41436 FINANCIAL SECTOR ASSESSMENT FIJI OCTOBER2007 EASTASIA &PACIFIC REGIONAL VICE PRESIDENCY FINANCIAL ANDPRIVATESECTORDEVELOPMENT VICEPRESIDENCY BASED THEJOINT IMF-WORLDBANKFINANCIALSECTORASSESSMENT ON PROGRAM This Financial Sector Assessment (FSA) i s based on work of a World BanWIMF Financial Sector Assessment Program (FSAP) team to Suva, Fiji, from June 29 to July 13,2006.' 'TheFSAP missionwas headedby Peter Kyle (World Bank) and composedof Edward Frydl (Deputy Head, IMF),Alain D'Hoore, Jennifer Moyo, Yuji Yokobori (all IMF);BikkiRandhawa, Sameer Goyal, Robert Liu, RahulAgarwal, Barbara Mondestin(all WorldBank); DimitriVittas and Peter Phelan(Consultants). An AMLEFT assessment was conducted separatelyby a World Bank team consisting ofHeba Shams (Legal Expert and Team Leader), Mark Butler (Law Enforcement Expert) and Allan Schott (Financial Expert). i Contents I.OverallAssessmentandKeyRecommendations................................................................... 1 I1.Macroeconomic Environment andRisks.............................................................................. 3 I11. Monetary Policy Framework and Systemic Liquidity......................................................... 4 IV. FinancialSector Stability andPerformance ....................................................................... - 6 A.Banking Sector.......................................................................................................... 6 B.Insurance Sector........................................................................................................ 8 C. FijiNationalProvidentFund.................................................................................... 9 V. Regulatory Frameworkand Crisis Management................................................................ 10 A Banks and Credit Institutions.................................................................................. . 10 B Insurance................................................................................................................. .. 11 12 D.Other ....................................................................................................................... C The FijiNational Provident Fund........................................................................... 12 E Crisis Management and Safety Net......................................................................... . 12 VI.Access to Finance.............................................................................................................. 13 VI1.Payment System............................................................................................................... 15 VI11. Anti-Money LaunderingKombatingofthe Financingof Terrorism (AMLKFT)........-15 Appendix 1.Investment Returnfor FNPF............................................................................... 17 Appendix 2.Macroeconomic and FinancialIndicators for Fiji............................................... 19 Appendix Tables 1. FNPF: Comparison o f Returnon Investment...................................................................... 18 2. SelectedEconomic Indicators, 2003-07 ............................................................................. 19 3. Financial System Assets, 2000-05 ...................................................................................... 20 4.Solvency and Premiums Indicators for Total Insurance Sector, 2001-05 .......................... 20 5. Bank Financial Soundness, 2000-06 (percentages) ............................................................ 21 11 .. Glossary ANZ AustraliaNew Zealand CMDA Capital MarketsDevelopment Authority FNPF FijiNationalProvident Fund IAS International Accounting Standards IFRS International FinancialReporting Standards MOF MinistryofFinance NBFIs Nonbank Financial Institutions NCSMED National Center for Small and Micro Enterprises Development NMFU National Microfinance Unit NPL Nonperformingloan RBF Reserve Bank o f Fiji SRD Statutory Reserve Deposit RBFA Reserve Bank o f FijiAct 1 I.OVERALLASSESSMENT KEYRECOMMENDATIONS AND 1. The financial sector inFijiis generally sound but has concentratedtoo heavily on domestic exposures producinga lack of risk diversification.This concentration i s an increasing vulnerability, as foreign currency earnings become more dependent on tourism and remittances from workers overseas. Fijihas a financially strong and highly profitable banking sector, good supervision and laws, and a highdegree o f long-term contractual savings through the insurance andpension sectors. The major distortion arises, however, from the FijiNational Provident Fund(FNPF), which itself accounts for about 40 percent o f financial system assets. FNPFissues 2. The FNPF has been constrainedfrom carrying out international diversification, a prudential necessity for the pensionfund of a small-open economy. Inconsequence, it has become the dominant investor ingovernment bonds, stifling market development, and has taken on an increasing concentration intourist sector projects, the remainingdomestic growth area. Diversifying the FNPF (and financial institutionportfolios generally) i s a key priority action for addressing financial sector vulnerabilities and development needs. Pressures on international reserves, however, impose a substantial constraint on how fast diversificationcan be done. Internationaldiversificationof FNPF assets should be undertaken ina coordinated strategy o f macroeconomic adjustment and disciplinedfiscal policy that allows for increased FNPF capital outflows and of financial market development that broadens participation inthe domestic government securities market. 3. Asset diversificationby the FNPFwill have important consequences for the government bondmarket. The FNPF has longbeenthe dominant buyer o f government bonds, acquiring inevery year over the past decade roughly 75 percent of the net increase in government bonds outstanding. Its presence has worked to stifle initiativesto reach other buyers and to develop secondary market liquidity (since the FNPFtypically holds the bonds to maturity). The authorities should address the challenge of FNPF diversification for the bond market by strengthening transparency and better tailoring issues to new buyers. 4. Apart from asset diversification,the authorities needto dealwith other important FNPFissues. The FNPF is too large and pervasive inthe financial system and has hampered capital market development. An overall strategy aimed at reducing its relative size would include demonopolization through allowing private suppliers into the pension market and eliminating subsidiesinthe provision o f FNPF services. Additionally, the FNPF needs to put its annuity program on an actuarially sound basis. Banking system 5. The banking system inFijiis generally sound and highly profitable. Banking system assets are concentrated inbranches and a subsidiary o f strong foreign banks. The principal risk concern for lending institutions relates to the high concentration o f both loans and deposits ina few individual exposures. Commercial bank loans are predominantly short- 2 term or at floating rates. However, the smaller credit institutionswrite more fixed-rate mortgages and may have been exposed to the recent run-upininterest rates. Monetary policy 6. The team undertook an assessment of the transparency of monetary and financial policy and found it to be generally transparent. Monetary policy o fthe RBF is aimed at the broadobjectives o f inflation control and maintenance of an adequate foreign reserves level. The principal area inwhich to strengthen transparency i s the need to clarify the conditions under which the government can override monetary policy decisions and criteria for removal o f the Governor and RBF Boardmembers. 7. The RBFconductsits monetary policyprincipally through auctionsof RBF Notes. It hadnot been successful with this approach, however, indraining excess liquidity from the banking systemand slowing credit growth. Consequently, the RBF resorted to raisingreserve requirements. This action did effectively tighten liquidity and restore the ability o fthe RBF to move bank lendingrates through its open market operations. Effective liquiditymanagement requires betterinformation on government cash flows and utilization of information on bank liquidity generated inthe banking supervision area of the RBF. Regulation 8. Regarding financial regulation, a major concern of the team has beenthe adequacy of resources for the task. The RBF has a wide breadth o f supervisory responsibilities for banks, insurance companies, andthe FNPFand highturnover stemming from emigration. The team conducted an assessment o fthe bank supervisionregime and concluded that it i s broadly satisfactory. Bothbank andinsurance supervision have overall well-designedregulatory frameworks and good off-site report systems, althoughreporting and analysis related to interest rate risk should be strengthened.Both functions, however, needto build staff expertise and conduct a more active on-site examinationprogram. Access to finance 9. Providing financial services to the poor and to rural communities and expanding access to finance for small enterprisesare key developmentgoals for Fiji.Initiativesin thisregardhave not been coordinated and sustained. A lead agency is neededto formulate an overall development strategy for micro, small and mediumenterprises (MSMEs) and to harmonize the various initiatives to improve access to finance for these enterprises and to rural areas. The RBF should work closely with this agency and other stakeholders to facilitate the enhancement o f the enabling environment. 3 Box 1.Key FSAP Recommendations Banking supervision Enhance supervision while economizing on RBF's resources. Make greater use o f external and financial institution internal auditors to deal with targeted areas; Fullyintroduce risk-based supervision to ensure that supervision is focused on the areas and institutions o f greatest concern; and 0 Clarify the status o f "credit institutions" in law and regulation. Monetary policy framework and transparency 0 Strengthen liquidityforecasting capacity to improve forecasting o f foreign reserves and the net position o f the government; and 0 Clarify the powers and responsibilities o f the RBF and the MOF. Government securities market development Establishjoint group between the FNPF, the M O F and the RBFto share information and agree on the transitional pace o f FNPF diversificationout o f the bond market and publicly disclose broad parameters o f FNPF's planned diversificationinorder to limit disruptions to the government securities market. FijiNationalProvident Fund 0 Implement a clear separation o f accounts by area o f activity and place the annuity business on a sound actuarial basis; and 0 Prudent investmentprinciples, including appropriate levels o f international diversification for all providers o f retirement savings, need to be adopted. The foreign assets o f the FNPF and other providers o fretirement savings should not be subject to recall. Gradual implementation o f these principles i s necessary to ensure consistency with macroeconomic stability. 11. MACROECONOMIC ENVIRONMENT RISKS AND 10. Fijiis a lower middle-income country,with a per capitaGDPestimatedat about US$2,000. With its population o f about 850,000, Fiji shares many o f the challenges of other Pacific Island countries: territorial fragmentation, remoteness from major markets, and a high exposure to shocks such as commodity price fluctuations and natural disasters. Inaddition, its unique ethnic make-up among the Pacific Islands has been at the source o f singularly difficult politics, culminating inseveral military coups that, while not causing much loss o f life or property, nevertheless hurt consumer and investor confidence, and the tourism sector.2 This said, Fijihas managedto maintaina fairly positive recordof economic achievement since independence in 1970-per capita growth, while uneven, averaged 2 percent per year. 11. Fiji'sgrowth momentumhas beenuneveninrecentyears. RealGDP growthfell below 1percent in2005 and i s expected to hover around 2.5 percent inthe mediumterm. The lifting o f Multi-FiberAgreement quotas inearly 2005 ledto the loss o f virtually all its garment exports to the UnitedStates, yielding a negative growth shock equivalent to about 2 percentage points of GDP. European decisions to cut preferentialprices under the Sugar Protocolwill translate into a large loss of export revenues, which could exceed one percent of 2008 GDP. While sugar has lost its quantitative importance as a major source o f export earnings inFiji's balance o f payments and does not generate a large direct exposure for the 2Ethnic Fijians account for about 55 percent o f the population, Indo-Fijians for about 40 percent, and other ethnic groups o f various immigrant origins for about 5 percent o f the population. 4 bankingsystem, the macroeconomic and social consequences ofprice cuts will still be significant. On the positive side, tourism receipts have grown at double-digit rates for the last four years, and foreign direct investmentinthe tourism sector has beenstrong. Fiji has become increasingly dependent on remittances from overseas workers as a source o f foreign exchange. Latest RBF estimates putthe amount o f formal and informal transfers at F$450 million, inexcess of even tourism revenues. 12. Inflationhas remainedlargelyunder control. Low inflation reflects mainly the maintenance o f a fixed exchange rate over a longperiodwithout the needfor frequent readjustments. Fiji maintains a peg against a basket of the currencies of its maintrading partners; it last adjusted the parity inearly 1998 inthe context o f the Asian financial crisis. The RBFmaintains a fairly extensive set of exchange controls and, inthe past, hastightened themwhenpressureson foreignreserves emerged. These controls notwithstanding, macroeconomic policies must at times respond decisively to negative shocks to the external balance to prevent a sustained loss o f foreign exchange reserves, as has beenthe case with regardto the recent tightening o fmonetary p01icy.~ 111. MONETARY FRAMEWORK SYSTEMICLIQUIDITY POLICY AND 13. Monetarypolicy is formulatedby the RBFBoardwith the 91-day RBFNoteas the mainmonetary policyinstrument.The RBFdoes not conduct monetary policy interms of formal quantitative objectives but considers developments primarily ininflation andthe level o f international reserves insettingthe monetary policy stance. Although monetary policy transparency is good, it could be strengthened by clarifying the powers and responsibilities o f the RBF and the ministerof finance and improving the reporting o f the breakdown of international reserves heldinside and outside the RBF. 14. Monetarypolicy effectivenesshas beenweakenedby the existenceof chronic excess liquidityin the bankingsystem. Although the RBF has raised interest rates several times since October 2005, the lendingrates were initially slow to rise. The transmission mechanism was weakened by persistent excess liquidity inthe banking system resulting from ineffective liquidity management by the central bank andfrom the RBF settingthe policy indicator rate below market levels4 15. The framework for managingliquidityfaces considerablechallenges.The main challenges relate to foreign reserves forecasting ininstances whenthe timing o f large Inthe year and ahalfbefore the May 2006 elections, foreign exchange reserves came under severe pressure, falling by more than 36 percent, to about US$390 million, adequate to cover 2.8 months o f imports o f goods, compared with 3 'A months at end-2004. Thereafter, reserves continued to decline (Figure 1) despite further monetary tightening untilthe country borrowed USSl50 million ininternational markets in September 2006. Following the coup inDecember 2006, the RBF imposed stringent exchange controls, put inplace a freeze on total credit extended by individual banks, and raised interest rates on RBF facilities by 10 percentage points. Excess liquiditywas estimated at 4 percent o f bank deposits before the increase inreserve requirements on May 8,2006. The RBF note issues have been under-subscribed, giventhe nonmarket-clearing price. 5 payments subject to exchange control approval has beenincorrectly projected. Further, the commercial banks' demand for RBFNotes i s difficult to predict and the capacity o f the Ministry of Finance's (MOF's) Debt Management Office to project government's cash flow i s weak. The RBF FinancialInstitutions Group i s currently requiring individual banks to project weekly their flows inand out o f their accounts at the RBF four weeks ahead inorder to monitor potential bank liquidity problems during the current period of tightness. 16. Arrangements for the provisionof emergencyliquidity are satisfactory. Ifthe commercial banks face a temporary liquidity shortfall and are unable to obtain funding through the interbank market, they may borrow from the RBFunder secured repurchase agreements, re-discount buyback operations or an unsecured advance facility (overnight facility) at a penalty rate. Utilization of standing facilities has been dormant because o f RBF requirements to first seek alternative funding, highpenalty rates, and a highlevel o f system liquidity.The government borrows under the so-called Ways and MeansFacility.' 17. The interbank money market is very limitedin depth and its growth, even with the tightened liquidity conditions,may be constrainedby the smallnumber of players. Although interbank turnover rose from F$297million in2002 to reach F$846 million in 2005, the market remainedvery limitedbecause the banking systeminFijihadbeen characterized by a high level o f average cash balances maintained by the financial institutions, thereby undermininginterbank activity. The recent increase inStatutory Reserve Deposits (SRD) has ledto a tightenedliquidity conditionwith a resulting increase in interbanktransactions, bututilizationremains limitedbecauseany attempt to raise money in this small market provides strong competitive signals making some ofthe banks reluctant to participate. 18. Secondarymarket activity in securities is very limited. The market inshort-term debt securities is inactive as securities are usually heldto maturity by banks. Activity inthe secondary bondmarket i s similarly low; the FNPF i s the dominant investor and holds to maturity. Secondary market development could be enhancedby the consolidationo ftreasury bill issues andpre-announcing a schedule of auctions. 19. I nJuly 2005, the RBFannouncedan expandeddefinitionof international reservesto includeforeign currency assets held outsidethe RBFby nonbankfinancial institutions,primarily the FNPF. These foreign currency assets have long been subject to recall by the central bank on seven days notice but only in2005 didthe RBF start to count them as part of internationalreserves. The RBFrequires the FNPF, which holds the bulkof these reserve funds, to hold 40 percent o f the total in liquid assets inorder to give assurance about the underlyingcallability of the funds. Boththe callability feature and this explicit liquidityrequirementlimit the ability o fthe FNPF to carry out diversification of its asset The Government Ways and Means Facility is available on a standby basis and provides government with access to overnight funds inthe case of a temporary shortfall inrevenue. The maximum amount that the government can borrow is currently set at F$20million and the government i s charged the minimumlending rate on this Facility. Drawings are reserved inpractice for meeting debt service obligations incase o f unexpected shortfalls. 6 portfolio. Recent reserve losses ledthe RBFto recall funds from the FNPF according to a phased schedule without any difficulties emerging. Iv. FINANCIALSECTOR STABILITY AND PERFORMANCE A. Banking Sector 20. The Fijian banking system is dominated by foreign-owned banks usually operating through branches. The eight licensed financial institutionsinFijithat take deposits from the general public are authorized under the Banking Act and supervisedby the RBF. There are branches oftwo Australian banks, an Indianbank, and a PapuaNew Guinea bank; inaddition, there is one banking subsidiary o f an Australian bank. The three remaining institutions are locally owned, one by the government-owned FNPF. Unlikethe banks, they have a restricted license which forbids them from operating checking accounts, offering demand deposits and doing foreign exchange business. They, therefore, offer more specialized services, such as mortgage and vehicle finance. Inaddition to the eight licensed deposit-taking institutions, there are a number of credit unions and savings andloans cooperatives whose oversight has been entrusted to the Registrar o f Credit Unions andthe Department o f Cooperatives, respectively. 21. The banking system inFijiholds about F$3billioninassets, which is equalto around 65 percent of GDP and 40 percent of financial assets (Figure 1). The banking system has been limitedby the presence of the FNPF, which is of comparable size interms of assets and which provides a major alternative channel for savings. Credit institutions are slightly over 10percent the size of commercial banks. Figure 1.The Fiji Financial System, 2005 (Inpercent oftotal assets) NBFls 0% FNPF 39% Credit institutions Insurance companies 9% Source: RBF. 7 PerformanceandVulnerabilities 22. Banksand credit institutionsin Fiji are well capitalizedand profitable.In December 2005, the sector-wide capital adequacy ratios (CARS)for banks and credit institutions were 12 percent and 23.7 percent, respectively, andall institutions maintainedthe requiredminimumCAR throughout the yeare6 addition, two major banks that represent In 75 percent of total banking sector assets are branches o freputable Australian banks, andtheir access to global capital further reinforces the resilience ofthe system. Banks' profitability has been very high with returnon equity at 48.2 percent and returnon assets at 3.7 percent on average over the last five years. Highprofitability of the sector i s mainly due to steady high interest spreads o f around 500 bps and highfees that financial institutions charge their customers. The team found the high profitability to be consistent with operating ina perceived high risk environment and not associatedwith apparent impedimentsto competition.' Asset quality has also continuedto improve andthe ratio o fNPLsto total loans declined to 2.3 percent inMarch 2006, from its peak o f 8.7 percent at end-2001 .* 23. Concentrationto a limitednumberof large borrowersandlargedepositorsis a markedfeatureof the Fijibankingsystem. The RBFimposed concentration limitson foreign bank branches relative to global bank capital because diversification o f the loan portfolio i s limitedina small economy like Fiji and the head offices expressedtheir willingness to replenishlocal branchcapitalwhen neededto be inc~mpliance.~ principal The credit risk arising from these loan concentrations is not that the global bank will become unsound but that the head office will have to make unanticipated capital injections into Fiji for its branchoperations. Since loanportfolios booked inFijiare relatively small compared to global operations, highrisk concentration to some large exposures has emerged." Combined large exposures amount to more than 300 percent of aggregated local capital compared to about 200 percent for Mauritius and 85 percent for Trinidad, other comparable economies. Deposits are also concentrated ina small number o f institutional depositors, with the five largest depositors having 18percent andthe fifteen largest depositors having 28 percent o f total deposits. 6The CAR is calculated as the ratio ofrisk-weighted assets o fthe localbanksdividedbythe allocated local capital to specifically show the financial strength o f local banks. There i s not an additional capital charge for market risks. 'In contrast, the Report o fthe Committee o f Inquiryinto Financial Services (February 1999)took a qualified view that banks exhibited oligopolistic pricing features but did not think it had sufficient evidence to make a strong conclusion. 8The problem loans are concentrated among private individuals (27 percent), followed bythe miningand quarrying sector (23 percent) and the hotels and restaurants sector (2 1percent). Provisions covered about 65 percent o ftotal NPLs at end-March 2006. 9The RBF regulation limits aggregated large exposures below 25 percent o ftotal global capital, instead o f local capital 10For instance, total assets o f ANZ's Fijibranch represent only about 1percent o f ANZ's total global assets. 8 Stress Tests 24. Stresstests suggest that the system's main vulnerabilities are credit and liquidity risk.Basedon available data, direct impacts from foreignexchange rate fluctuationand interest rate movement appear to be manageable (Appendix 1). The stress tests were conducted against local capital, although most banks are branches o f foreign banks with large global capital bases that mitigate the institutional credit risk, since the RBF imposes the CAR requirementbasedon local capital andregulatory actionrequiringcapitalreplenishment is triggered ifthis is not met. Credit risk arises mainly from bank exposures to large borrowers. Ifthe largest exposuredefaulted, two large banks wouldbecomeundercapitalized interms of local capital and, ifthe four largest borrowers defaulted simultaneously, the largest bank could exhaust its local capital. 25. The banks' large and rapidly growingexposures to the mortgagesector also pose a concern. The household debt-to-GDP ratio has nearly doubled inthe last five years and a sharp rise ininterest rates could seriously affect homeowners' debt-service capacity, but likely only inextreme conditions. The stress test results suggest that ifthis leads to 20 to 30 percent o f these loans becomingNPLs, one bank and one financial institution focusing on the sector couldbecome insolvent. This is arealthreat to the financial system, since these institutions are local ones without external support. Meanwhile, banks and credit institutions appear to be resilient to a moderate shock to the tourism-related sector. Interms o f liquidity, giventhe concentration o f large institutionaldepositors andthe large maturity mismatchin the balance sheets ofbanks and credit institutions, all financial institutions would be adversely affected by the unexpected withdrawal o f large depositors. It should be noted, however, that these risks are likely to be mitigatedfor branches o f foreign banks by capital buffer and liquidity support from the headoffices and by the lack of noncashalternatives to bank deposits inFiji. B. InsuranceSector 26. Fiji'sinsurancebusinessis reasonablywell developed.In2005, total premiums amounted to F$184million, equivalent to 3.9 percent of GDP. This level i s higher than most other Asian countries, with the exceptiono f Japan, Korea, Singapore and Malaysia. The total assets of insurance companies amounted to 15 percent o f GDP (life, 11percent; nonlife, 4 percent) at the end o f 2005. Life companies invest 45 percent o f their assets ingovernment securities and an additional 25 percent inother fixed-income, long- term assets (loans and debentures).Diversificationinforeign assets is constrained by exchange controls. 27. The insuranceindustry has a concentratedbut solid structure. The industryis generally profitable, well-capitalized, and adequately reserved -the solvency surplus ratio (assets inexcess o f the minimumrequired solvency margin) i s nearly 200 percent. O fthe ten companies, two are life and eight are nonlife. Several lines o f business are highly concentrated because several companies specialize (e.g., medical or motor insurance). One small general insurer i s under liquidation, and several other small insurers have faced some difficulties, but all the larger companies have solid capital structures with more than adequate levels of reserves. 9 C. FijiNationalProvident Fund 28. The FNPFhasseveralimportant strengths, includingthe accumulationof large funds, extensive coverage of the formal labor market, achievement of positive investment returns and relatively low operating costs. The FNPF is a government-owned institutionthat has a legal monopoly o f compulsory savings. It i s a nationalprovident fund operating a defined-contributionscheme with individual capitalizationaccounts but it also offers a pensionoption to retiring workers at 55 years o f age and modest-term life insurance (death benefit) to its active members. Its total assets amounted in2005 to 63 percent o f GDP. The FNPFhas an efficient collection systemand maintains goodrecords and accounts. Over the years, ithas achieved positivereal investmentreturns andhaspaidapositivereal interest rate to member accounts, which was inmost years well above the rate on term deposits with banks, but below unit trust returns. Its operating costs are also relatively low at 60 basis points o f average total assets. 29. The FNPFsuffers from some importantweaknesses. Its annuity businessis actuarially unbalanced.The annuity conversion factor (annual annuity payments as a percentage o f the account balance usedto purchase the annuity) for single annuities at 55 years of age was set initially at a very highrate o f 25 percent. However, various actuarial studies estimate the equilibrium conversion factor at 10 percent or less. Because ofthe lack o f investment opportunities and the imposition o f exchange controls on foreign investments, the FNPF has investedinlarge local companies and projects inviolation o f generally observed concentration limits. The FNPF invests 70 to 75 percent o f its assets infixed income public sector securities and various loans and advances. The dominant size o f the FNPF has also constrained the development of secondary market liquidity inbond and equity markets. 30. The FNPFneeds to take actionto placeits annuity business on a strongactuarial basis and to implement a clear separationof its accounts by major area of activity. The former would require a substantial reduction inthe annuity conversion factor from the current target o f 15 percent to less than 10 percent for single annuities and from 11percent to perhaps less than 7 percent for joint life annuities. Separation o f accounts would require the attributiono f assets, liabilities, revenues, and costs to each major area o f activity, covering the accumulationfund for active workers, the annuity business for pensioners, the offer of death benefit, and the use of withdrawal services (and ifintroducedinthe future, the offer o f medical savings accounts). This would allow a better targeting of asset allocationto the differingneeds of active workers and retiredmembers. 3 1. International diversification of long-term retirement savings is imperative for a small open economy such as Fiji.At present, pressures on internationalreserves restrict the scope for international diversification. However, the need to create room for capital outflows by the FNPFshould be factored into any program ofmacroeconomic adjustment over the mediumterm. As suchpolicies are put inplace, the foreign assets ofthe FNPF should not be part of the official foreign exchange reserves and should not be subject to recall. A smaller domestic footprint for the FNPF would requirethe authorities to expendgreater effort in developing a more diversified investor base for government securities, including retail and international investors. It would also encourage the authorities to promote greater integration 10 o f the Fijian economy with international markets, inthe areas o f foreign direct andportfolio investment and injoint ventures betweendomestic and foreign investors. 32. Inthe mediumterm, limitingthe size of the FNPFthroughapolicyof demonopolizationand authorizationof privateprovidersof pensionplanswould be a positivemove. A reduction inits relative size would liberate the FNPF from political and social pressures and would create a more pluralistic structure that could help stimulate more active financial and capital markets and increased competition inthe pension sector. The feasibility o f demonopolization would depend on the creation o f a robust regulatory framework for private providers o f retirement savings, the presence o f interested parties among banks, insurance companies and employers that would be willing to compete with the FNPF, and a sufficiently large market for pension savings to allow complements to the FNPF to develop. 33. The authoritiesshould addressthe challenge of FNPF diversificationfor the bondmarketby strengtheningtransparency and better tailoringissues to new buyers. First, the FNPF, the MOF, andthe RBF should establish ajoint group to share information and agree on the transitional pace o f FNPF diversification out of the bond market, taking appropriate account o f any effects on international reserves.The broadparameters o f the planned diversification- say, interms o f annual planned reductions inthe portfolio share of government securities - should be made public. Second, following on earlier Fundadvice, the MOF should establish a clear calendar o f benchmark issues and consolidate the wide variety o f outstanding issues through replacement offerings. Finally, it may be useful to tailor newbenchmark issues more closely to the investment habitats of potentialbuyers.Long-term issues would be attractive to the FNPF and insurance companies while issues inthe 1-3 year range may be more readily taken up by banks. v. REGULATORY FRAMEWORK CRISIS MANAGEMENT AND A. Banks and CreditInstitutions 34. The supervisoryregime for licensedbanksand credit institutionsis broadly satisfactory.The RBFis the sole supervisor and has the necessarypowers under the law to license institutions, set prudential rules and guidelines, andtake remedial action, including revocation of the license. While the ministero f finance has to give concurrence to some actions o f the RBF, notably the appointment o f a controller, inmost cases, the central bank can act alone. 3 5. The criteriafor licensinga financialinstitutionare comprehensive,including assessments of management,the business plan, and the adequacy of capital. Capital adequacy requirementsare broadly inline with the Base1ICapital Accord and regulations on loan classification andprovisioningare satisfactory. There is a comprehensive set o f returns for all financial institutionsthat have to be submittedon a regular basis. The RBF arrangements for on-site and off-site coordination are acceptable. On-site examinations are thorough, with a particular focus on the loan book, which i s perceived as the biggest risk. The RBFhas demonstrated a readinessto take effective remedial actionagainst bothbanks and credit institutions whenthe need arises. 11 36. There are, however,a number ofshortcomings that could usefullybe addressed: e With 17examiners on hand(three below budget) to cover 17banks and insurance companies and the FNPF, the RBF is under-resourced for its supervisory responsibilities. One way o f mitigating the effects of this shortfall would be to make more use of both external and commercial bank internal auditors inareas o f particular concern. e The definition o f a credit institutioninthe Banking Act i s unsatisfactory. Pending a revisiono fthe Banking Act (which is not imminent), a clarifying Policy Statement should be issued that would formalize existing practices. e The current RBF focus on asset quality should be balanced by more work on other issues, such as interest rate risk, operational risk, and enhanced liquidity monitoring. e Off-site and on-site supervision should be more completely integrated by the full introductiono f risk-based supervision. This will also ensure that the current informal arrangements for the allocation o f resources are more objectively handled. a Cooperation arrangements with overseas supervisors are currently informal, and, in the case ofIndiaandPakistan, rather distant. They should beformalizedby meansof Memorandao f Understanding (MOUs), and personal contacts at all levels should be built upto ensure that the different supervisors can work effectively together inany crisis and to coordinate examinationschedules to economize use o f RBF resources." B. Insurance 37. With one major exception,the insuranceregulatoryframeworkis modern and robust.The exception relates to the absence of a risk-based solvency requirement.The solvency regime is a modifiedversion o fthe European Union(EU) so-called Solvency I approachthat i s basedon premiums and claims. It does not take into account the riskiness of assets and reinsurance arrangements." 38. Insurance supervisionis undertakenby the FinancialInstitutionsGroup (FIG) ofthe RBF.Off-site surveillance is supportedby an excellent systemof regular statistical returns. On-site inspections are rather infrequent, although they focus on the effectiveness o f management and internal control systems. As inother areas o f financial supervision, the supervisor needs additional staff with advanced skills. Itis inthe process of recruitingan experienced expatriate actuary but needs to develop intense training courses to elevate further the knowledge and expertise of its staff and find ways to retainskilled examiners. Currently, there i s a draft MOU with the Australian Prudential Regulatory Authority. The scope o fthis MOU i s sufficient and it should be finalized as soon as possible. Similar arrangements should be put inplace with other domestic regulators, especially the Capital Markets Development Authority. 12 However, this i s not a major problem because reserves are invested insafe assets, while the reinsuranceratio i s relatively low. The solvency regime applies reasonable limits on maximum retention of individual risks and on the standing ofreinsurers and includes a strict defmition o f admissible assets. 12 C. The FijiNationalProvident Fund 39. The FNPF is subject to a sound regulatory regimewith regard to accounting and valuation rules but suffers from high levels o f asset concentration risks, including inadequate international diversification, and an actuarially unsound annuity business. Since 2004, it has beenplaced under the supervision of the RBF. Considerable progress has been made indeveloping an effective program o f supervision. Initial effort has been focused on strengthening corporate governance and sharpening risk management policies. Future efforts need to focus onthe risk areas identifiedearlier. D. Other Accounting and Auditing 40. The accounting and auditingframework inFijiappears to be strong andwell regulated. The Fiji Institute of Accountants regulates the accounting profession, determines good accounting practices (IFRS and IAS standards), provides significant level of training, and disciplines its members. The four main international accounting firms are represented in Fiji, and have to comply with strict internalprocedures and guidelines. Capital Markets Development Authority 41. The regulatory framework for capital markets is fairly strong. The Capital Markets Development Authority Act 1996 sets up the Capital Markets Development Authority (CMDA) as the market regulator, and makes it responsible for regulatingmarket offerings and licensing intermediaries such as securities exchanges, brokers, dealers, and unit trusts as well as ensuringthe overall smooth functioning o f the capital markets. The CMDA also promotes enhanced disclosure requirements, and grants renewable annual licenses. While this appearsto increase applicationand compliance costs, it also enablesthe CMDA to continuously assess the suitability of licensees. There are 3 licensed brokeddealers and 10 licensed investment advisors inFiji. 42. The CMDA is actively involved indeepening the spread of capital markets in Fiji, but the small size of the market and limitedtrading on the stock exchange restricts its ability to take many actions, such as reducing transaction fees. Stock market capitalizationrelative to GDP is about 20 percent inFiji (withthe turnover rate at around 2 percent), which i s below ratios for comparable countries such as Mauritius (40 percent) or Jamaica (180 percent). The CMDA undertakes routine onsite inspections o f all licensees to monitor compliance with the CMDA Act and underlying regulation. E. Crisis Management and Safety Net 43. Crisis management procedures are based on a strong legal grounding and are detailed in a well-developed contingency plan and have been tested through implementation to some degree. The BankingAct gives the RBF broadpowers to intervene inabankthat is not incompliance with its directives or, whenabank is unlikelyto meet its obligations, to appoint a controller to runor resolve the bank. LOLR liquidity beyond 13 amounts acceptably collateralized i s provided only after all alternatives are demonstrated to be exhausted andthe bank isjudged to be solvent. 44. In2001, the FU3Fdevelopeda contingencyplanfor dealingwith a problem licensedfinancialinstitutionthat spells out a promptcorrective actionframework. For CAMEL13indicators, the contingency plan uses quantitative and qualitativetarget levels to trigger a graduated schedule of remedial actions that range from requests for commitment letters andwarnings to directives to take corrective action. Ina recent episode, the RBF has applied early interventionprocedures based on CAMEL inadequacies, requiring an increase inthe capital adequacy ratio, a capital injection andatime frame for NPL reduction. These conditions were smoothly fulfilled, showing that the crisis management contingency framework works well inpractice. The contingency plan could be improved by detailing more specific actions to seize control o f branchassets inFiji inthe case o f a pending liquidationo f a failed foreign parent bank and to have these actions clearly understood before the fact by home country supervisors, 45. The team consideredwhether there was a needto establisha formaldeposit insurancesystem inFijiandjudged that while it may be desirableover the longerterm, it was not a pressingissue. The banking systemis ina generally healthy financial condition and is dominated by branches or subsidiaries owned by strong foreign financial firms. The FU3Fhas a strong legal grounding to intervene indistressed banks and to take control of bank assets (including those inbranches) inorder to protect deposits. For small depositors, protection could be enhanced by giving the RBF explicit legal scope to favor small depositors inthe payout o f assets duringbank liquidation. VI. ACCESSTO FINANCE Smalland MediumEnterprises 46. Access to finance for micro,small, andmediumenterprises (MSMEs) i s perceivedto be a major constraint inFiji.The National Center for Small, andMicro Enterprise Development (NCSMED) was established following the passage o f the Small and Micro Enterprises Development Act o f 2002 to facilitate access to funds. The NCSMED Strategic Plan for 2003-12 identifiedspecific activities inthis regard. However, due to capacity and financial constraints, a majority of the identified activities have been unable to achieve the milestones set out inthe Strategic Plan. More recently, the RBF has established an internal committee to look into options for improving access to finance for small and micro enterprises. MicrofinanceandRuralFinance 47. The microfinancesector hasbeensupportedby the governmentthroughthe establishmentin 1999 of an apex institution,the NationalMicrofinanceUnit(NMFU). l3CAMELrefers to the framework of principal supervisory indicators:capital, asset quality, managementquality, earnings, and liquidity. 14 The NMFUhas since beenmerged with the NCSMED butcontinues to operate as a separate department. The mainobjective o fthe NMFUi s to provide grant funding to organizations providing loans and savings products to the poor as well as to provide training and institutional capacity building.The NMFUi s currently working with nine organizations comprising nongovernmental organizations, charitable trust organizations, cooperatives, village banks and a credit union. 48. With the majority of financialinstitutionslocatedin or near cities, the provision of financialservices is severely limitedinruralareas.The Rural BankingWorking Group, established in2003 and chaired by the RBF, to catalyze the interests o f financial institutions towards rural banking services has had limitedsuccess. However, the ANZ Group launched a rural bankinginitiative in2004 and has built a mobile bankingnetwork inselected rural areas, which has resulted inthe opening of 54,000 savings accounts within 18 months o f operations. The program has beensupported by a UNDP-sponsored financial literacy campaign through the NMFU.Other commercialbanks have, however, beenreluctant to venture into rural areas. Credit Unions 49. Fijihas longhad an establishedcredit unionmovementalthoughthe number of creditunionshas declinedfrom approximately 180 inthe early 1990sto approximately 45 creditunionscurrently. The legal and regulatory framework for credit unions i s outdated and the oversight by the Registrar o f Credit Unions is weak due to lack o f staff and appropriate skills. There i s a dearth of information since no regular statistics are maintained but data collected in2002 reveal a sector consisting of approximately 15,000 members and F$25 million inassets. Inlight of the inadequate data on the size and structure o f the sector, the RBF has recently initiated an effort to collect information on the membership base and financial performance o f credit unions. Credit InformationBureau 50. A privatelyfunded credit informationbureaustarted operationin n 2001. Over the past five years it has been able to enroll 64 key public and private institutions and has built a database covering 100percent o fthe registeredcompanies and 144,000 consumer files. The DataBureauprovides credit behavior-related informationto subscribers on a cost- per-usage basis. However, its coverage i s still limitedwith several private (including two o f the commercial banks) and public institutions (including some o f the larger utilities and the FijiIslands Revenueand Customs Authority) still outside its membership. OverallPolicyand Strategy 51. Generally,a lead agency is neededto formulate a strategy for the sustainable developmentof MSMEs.This leadagency should also coordinate the various initiatives to improve access to finance for these enterprises and to rural areas. The absence o f a lead agency has ledto the lack o f a coordinated approach as well as lack o f clarity on the proper role o f government inthis area. Additionally, the RBF should continue to play the role o f a 15 catalyst working closely with the lead agency to support the enhancement of the enabling environment.More specifically inthe following areas: 0 The NCSMED should make a stronger effort to implement activities identifiedinthe NCSMED Strategic Plan. It should collaborate with the RBF, commercial banks and other financial institutionsto identify the key constraints to the financing of MSMEs and make efforts to addressthese inconsultation with the key stakeholders. 0 NMFU'srole as a grant giving apex should berationalizedto develop financially viable microfinance institutionsthat set precisely definedperformance targets and milestones for financial sustainability. 0 The RBF should conduct a comprehensive data collection and analysis exercise to determine the size and structure o f the approximately 45 active credit unions. 0 The government should encouragethe participationofpublic andprivate institutions inthe DataBureau. VII. PAYMENT SYSTEM 52. The team reviewed the implementationof a real-timegross settlements(RTGS) systemto replace the existingclearinghousenettingarrangement for large-value paymentsinFijiand notesthat considerableprogresshas beenachieved. The RBFhas chosen a vendor for the RTGS systemand started testing in September2006 with a current plannedoperational implementationtarget o f early 2007. The RBF has drafted a set o f business rules for the operation o f the RTGS and will establish an intraday liquidity facility to provide collateralized credit to banks that wish to have a cushion against havingtheir payments queuedfor insufficient funds intheir settlement accounts. The RBF i s developing inconsultation withthe banks a fee structure aimed at recoveringits capital costs for the program (as well as operating costs) over a five-year period. In2007, after the RTGS system has been implemented, it would be useful for the RBFto conduct a full assessment o f compliance with core principles o fpayment system supervision. VIII. ANTI-MONEYLAUNDERING/~OMBATINGTHE FINANCING TERRORISM OF OF (AMLKFT) 53. An assessmentofAnti-Money Launderingand Combatingthe Financingof Terrorism (AML/CFT) concludedthat Fijihas a stron legislativeframeworkbutthat implementationand resourcesare a serious c~nstraint!~ Fijihas committed substantial resources to bringingits AML/CFT systemup to international standards. With the entry into force o f the FinancialTransactions Reporting Act (FTRA) inJanuary 2006, Fijihas added a central piece to a strong AMLKFT legislative framework. However, overly ambitious provisions that go beyond international standards exceed resource availabilities. Achieving effectiveness o f the AMLKFT regime will require capacity building, risk-based implementation, and leveraging o f resources. l4 The assessment was conducted inFebruary 2006. 16 54. T h e supervisory framework is unclear and as structured under the FTRA cannot b e effective. Only the FinancialIntelligenceUnit (FIU) has clear supervisory responsibility for AMLKFT. Boththe RBF and the Capital Markets Development Authority (CMDA) have an adequate legal basis for inspections andthese should serve as a supervisory complement to the under-resourced FIU. 17 APPENDIX 1.INVESTMENT RETURNFORFNPF 1. The 2002 ILOreport indicatedthat the suggestedequilibrium conversion factor of 10 percent for single-life pensions was basedon the assumptionthat the FNPFwould achieve an annual investment returno f at least 7 percent. However, historical figures for 1997-05 indicate that this was achieved only in 1997 and 1998 and the returnon investment (ROI) has beendecliningto 5.1 percent in2005 partly due to its limitedportfolio diversification. Asset allocation has beenconcentratedlocally, especially ingovernment and quasi-government securities basedon investmentrestrictions imposed by the Trustee Act until recently. InJune 2005, the FNPF Act was amendedto permitthe FNPF to diversify its portfolio inthe domestic, regional, and global markets, andto achieve a higher ROI. Nevertheless, the FNPF has not beenpermitted by the RBF to invest freely offshore and i s requiredto surrender its foreign assets whenthe RBFrecalls them. The recent recall is estimated to have resultedina largedecline of FNPF's foreign assets to about F$57 million, or 1.8 percent of its total investment assets. The local concentration o f FNPF assets prevent it from seeking higher investmentreturns overseasbut also leadsto excessive exposure inrisky domestic projects. 2. Concentration o f investments inlocal assets leaves the FNPF exposed to highcountry and credit risk. While its interest rate risk profile could not clearly be determined because o f data constraints, it appears to have limitedexposure to capital losses on its large government securities holdings, since they are heldto maturity. Credit risk arises from its loanportfolio and investmentsinlocal equity. Loans are extendedmostly to its subsidiaries, mainly the HFC. Since most o f the HFC's loans are extended to the housing and mortgage sectors, the FNPF's loanportfolio i s indirectly exposed to developments inthe real estate market andby households' debt-servicing capacity. Giventhe recent high growth inlending inthis sector, and associatedsharp increase inhouse prices and household debts, a large interest rate hike and/or decline inhouse prices would have a significant negative impact on the lending institution, which i s consistent with the stress test results. The FNPF investment returns would be affected by lower dividends and any losses on its equity stake inHFC. Investment inlocalequityhasnotbeenvery profitable. The localmarketsize is small withlimited options for diversification. 3. Shiftingto a more diversifiedportfolio withforeign investments of highcredit quality and market liquidity would likely benefitthe FNPF with a higher and more stable long-term ROI, even after adjusting for foreign exchange risk. The following table suggests that moving to a larger foreign asset portfolio would likely achieve an ROI higher thanthe targeted ROI of 7 percent, althoughnot necessarily immediately. Inaddition, credit risk would be better managed with more diversifiedportfolio. The authorities are encouraged to consider how best they could achieve the targeted ROI, including a more globally diversified portfolio. 18 Appendix Table 1.FNPF: ComparisonofReturnonInvestment (Inpercent) Actual asset allocation Alternativeallocation Average of as ofJune 1997-2005 2005 Case 1 Case2 Case3 Local assets 90.9% 89.6% 70.0% 60.0% 40.0% Dimestic government and quasi-government securities 56.9% 58.5% 45.0% 40.0% 27.0% Other fixed incomesecurities 11.0% 9.6% 10.0% 7.0% 5.0% Advances and loans 7.3% 8.4% 5.0% 3.o% 0.0% Term deposit 1.5% 0.9% 5.0% 5.0% 5.0% Equity 11.5% 10.2% 5.0% 4.0% 2.0% Investmentproperties 2.6% 1.9% 1.O% 1.O% 1.0% Foreign assets 9.1% 10.4% 30.0% 40.0% 60.0% Governmentsecurities 0.0% 0.0% 20.0% 25.0% 40.0% Deposit 3.5% 3.2% 3.0% 3.o% 3.0% Equity 5.7% 7.2% 7.0% 13.0% 17.0% Return on investment 6.3% 5.1% 7.0% 7.2% 7.6% Source:RBF, FNF'F, and staff estimates. Note: Returnfor the "Alternative allocation"was estimatedby usinghistorical figures for local assets and historicalfigures of MSCI Equity World FreeFloat index for foreign equity andMSCI CompositeWorld index for security investment. 19 APPENDIX2. MACROECONOMIC AND FINANCIALINDICATORSFORFIJI AppendixTable 2. SelectedEconomic Indicators,2003-07 Nominal GDP (2004):$2,624 million Population (2002): 826,281 GDP per capita (2002): $2,195 Main export: tourism (29% of total exports of G&S) Quota: SDR 70.3 million 2003 2004 2005 2006 2007 Prelim. Budget Staff I / Staff I/ Output and prices (percent change) Real GDP (at constant factor cost) 1.o 5.3 1.6 2.0 3.2 2.4 Consumer prices (end of period) 4.2 3.3 2.0 3.5 3.8 4.0 Central governmentbudget (percent of GDP) Revenue and grants 25.3 25.7 25.8 27.0 27.7 28.8 Total expenditure 31.1 29.1 29.4 30.7 30.4 29.9 Of which: capital 5.7 4.5 4.4 5.7 4.6 4.8 Overall balance -5.8 -3.4 -3.6 -3.7 -2.7 -1.I Overall balance excluding privatization receipts -5.8 -3.4 -3.6 -4.3 -3.3 -1.2 Total debt outstanding 50.4 50.3 51.3 52.3 50.8 48.9 International reservesand external debt (US$ millions) Exports, f.0.b. 673 777 769 ... 821 870 Imports, f.0.b. 1,075 1,198 1,358 ... 1,531 1,615 Net nonfactor services and transfers 270 264 350 ... 373 465 Net factor income -11 -12 -27 ... -45 -64 Current account balance I / -143 -169 -266 ... -382 -344 (In percent of GDP) -6.4 -6.5 -9.5 ... -13.2 -11.2 Capital account balance 147 226 101 .I. 428 335 Errors and omissions 2/ 61 0 0 ... 0 0 Overall balance 65 57 -165 ... 46 -9 Gross official reserves (end of period) 3/ 424 478 315 ... 360 350 (In months of imports, goods & nonfactor services) 3.3 3.3 2.0 ... 2.0 1.8 External public debt (end of period) 174 169 164 191 452 632 (In percent of GDP) 4.1 3.7 3.5 3.8 9.0 11.8 Miscellaneous Real effective rate (average) 4/ 107.6 109.8 109.2 ... ... Exchange Rate (F$ per US$; end of period) 1.72 1.65 1.74 ... ... ... GDP at current market prices (F$ mn.) 4,245 4,539 4,724 4,987 5,040 5,351 Unemployment rate 7.3 ... ... ... ... .I. -~ ~~ ~~~ ~~~ ~~ Sources: Reserve Bank of Fiji; Ministry of Finance and National Planning; and Fund staff estimates. I / Forecast assuming changes in policies. 2/ Including an offsetting value for aircraft leases or their return. 3/ Excluding the foreign assets of some non-bank financial institutions not yet recalled. 4/ 2000 = 100. 20 Appendix Table 3. FinancialSystemAssets, 2000-2005 (Inmillions ofFijidollars) 2000 2001 2002 2003 2004 2005 Financial Institutions Banks 1,948 1,984 2,129 2,580 2,626 3,043 Credit institutions 197 196 205 245 293 362 Insurance companies 476 524 570 609 668 711 FNPF 2,354 2,492 2,604 2,745 2,937 3,074 Sub-total: Regulated financial institutions 4,975 5,196 5,508 6,179 6,524 7,190 NBFIs 568 552 595 575 555 647 Total financial institutions 5,543 5,748 6,103 6,754 7,079 7,837 Source: RBF Note: NBFIs include Fiji Development Bank, Housing Authority, and UnitTrust of Fiji. Appendix Table 4. Solvency andPremiumsIndicatorsfor Total Insurance Sector, 2001-05 (Inmillion ofFijidollars) 2001 2002 2003 2004 2005 Total Assets 524.4 569.6 626.6 668.2 728.3 Admissible Assets 41.0 44.5 71.0 89.0 96.8 MinimumRequired Solvency Margin 24.9 27.1 29.2 31.5 33.2 Solvency Surplus 16.1 17.4 41.8 57.5 63.6 Total Gross Premiums 123.2 142.0 159.1 173.3 183.8 Underwriting Profit (general insurance) 26.0 7.9 12.5 20.6 24.6 Source: RBF 21 AppendixTable 5, BankFinancialSoundness, 2000-2006 (percentages) 2000 2001 2002 2003 2004 2005 2006-Q1 Capital adequacy Tier Icapitalirisk-weighted assets 8.2 10.6 8.8. 9.9 10.6 9.6 8.2 Total regulatory capitalirisk-weighted assets 10.9 13.4 12.1 12.7 13.4 12.0 11.3 Total regulatory capitalitotal assets 6.7 8.2 7.3 7.6 7.8 7.8 7.7 Asset quality NPLsitotal gross loans (or exposures) ratio 7.0 8.7 6.9 4.8 4.2 3.6 2.3 NPLs net o f provisionsitotal capital ratio 45.0 44.3 37.1 23.4 23.1 26.8 17.5 Provisionsto NPLs ratio (revised) 46.7 40.6 56.8 73.0 62.1 45.3 64.8 Aggregate large exposuresitotalassets ratio 24.8 22.0 21.0 22.8 24.7 24.4 24.0 Aggregate large exposuresitotalcapital ratio 372.6 269.3 288.1 298.2 318.4 312.9 312.0 Foreign exchangeloansitotal loansratio 0.2 0.3 0.0 1.8 1.5 1.5 1.4 Governmentguaranteeitotalloans ratio 1.4 1.1 0.9 0.4 0.2 0.2 0.2 Distributionby risk weight category 0 percent 17.4 19.3 20.1 25.6 20.2 16.2 15.6 10 percent 5.1 6.4 6.3 4.0 4.5 4.5 4.4 20 percent 13.1 13.5 15.0 12.7 8.7 8.8 8.0 50 percent 17.0 17.8 16.5 15.1 18.3 20.6 21.1 100percent 47.4 42.9 42.0 42.7 48.2 50.0 51.0 Sectoral loan concentration Government 0.7 0.7 0.7 0.7 0.5 0.4 0.3 Agriculture, forestry, and fisheries 3.4 2.4 2.5 1.8 1.4 1.3 1.2 Mining & quarrying 0.4 0.4 0.4 0.3 0.1 0.1 0.1 Manufacturing 12.5 12.6 12.1 12.8 14.2 10.8 10.3 Transport 2.2 2.4 2.1 2.2 2.8 3.1 2.9 Building and construction 3.1 2.7 2.8 3.0 3.5 4.7 7.4 Realestate 4.0 5.2 4.5 5.3 7.5 8.4 8.3 Hotels and restaurants 10.9 10.7 10.4 10.0 9.6 9.6 9.6 Other whole sale and retail trade 19.7 21.3 21.8 21.9 19.0 18.0 16.1 Financial institutions 0.0 0.0 0.2 0.2 0.0 0.1 0.1 Other services 11.1 8.0 7.6 7.6 8.3 10.5 10.0 Household 31.7 33.5 34.7 34.7 33.0 33.1 33.7 of which: mortgage 24.9 26.2 26.8 26.8 25.7 26.6 27.0 Profitability Return on (average) assets 2.9 3.4 3.5 3.9 3.7 4.0 4.4 Return on (average) equity 44.3 45.8 43.5 48.7 48.2 54.8 58.9 Interestmarginigrossincomeratio 54.1 51.0 51.5 52.8 53.7 55,l 55.6 Expensesirevenuesratio 67.5 65.7 59.8 62.3 57.4 57.4 54.0 Non-interest expensesigrossincomeratio 52.9 52.8 49.1 50.9 47.8 46.1 42.9 Personnelexpenseshoninterestexpenses 38.1 45.7 45.0 42.9 44.6 47.9 51.2 Trading and fee incometo gross incomeratio 16.4 17.7 20.3 21.8 22.0 21.2 19.8 Liquidity Loansto deposits ratio 72.4 68.8 66.2 65.6 75.0 79.7 82.4 Liquid assetsitotalassets ratio 31.4 34.6 34.8 36.7 27.3 23.1 23.8 Liquid assetsishort-termliabilities ratio 40.7 43.9 43.2 45.6 33.8 29.0 29.7 Demanddepositsitotalliabilities ratio 32.5 36.3 39.0 38.5 38.0 39.1 37.1 Forex liabilities to total liabilities ratio 11.4 10.5 8.6 8.6 7.9 7.9 7.8 Net forex open position to total capital 5.1 3.3 1.9 1.6 1.7 2.8 na Regulatory'limit on net forex openposition 25 25 25 25 25 25 25 Source: RBF Note: Capital is regulatory capital.Provisions are specific provisions.