast ANZ's head office is further away, in Melbourne, but its management is more open – perhaps indicative of the bigger bank's greater experience and commercial nous.
ANZ Pacific spokesperson Victoria Kanevsky says the bank has been operating in the Pacific for more than 140 years and plays an important role in connecting customers to the growing trade and investment opportunities in the region, as well as providing industry insight and links into the bank's home markets of Australia and New Zealand.
"We are competitive and transparent about all of our rates and fees and we educate our customers on ways to keep costs down, particularly when sending and receiving funds." – Victoria Kanevsky, ANZ
"The economic impact of Covid-19 on the Pacific has been significant and we know it will take some time to recover," she says. "We have been supporting customers in the Cook Islands with hardship options such as payment deferrals, interest-only and loan term extension, as well as having the critical conversations to ensure our customers can navigate through the pandemic and become successful in this new world.
"We are competitive and transparent about all of our rates and fees and we educate our customers on ways to keep costs down, particularly when sending and receiving funds."
She points to the last major independent review into banking in the Cook Islands, by New Zealand director and consultant Sam Knowles in 2013. It found the Cook Islands banking system was still operating on a developing country model, despite the developed needs and expectations of its business customers.
The banking system's small scale made it a high cost model, with relatively low profitability. That was possibly unsustainable, the report said.
In particular, the banking system had a significant non-performing loan problem that is a major drag on the economy, and the communal property ownership regime contributed to high bank lending rates.
Eight years after that report, banks in the Pacific still insist their high interest rates are justified by high rates of default on loans.
But Adrian Orr rejects that.
"From what I hear, non-performing loans are incredibly low across a lot of countries, very very low, because particularly if you're borrowing and building on collectively-owned land. There's a willingness for broader family to step in, rather than lose an asset that's sitting on collectively-owned land.
"So when you think about it market risk, credit risk, liquidity risk, currency risk – no different. It really just comes down to weather-related country risk. So it does seem that mortgage borrowing costs are very high relative to the usual risks."
