South Pacific Defies Credit Squeeze with Crops and Cattle Collateral ^Featured

The  region, prone to cyclones and spanning an area equivalent to around 15% of the world’s surface, is a blank spot in global finance. The biggest economy, Papua New Guinea, is estimated at $16.8 billion,  roughly equivalent to that of Montgomery, Ala.
 
The  land in the several thousand islands in the area is largely tribally owned, cutting small businesses off from a common source of security, and bank funding.

Private-sector credit is below 50% of gross domestic product in much of Oceania, compared with an average of 107% in low and middle-income countries globally, World Bank  Group data shows.

This credit squeeze has hampered economic growth and pushed aid-dependent island nations from Papua New Guinea to Samoa into  a strategic rivalry  between Western powers like the U.S. and Australia, and China.

In Tonga, an archipelago highly indebted to the Chinese government, the situation is acute. “All the land belongs to the king, so it’s very hard for small businesses to get money from the bank unless they have a mortgage,” said Simon Thompson, a New- Zealand-based finance consultant who  recently went on a mission to change things.

On a recent visit, wild pigs crossed the dirt track leading to some 300 farms in the  once-thriving heart of Tonga’s vanilla industry. Falling  prices and a lack  of credit have made production unviable for many growers. Lately, however, workers with machetes have begun to clean up the tangle of vines and coconut palms, as Mr. Thompson helps implement new  lending rules in Tonga on behalf of the Asian Development Bank, and the Australian and New Zealand governments.

‘That’s the problem with  movable collateral: it moves’

—Parmendra Sharma, finance lecturer at Brisbane’s Griffith University

Known as secured transactions reforms, the overhaul is modeled on U.S. laws and tries to overcome land constraints by allowing farmers to use movable goods from canoes
to crops as collateral. Similar legislation is being rolled out across nearly a dozen South Pacific nations in a sweeping effort to unlock millions of dollars of business funding.

“It’s higher risk,  of course,” said Leta Kami, chief executive of the Tonga Development Bank. “But vanilla vines are a good security because you  can replant them even if the business defaults.”

While a few bigger companies are already able to list heavy vehicles or machinery as collateral for high-risk loans, officials hope the changes will make lending against movable goods much more popular, and cheaper, for anyone hoping to open an island business—from taxi drivers to roadside chicken roasters.

 
Ms. Kami has already agreed to lend more than two  dozen Tongan farmers the equivalent of US$45,000 against their crops. The  loan, part of a pilot  project starting later this month, comes at an interest rate of 10%, less than half what local pawnshops or microfinance firms typically charge.

Not everyone is as enthusiastic. Skepticism is high following the collapse of state- owned National Bank  of Fiji in the mid-1990s under a pile of bad debts. Central-bank investigators found all sorts of movable securities in its loan books, including musical instruments. When they tried to seize these assets, they’d vanished.

“That’s the problem with movable collateral: it moves,” said Parmendra Sharma, a finance lecturer at Brisbane’s Griffith University who  was part of the investigative team. He said the call for bigger loan volumes must be offset against the need for stable banks in an economically vulnerable region.

Others are doubtful whether the reforms can be a game changer in remote islands, where villagers sometimes trek for days over rugged terrain to reach the nearest bank.

Fiji is one of the next countries in line to adopt the new  laws, which for the first time will allow the use of more sophisticated movable goods, such as sales contracts, as security.

In the Solomon Islands, a nation of 570,000 people, Credit Corporation PNG Ltd. accepts cars and office equipment as security, but refuses anything borrowers can dispose of easily. It remains wary  of lending in remote areas. Tony  Langston, Credit Corp.’s local chief executive, recalls how  he once tried to sell an excavator that an insolvent construction company had used as collateral. It took a yearlong legal battle to recover the money because crucial paperwork was missing.

Tackling such hurdles, the overhaul  includes new  online registries of borrowers’ collateral data. The move to a centralized registry is a positive one,” said Westpac Banking Corp. an Australian company with branches in the Pacific including Papua New Guinea. “We anticipate, once the registry has been established and is operational, there will be an increase in lending, especially in the small business sector.”

Bank  South Pacific, Papua New Guinea’s biggest lender, has already expanded its loan volume by nearly 42% in the two years since 2012, when the country’s legislation changed. It plans to lower the interest rate for secured small-business loans from around 28%,  once the official collateral registry goes live next week.

Standard & Poor’s Financial Services said the overhaul was positive and wouldn’t threaten Bank  South Pacific’s creditworthiness, despite an increase in higher-risk loans.

Back in Tonga, major Australian importer Queen Fine Foods has promised to buy virtually every vanilla bean on the island, guaranteeing a market for Tonga Development Bank  in case it needs to sell the produce it accepted as collateral. After joining villagers for weeklong New Year celebrations, the bank’s Ms. Kami thinks she has all imponderables covered. Together they prayed that cyclones will spare the island this year.
 
Wall Street Journal