Law and Banking Development in a South Pacific Island Economy: The Case of Fiji, 1970-2006

Abstract

This paper examines the applicability of the prominent Law-Finance theory to banking development in Fiji, a representative island economy in the South Pacific region. Secondary and primary data are used to assess legal institutions and the level of development in the banking sector in Fiji (and, where possible, in other South Pacific island economies) in comparison with up to 53 other countries, both developed and developing. The paper also re-examines the question of a possible Law-Banking Development connection internationally, in light of newly available data and a newly proposed composite index of banking development. The results are consistent with previous findings of a direct relationship between law enforcement quality and banking development, but they also suggest that the legal rules codifying creditor rights may not be as influential as had been thought previously. The latter result accords with the experience of Fiji, where very weak legal rules combined with average law enforcement quality (and high accounting standards) yield a reasonable performance in terms of banking development over the 1970-2006 period. The paper also points out some possible policy implications of these results.