Statement by the Minister for Finance and Treasury Hon. Gordon Darcy Lilo on the Future of Development Bank in Solomon Islands, 5 February 2007

Hon DARCY: Thank you Mr Speaker, for granting me leave under Standing Order 24 to address the House on the Development Bank of Solomon Islands and the future of development bank in our country.

Mr Speaker, the House will recall the financial collapse of the Development Bank of Solomon Islands and the appointment of the Central Bank as the Court Appointed Manager in June 2004. ]

Mr Speaker, permit me to remind the House of what the circumstances were. Action was taken under section 18 of the Financial Institutions Act 1998. It was taken to protect the stability of the financial system; to protect the interest of ordinary people who held their savings on deposit in the Development Bank of Solomon Islands; and in the overall interest of the Solomon Islands public, one of the main and most important purposes of the Act.

Mr Speaker, the Central Bank of Solomon Islands has performed a first class job in attempting to normalize the balance sheet of the DBSI; it played a commendable role and deserves our gratitude. However, Mr Speaker, the role of the Court Appointed Manager is now coming to an end. After the Court Appointed Manager has concluded a number of actions already in progress, all that will remain of the DBSI is the debt owed to the European Investment Bank, amounting to some SBD$21 million.

Mr Speaker, this is the first time in Solomon Islands history that the Central Bank has had to deal with an unsound and insolvent financial institution. To record what happened, the Central Bank has produced a report in which I will table in this House that documents the financial and operational history of the Development Bank and the mistakes that led to its financial collapse. The report records important lessons about developing banking in Solomon Islands. Sir, it is crucial that we learn from these lessons, so that we avoid making the same mistakes again.

Mr Speaker, many believe that the DBSI’s problems are entirely due to the conflict. However, the report shows that the DBSI was in trouble almost from the start. For instance, Mr Speaker, in 1981, 50% of DBSI’s loan portfolio was in arrears. Losses of $6.6million were written off in 1990 and a further $23million in losses accrued by the end of 1993.

The DBSI had actually stopped lending well before year 2000. By the end of 2004, the DBSI had accumulated losses exceeding $42million. Hence, aside from aiding the development of our country, the DBSI simply added to our financial woes.

The key problem, Mr Speaker, and one that has been learned all over the world, is that the conflicting aims of government social policy and good banking rarely go together. If there is a future for development banking in this country, it would need to be based on sound commercial and financial practices and free from government interferences and political pressure.

Mr Speaker, when one reads about the history of the DBSI, I believe many in the House will agree that the best line of action is to remove government from the business of development banking in Solomon Islands. In fact we will not be the first country to do this.

I believe the House, Mr Speaker, will agree that one of the most important roles of development banking in Solomon Islands is to ensure development reaches rural people and those that do not have access to formal financial services. Development banking would not be contributing to the country’s economic growth if it simply caters for those who already enjoyed access to financial services. Poor people need financial services just as much as richer people do and, all over the world, financial institutions are adopting new technologies and new approaches that enable them to meet the needs of the very poor. Some of these approaches are being piloted in the Pacific, including the Solomon Islands.

Mr Speaker, financial services offer a safe and secure place to keep savings – no matter how small they help women to budget for family commitments, pay school fees, improve nutrition and housing or even to start a small business. Rural people need access to financial services just as much as those living in the city.

The Government is fully aware that having access to financial services by itself is not sufficient to generate business activities, especially in the rural areas. People also need to be trained on how to plan and successfully manage their own businesses. Mr Speaker, the Government plans to meet this important requirement by conducting more business training in rural areas in the months ahead.

Our vision, Mr Speaker, is to support the expansion of commercial financial services and private sector development throughout the country. Over the coming year, this Government will launch a number of initiatives to help expand financial services. In fact we will adopt a two-legged approach.

The first leg, Mr Speaker, is a new rural and small business credit guarantee scheme that will be launched in the first half of the year. Through the Development Budget, the Government will deposit $10million as seed-capital into an account at the Central Bank. The scheme will be administered by the Central Bank and will operate through the commercial banks. The new scheme will help to share the risk of providing loans to rural based businesses that lack bank acceptable collateral to secure a loan. The scheme will help rural people with sound business ideas to access commercial loans.

I use the word “sound” Mr Speaker, because business ideas will need to be robust and viable. The guarantee will not perform miracles; it will not turn a bad business idea into a good one. Rural businesses will apply for loan in the usual way. Banks will need to be convinced that the loan proposal stands a good chance of success – the only constraint is that the borrower does not have acceptable collateral to secure a loan. Other impediments to private business development in rural areas will be addressed separately. The scheme will be managed by the Central Bank with the commercial banks. The Government will not be involved in operational issues beyond providing the seed funding.

The second leg will support the expansion of banking services into rural areas, including micro credit services. Shortly after the budget, we will invite registered financial institutions to submit proposals describing how they intend to reach rural people. The Government will help share the cost of these initiatives for a limited time period.

This House will agree that this Government is already taking steps to avoid the mistakes of the past. We are taking actions to expand financial services and infrastructure of existing financial institutions in the country. In the past, we have both had our fingers burnt – the banks and the government. But if we can work together, we have a better chance of success.

Mr Speaker, our vision for the DBSI and the overall provision and management of the financial system is simple. We will remove government from its ownership and operational business. Over the next few months, the Government will consider all available options to achieve this objective including the feasibility of selling DBSI to a private investor and providing service which is free from political interference.

With those remarks, Mr Speaker, I will shortly table this report on the CBSI Court Appointed Manager Report to this floor, and I commend that report to this House.

Thank you, Mr Speaker.