Ali: BSP Fiji Would Not Object To Australia-Style Banking Inquiry

Bank South Pacific Fiji has been put on alert by the findings of a recent inquiry in Australia that showed Autralian financial institutions engaged in deception, driven by greed and
08 Sep 2018 10:30
Ali: BSP Fiji Would Not Object To  Australia-Style Banking Inquiry
Newly-appointed Bank South Pacific country head Haroon Ali.

Bank South Pacific Fiji has been put on alert by the findings of a recent inquiry in Australia that showed Autralian financial institutions engaged in deception, driven by greed and fraud.
BSP’s new country head, Haroon Ali, says the bank would not object to a similar inquiry in Fiji, although adding that it was highly unlikely such issues existed here.
In the final part of Fiji Sun’s exclusive interview with Mr Ali, the former BSP group chief risk officer says the findings showed how important it was for banks to self-regulate.
A recent public inquiry into the Australian financial sector led to the discovery of a series of faults that has rocked the country, in one of the biggest financial scandals in recent times.
Australia’s four biggest banks – Commonwealth Bank of Australia, Westpac Banking Corporation, National Australia Bank Limited and Australia and New Zealand (ANZ) Banking Group Limited – are involved in the inquiry.
Westpac in Australia was forced to pay regulators a penalty of AU$35 million (FJ$53.62m) on Tuesday after admitting its automated loan assessment system had breached responsible lending laws, according to Australian media.
Mr Ali also talks about tight liquidity and the implications of the new financial reporting system for BSP.
The Papua New Guinea banking giant holds around 25 per cent market share in Fiji’s highly competitive financial sector.
Excerpts from the interview:

You had earlier said that BSP will be a responsible bank, can you explain what you mean?  
Being responsible means that we do the right thing by the customer and not only looking at what the bank can gain from it.
For example, if we have a loan request before us, apart from asking the only question “could we”, we also ask “should we” do the transaction.
Let me share one example by explaining a recent transaction where a customer sought a car loan for $40,000 and asked if we could add this loan to an existing home loan and amortise the debt over 30 years.
In this instance, yes we could definitely underwrite the loan but we could not get far from answering the ‘should we’ do a car loan over 30 years?
As a responsible lender, we looked at what the impact was on the customer in terms of the borrowing costs and not the potential income available to the Bank.
The car will fully depreciate in five years and the real life expectancy of the car would be seven to eight years at a maximum.
This means that after eight years, there is no asset (car) but the customer continues to repay this debt for another 22 years (30 year term – life of the car) paying interest cost almost 5.6 times more than what would have been paid over a reasonable loan term of five years.
The cost of the car including interest would be circa $49,800 over a five year borrowing term.
The cost of the same car including interest cost over 30 years would increase to circa $95,300.
This is assuming the variable interest rates don’t move.
Congruent with our financial literacy programme, we explained to the customer about the significant interest cost if he borrowed beyond a term exceeding the life cycle of the asset.
This was not accepted and we let the business pass.
This is what we mean by being responsible.

The recent royal commission inquiry in Australia revealed Australian financial institutions engaged in deception, driven by greed and fraud. Would you welcome a similar inquiry in Fiji?
We would not object to such an inquiry if our regulators decided it was absolutely necessary to go down that path.
Athough in Fiji, we haven’t seen banks behaving in an outrageous manner that has customers and other stakeholders demanding action
The Reserve Bank of Fiji has a very effective oversight programme through annual prudential onsite examinations of Banks.
Concerns, if any, are addressed through mutually agreed actions.
Of course, banks like any other business, will have customer complaints.
For example, at BSP, when we receive a customer complaint we give it a priority.
I am a big fan of the principle that if you have wronged a customer, you have to make it right whatever it costs us.
If we self-regulate ourselves, as we try our level best at BSP, there won’t be a need for a prudential inquiry like that.
If you look at the outcome in Australia, there have been some serious and specific findings.
But if you look at the financial performance, there were no issues.
A bank can be performing very strongly and customer feedback areas can be ticked off as well.
But when complaints start coming in, and no urgency is shown to fix it, people start to take notice.
Competition between banks is very intense.
But the competition is healthy and benefits the customers.

Are you happy with BSP Fiji’s profitability and revenue trends?
Absolutely. Our international standards by default fall to Australia and New Zealand.
Compared to them, our returns are somewhat on the high side.
But, it’s important to understand that different markets have different inherent risks.
If the risk is high, you’d expect a higher reward.

What are your major challenges in the Fijian market?
Liquidity would be right at the top.
Unless we have strong liquidity we can’t fund our loan growth; and if we can’t fund our loan growth then we don’t have a growing income stream.
Again, it’s all about competition. Market liquidity is at about $500 million.
ANZ and Westpac have traditionally enjoyed and continue to enjoy the lion’s share of the liquidity because of their customer base.
Then come the other banks who are competing agressively to secure the balance of the market liquidity.
When we compete for that remaining pool of funds, it comes at a price as our Cost of Funds trend upwards.
This has that unintended consequence of lending rates potentially going up as well.
The other very significant challenge is the compliance with the new International Financial Reporting Standard (IFRS 9) which replaces IAS 39 and is effective for financial periods commencing January 1, 2018.
IFRS 9 is premised upon a ‘forward-looking’ Expected Credit Loss (ECL) model with the objective of providing more timely recognition of potential loan losses whereas IAS 39 was based on an “incurred loss” model where provisions were only required to be taken based on historical loss trends.
Under IFRS 9, it is no longer necessary for a credit event to have occurred before credit losses are recognised.
The application of this new complex Standard has cost Banks millions of dollars to ensure implementation and compliance.
For BSP Fiji, we are fortunate that our head office has done all the hard yards in the last 12 months and we have received group auditors sign-off that we are fully compliant with IFRS 9 from effective date.
Our prudent provisioning policies even under the old standard has enabled us to adopt the new standard without the need to increase our provisioning levels, unlike financial institutions who had adopted the IAS 39 minimum in the past and under IFRS 9 need to recognise significant increases in provisioning levels based on the expected credit loss model.

How competitive is the Fijian market compared to PNG?
It is very, very competitive. BSP in PNG enjoys slightly over 60 per cent market share on loans and advances.
In Fiji, we have only 25 per cent.
Like I said earlier, we have that desire to become number one and to do that we will have to claim 30-35 per cent market share.
Once you are past 60 per cent in market share, you are sitting in a position where you are cherry picking new business.

Do you have any closing remarks?
I’m really excited about my appointment. When I did my tour of the branches in Fiji, I was pleasantly surprised to see the passion our staff had to serve customers.
They carry the required energy to work towards that common goal of becoming the number one bank in Fiji.
Plus we have very experienced staff in Support areas.
We have a great executive team as well and I have no doubt in my mind that we will be at the top in just a few years..

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