Financial Development in Fiji

Abstract

Fiji, a developing island economy in the East Asia and Pacific region, has been experiencing modest growth for some time despite its ability to do better. Various strategies to boost the growth levels, including major cross–sectoral reforms, have yielded little success. Motivated by a recent and expanding finance–growth literature, this study investigates the possibility of enhancing the country’s financial development. Further financial development appears to depend importantly on designing appropriate strategies to deal with obstacles and challenges relating to enhancing both the supply of funds to the private sector and the demand for these funds. This study provides strategies for dealing with two such likely important challenges in the case of Fiji— legal institutions and alternative finance. Prior to investigating and developing strategies in relation to these issues, the study attempts to understand the financial sector’s past development trends and its current strengths and weaknesses. This extensive analysis uses a recently available comprehensive financial structure database to assess Fiji’s situation against 20 developing and developed countries across the Asia–Pacific region over a 33–year period. Overall, it assesses Fiji’s relative banking and stock market development using relevant composite indices constructed for the purpose. Specifically, it assesses the size, activity and depth of Fiji’s sectors relative to the comparator countries. Findings suggest positive past development of the banking sector but weak development of the stock market. Further, the banking sector has become larger, deeper and more active while the stock market remains small and largely inactive. Legal institutions—encompassing the mandating of legal rights of the suppliers of funds and the appropriate enforcement of their rights—have become widely accepted in the literature as a major, possibly even the dominant, supply–leading determinant of financial development. The legal theory asserts that the supply of funds is likely to be better in countries with better legal institutions. The suppliers of funds include mainly banks (providers of private sector credit) and shareholders (providers of stock market equity).