Government of the Federated States of Micronesia

FSM Banking Commissioner Reported on Commercial Banks

PALIKIR, Pohnpei (FSM Information Service): October 14,
1997 – The FSM Banking Commissioner reported that it is observed
that during the quarter ending June 30, 1997, there was a continued
contraction of all major categories of assets in the FSM Banking
System.

Liquid assets decreased by $809 thousand or 1 percent, and gross
loans also decreased by $1.2 million or 3 percent from the previous
quarter. Over the course of the last 12 months, liquid assets
declined by six percent and loans by 12 percent.

Commercial loans increased during the quarter ended June 30, 1997,
but for the year commercial loans declined by 3 percent or $597
thousand.

The main factor in the continuing decline in consumer loans is the
adoption of a more prudent loan policy by the banks in response to
state and national government downsizing efforts. However there
remain funds for loan if bankable projects are presented to the
banks, the report stated.

The loan to deposit ratio during the quarter ending June 30, 1997,
was 43 percent while at June 30, 1996, the ration was 44.2 percent.

There was a downward trend in the deposit base at $3.5 million or
3 percent compared with $11.5 or 10 percent during the same period
last year.

All segments of deposit base declined during the quarter, demand
accounts declined by 5 percent, savings accounts by 2 percent, and
time deposit accounts by 4 percent.

The bulk of deposit base occurred in certificates of deposit,
which totaled at $60.5 million a year ago, now accounted for $56.4
million during the quarter. Public sector or Government deposits also
declined at $3.4 million and business deposits at $1.2 million.
Nonfinancial Public Enterprise deposits also declined by $562
thousand.

However, individual and non-business private sector deposits were
increased at $2.5 million.

The net profit for the banking system for the first six months
ended June 30, 1997 was $1.2 million compared to $923 thousand for
the same period in 1996, a 33 percent improvement.

The net interest margin of banks improved over the quarter due to
increased yields on both loans and other earning assets while cost of
funds or interest paid on deposits was unchanged at 3.4 percent, the
report stated.

In comparing the exportation of local deposits by the three banks
in the FSM over the four year period ended June 30, 1997, in 1994 the
banks exported $60.2 million, in 1995 $68.9 million, in 1996 $79.6
million and in 1997 as of June 30, $67.5 million.

In aggregate, over the four year period the FSM banking system has
exported $276.6 million from the FSM which were invested elsewhere.

If money indeed fuels an economy, it is conceivable that the
$276.6 million, extracted from the FSM’s economy and interested
elsewhere by the FSM banking system, could do some beneficial impacts
had it been reinvested in the FSM’s economic machinery.

However, the FSM Banking community has continually argued that
economic conditions in the FSM do not lend themselves readily for
expanded investments. The specific reasons given are the following:

  1. the interest rates restriction imposed by current Usury Law;
  2. the absence of a Uniform Commercial Code;
  3. current law dealing with real estate when it is desired to
    be used as collateral to back up loans and

  4. the questionable economic condition of the FSM in the
    remaining years of the Compact period, according to Banking
    Commissioner.