Causal Factors behind Non-performing Loans of Fiji’s

Commercial Banks: An Empirical Study: 2002-16

T.K. Jayaraman*

Baljeet Singh**

Ajeshni Sharma***

Working Paper 2017/3

Fiji National University

College of Business, Hospitality& Tourism Studies [CBHTS]
Nasinu Campus
Fiji Islands

*Professor of Economics, College of Business, Hospitality & Tourism Studies (CBHTS),

Fiji National University, Nasinu Campus, Fiji Islands.
** Senior Lecturer in Economics, School of Economics, The University of the South
Pacific, Laucala Campus, Suva, Fiji Islands.
*** Lecturer in Banking, CBHTS, Fiji National University, Nasinu Campus, Fiji Islands.

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Causal Factors behind Non-performing Loans of Fiji’s
Commercial Banks: An Empirical Study: 2002-16

T.K. Jayaraman
Baljeet Singh
Ajeshni Sharma

Abstract

Rise in non-performing loans (NPL) by commercial banks in an

expansionary phase of an economy is not unusual. As interest rates are
pro-cyclical, a booming economy leads to increase in interest rate margin,
as average lending rate increases faster than average deposit interest,
which works as an incentive to commercial banks to lend more. Further an
environment of low interest rate, which has been prevailing in Fiji since
the 2006 military coup, due to periodical cuts policy interest to reach the
lowest ever rate at 0.5 percent rate in November 2011, led to economic
growth at an annual average rate of 4.3 percent during last five years.
Although higher economic improves cash flows to business enterprises
and households facilitating easier debt financing, NPL in recent years has
been observed to be on the rise. It is apparent there are other causal factors
behind NPL. This paper, which studies the likely determinants of NPL in
Fiji, finds growth and inflation negatively affected NPL indicating that
rise in economic growth and inflation would lower NPL; appreciation of
real exchange rate would decrease competiveness of exports sector, which
is the major focus of bank lending and decline in exports would affect
repaying capacity of the borrowers and raise NPL; higher margin ( the
difference between average lending and average deposit rates would also
result in higher NPL; and finally increase in the amount of private sector
bank credit, which is a combination of both aggressive bank policies to
promote market share and lowering standards of credit appraisal would
lead to greater NPL. The policy implications indicate the need for
measures to ensure quality appraisal of loan application and stricter
supervision of use of borrowed funds by banks as well as timely steps on
the part of the monetary authority for preventing repetition of the banking
crisis of the 1990s.

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 INTRODUCTION

Failure of the first ever, indigenously owned National Bank of Fiji (NBF)1 in the 1990s was
caused by the mounting non-performing loans owing to poor recovery efforts. There were also
other factors. They included inadequate screening of applicants and weak appraisal of loan
projects, and reckless lending to friends and relatives of bank managers, high officials in the
government and politicians, and poor bank supervision of the use of borrowed funds (Grynberg,
Munro and White, 2002). Financial sector reforms, which were introduced in the early 2000s
(Chandra, Jayaraman and Waqabaca, 2008), enabled Fijian economy to recover. However, two
coups which took place, one in 2000 and another in late 2006, disrupted economic recovery for
next four years due to political sanctions by metropolitan powers, who did not approve the
coups. In addition, the deteriorating world economic conditions in late 2007 and the start of the
Great Recession since 2008 and the accompanying fall in demand for Fiji’s exports and services
including tourism led the Reserve Bank of Fiji (RBF) to lower the interest rate beginning from
2008 to the lowest rate ever, 0.5 percent on in November 2011. The easy monetary stance is still
continuing.

A low interest rate environment and excess liquidity build-up 2006 to 2011 in the banking
system and the pent-up demand for consumption and investment in housing and construction
encouraged credit expansion in the next five years. Rise in the rate of economic growth at an
annual average rate of 4.3 percent during past five years (2011-15) enabled business enterprises
and households to raise their capacity to borrow more in the light of increasing cash flows. Bank
credit rose from 39.8 percent in 2002 to 65.2 percent of GDP in 2015 (WDI, 2017). The
commercial banks, holding 51.3 percent of total financial assets of the country, play a major role
in the credit market (RBF, 2016). As of December 2015, commercial banks credit to private
sector has been around 84.1 percent of GDP (WDI, 2017).

The latest data on commercial banks performance available in the public domain2 reveal that
profits of commercial banks before tax have been falling during recent years. Utilizing the
published data by RBF, Jayaraman and Sharma (2017) attribute part of the decreasing profits to
rising total expenditure due to increasing annual provisions made for bad loans. It is apparent
                                                            
1
The failure of NBF is a stark example of how a bank could abuse the people’s trust and deprive them of their lives’
savings. Rescuing efforts spent on NBF were F$200 million which were at the cost of tax payers.
2
The data series beginning from 2002 now in the public domain do not give any information for each of the Fiji’s
six commercial banks and hence our analysis does not go beyond dealing with the commercial banking system as a
whole. While RBF declined to make the data series for individual banks available in the interests of confidentiality,
commercial banks when approached were unwilling to release any data on their operations.

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that non-performing loans (NPL) have been on the rise and as a result, income from interest
earnings being lost due to rise in the incidence of NPL and profits before tax getting reduced
over time. Despite the fact that Fiji, being a much smaller economy than some major developing
economies with much higher ratio of NPL to gross loans (India: 9.1 percent, Brazil 3.8 percent
and South Africa 1.2 percent), has a low ratio at 1.5 percent in 2015, which reached 4.4 percent
in 2010), the concerns are real. They cannot be ignored since the implications of rising NPL are
size- neutral. Further, the lessons from its own NBF failure of the mid 1990s should remind us an
increasing NPL ratio to gross loans would lead to lowering confidence in the banking system;
and it would trigger a banking crisis, as it did in the late 1990s.

It is necessary for bank managers as well as monetary authorities to know what the likely causes
behind NPL are so timely measures action can be taken to prevent occurrence of any fresh crisis.
The paper which undertakes an empirical investigation into causal factors of NPL in Fiji
covering a period of 14 years ( 2002-15) is organized along the following lines: Section II gives
an overview of the financial sector in general with specific focus on trends in domestic credit and
credit to private sector by commercial banking system, the major provider, and trends in NPL as
well; Section III undertakes a brief survey on the available literature on the subject; Section IV
outlines the econometric model and methodology for the empirical study and the results; and the
final and Section V presents a summary, listing conclusions with policy implications.

II. Fiji’s Financial Sector and Credit Trends

Fiji’s financial sector is dominated, in the descending order, by six commercial banks, five of
which are foreign-owned and one domestically owned; a government sponsored pension fund;
four credit institutions; two life insurance companies, seven general insurance companies; and
two unit trusts. The commercial banks hold 53.1 percent of total assets, followed by Fiji National
Provident Fund (FNPF) holding 30.9 percent and the rest are held by other institutions. The
government owned non-deposit taking Fiji Development Bank (FDB)’s assets form 2 percent of
total financial assets.

Fiji’s financial system has been growing, as it is reflected in the growth of credit disbursed by
both banking and non-banking institutions (Table 1). During the study period, domestic credit
rose from increased from 91.44 percent in 2002 to 118.84 percent in 2015 of GDP (Figure 1).

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Table 1: Domestic Credit by Financial Sector (Percent of GDP): 2002-2015

Dom Credit
Dom Credit by by Fin Sector Credit to Credit to
Dom Credit by Fin Sector to to Private Private Sector Private Sector
Fin Sector (% Public Sector Sector (% of by Banks (% by Non-Banks
Year of GDP) (% of GDP) GDP) of GDP) (% of GDP)
2002 91.44 36.13 55.31 39.83 15.47
2003 95.38 40.76 54.62 41.49 13.13
2004 102.10 41.19 60.91 47.28 13.62
2005 111.58 42.88 68.71 54.44 14.27
2006 121.77 43.26 78.51 62.09 16.42
2007 119.97 41.73 78.25 61.55 16.69
2008 127.97 41.99 85.98 64.51 21.47
2009 140.12 50.49 89.62 64.99 24.63
2010 132.30 48.82 83.48 62.66 20.82
2011 115.59 40.17 75.42 57.97 17.45
2012 114.59 37.79 76.80 58.69 18.11
2013 112.02 37.13 74.89 59.06 15.83
2014 114.64 35.75 78.89 62.38 16.51
2015 118.84 34.78 84.06 65.25 18.81
Source: WDI and Authors’ Calculations

Figure 1: Credit Distribution by Financial Sector (Percent of GDP): 2002-2015

Source: WDI

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