Source: MIL-OSI Submissions
Source: Reserve Bank of New Zealand
1 July 2021 – The tide is going out on international banking services for Pacific island nations, which could make trade, investment and sending money home more difficult and expensive.
Trade, foreign investment and remittance payments for Pacific nations all rely on correspondent banking relationships. These relationships enable cross-border payments and currency exchange.
These banking relationships are vital to the economic prosperity of Pacific nations, this Reserve Bank briefing shows.
However, correspondent banking relationships in the Pacific region are in decline. Some Australian and New Zealand banks are choosing to reduce or withdraw their services to some parts the Pacific region, which is at the forefront of an international trend of retreat.
From 2011 to 2019, the number of active cross-border correspondent banking relationships worldwide fell by 22 percent, but the fall was double that in Melanesia and Polynesia. More recent reports suggest the rate of retreat has continued or even speeded up in some parts of the Pacific.
The correspondent banking network is shrinking in part because of the rising risks and costs in relation to anti-money laundering and countering financing of terrorism (AML/CFT) requirements.
However, the consequences of an unchecked withdrawal of correspondent banking services could be significant for many small Pacific island nations.
The cost of accessing financial services in the Pacific is high. Many countries are heavily dependent on the international payments from tourism and remittances from Pacific people around the world sending money back to their home countries.
For many people, remittances help pay the bills in the islands. In Tonga, for example, remittance payments are estimated to have accounted for close to 38 percent of GDP in 2020 and almost 19 percent for Samoa.
If the already sparse correspondent banking network gets even smaller, it would concentrate payments services through a few fragile channels. It could also force payments to go through riskier networks, increasing financial system risk, making remittances more expensive, and potentially disrupting crucial ways of making payments.
The Reserve Bank urges banks to re-consider how they can continue to serve the needs of our Pacific neighbours.
“Now is the time for New Zealand banks to act with courage to keep providing banking services, including money remittances, to the Pacific Islands,” Reserve Bank Governor Adrian Orr has previously said.
The Pacific Remittance Project
The Reserve Bank of New Zealand’s Pacific Remittance Project was established in 2019 with the aim of enhancing access to, and reducing the costs of remittances to the Pacific. The project is currently exploring a range of initiatives including ongoing information gathering exercises, policy/legislative changes and the development of a regional electronic know-your-customer facility. This work will help address some of the underlying factors contributing to the withdrawal of correspondent banking relationships. However, there is a risk that our efforts could be undermined if Australian and New Zealand banks withdraw their services from the Pacific before the Pacific Remittance Project’s work is completed.
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