Samoa
Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision

This Detailed Assessment of Compliance with the Basel Core Principles for Samoa highlights general preconditions for effective banking supervision. The Central Bank of Samoa (CBS) should consider introducing some straightforward specific capital charges for market price risk and foreign exchange risk. The CBS should require banks to have in place mechanisms for regularly valuing collateral and assessing the strength of guarantees. Several recommendations to further improve the regulatory role of the CBS in accordance with current international standards have been noted and future efforts shall focus on incorporating and developing these as appropriate.

Abstract

This Detailed Assessment of Compliance with the Basel Core Principles for Samoa highlights general preconditions for effective banking supervision. The Central Bank of Samoa (CBS) should consider introducing some straightforward specific capital charges for market price risk and foreign exchange risk. The CBS should require banks to have in place mechanisms for regularly valuing collateral and assessing the strength of guarantees. Several recommendations to further improve the regulatory role of the CBS in accordance with current international standards have been noted and future efforts shall focus on incorporating and developing these as appropriate.

Basel Core Principles

1. With the concurrence of the Central Bank of Samoa (CBS) and the Samoa International Financial Authority (SIFA), the mission assessed compliance with the Basel Core Principles for Banking Supervision using the Core Principles Methodology. The assessment was conducted by Messrs. Ronald MacDonald (formerly Bank of England) and Timothy Sullivan (formerly Office of the Comptroller of the Currency of the United States).

Information and methodology

2. The assessment of the compliance with the Basel Core Principles was based on the examination of the relevant laws and regulations; interviews with the management and staff of the CBS, SIFA, the Money Laundering Authority (MLA), and the Inspector of International Banks; and discussions with the Attorney General, the Chief Executive Officer of the Ministry of Finance, and representatives from the domestic and international banks. The assessment also considered the self-assessments of compliance with the Core Principles carried out by the CBS and the Inspector, respectively.

3. The assessment used the October 1996 Core Principles Methodology, rather than the October 2006 Core Principles Methodology, in order to allow a meaningful comparison with the results of the previous assessment conducted in 2002. However, subsequent assessments will be conducted using the October 2006 Core Principles Methodology and the mission has identified material new issues in the requirements of that methodology to which the CBS and the Inspector should give special attention.

4. The laws that were reviewed for the purposes of this assessment included:

  • Financial Institutions Act 1996,

  • International Banking Act 2005,

  • International Companies Act 1987, and,

  • Central Bank of Samoa Act 1984.

The assessment also took into account the Money Laundering Prevention Act 2007, which was not reviewed in detail.

Institutional framework

Domestic banking sector

5. There are four licensed banks operating in Samoa, all of which are locally incorporated. The two largest are subsidiaries of major Australian banks and the remaining two are locally-owned institutions. Total assets of the commercial banks at end September 2006 were SAT 700.6 million of which SAT 562.9 million comprised loans and advances (80.3 percent of total assets). Deposits at the same date were SAT 530.8 million, giving a loan-to-deposit ratio of 106 percent. Liquidity has been of concern to the system recently. Liquid assets represented 4.4 percent of domestic deposits at the end of September 2006. The average risk-weighted capital ratio for the commercial banking system at the end of September 2006 was 23.8 percent; all banks complied with the required 15 percent minimum ratio. Total past due loans represented 3.0 percent of the loan portfolio; total provisions represent 94.8 percent of nonperforming loans. The commercial banking system has been profitable with system profits for the nine months ending September 2006 representing an annual return on net worth of approximately 22 percent and 3.8 percent on assets.

6. Besides the commercial banks there is a development bank that does not take deposits. Its assets at end-December 2006 were SAT 118.9 million. Another significant player in the financial sector is the National Provident Fund that had assets at end- December 2006 of SAT 328.8 million. At the end of December 2006 there were 18 credit unions registered with the Credit Union League and licensed with the domestic Registrar of Companies. There are four insurance companies operating in Samoa, some of which make loans. In addition there are several foreign exchange dealers and money lenders. The Development Bank, National Provident Fund, and the insurance companies were brought under CBS supervision in 2001.

International banking sector

7. There are six international banks operating in Samoa. These banks all operate with a B1 or B2 class license. The IBA allows B1, but not B2 licensees, to accept deposits from the public. In practice, however, none of the three current B1 licensees engages in public deposit-taking. All six international banks are primarily used for tax planning purposes and to carry out in-house treasury functions for their parent organizations.

8. All international banks now maintain a physical presence in Samoa. These offices hold records and accounts and have clerical employees, but do not appear to have any real local mind-and-management presence. The offices of the six international banks are maintained by trustee companies (company service providers) who also provide local directors for these banks.

9. At the end of 2005, total assets of the international banks were US$111.9 million.

General preconditions for effective banking supervision

10. The land tenure system in Samoa represents a constraint in terms of enterprise financing since freehold land, which is the major type of collateral required by banks, accounts for only about four percent of the total land, while the largest part, about eighty percent, is customary land, and the rest government-owned. The laws and the court system, however, allow banks to promptly take possession of real property security on defaulting loans. There is a system for the registration of banks’ ownership interests in motor vehicles. The court system is regarded as sound with legal firms of sufficient quality. The availability and reliability of financial data varies greatly but the new Companies Act is encouraging businesses to prepare financial statements within a specified time. There is an active professional body of accountants in Samoa and international accounting and auditing standards are generally the norm. There is no deposit insurance in Samoa and depositors are treated as general creditors.

Principle-by-Principle Assessment

11. The assessment, following the Core Principles Methodology, of the compliance with each principle is made on a qualitative basis based on existing laws and regulations, and practices. A five-part assessment system is used: compliant; largely compliant; materially noncompliant; noncompliant; and not applicable. Compliant is given whenever all essential criteria are generally met without any significant deficiencies. Largely compliant means that minor weaknesses exist but they are not seen as being of so significant a nature as to raise serious doubts about the authority’s ability to achieve the objective of that principle in practice. Materially noncompliant is given when the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance, but substantive progress has been made. Noncompliant is given when no substantive progress toward compliance has been achieved, or when insufficient information was available to allow a reliable determination that substantive progress has been made toward compliance. Not applicable is given when, for any reason, a specific principle is not relevant for Samoa.

Table 1.

Detailed Assessment of Compliance with the Basel Core Principles

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Table 2.

Domestic Banking Sector: Summary of Compliance with the Basel Core Principles

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C: Compliant.

LC: Largely compliant.

MNC: Materially noncompliant.

NC: Noncompliant.

NA: Not applicable.

Table 3.

International Banking Sector: Summary of Compliance with the Basel Core Principles

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C: Compliant

LC: Largely compliant

MNC: Materially noncompliant

NC: Noncompliant

NA: Not applicable

Recommended action plan and authorities’ response to the assessment

Recommended action plans

Table 4.

Domestic Banking Sector: Recommended Action Plan to Improve Compliance with the Basel Core Principles

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Table 5.

International Banking Sector: Recommended Action Plan to Improve Compliance with the Basel Core Principles

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Authorities’ response to the assessment

12. In reference to the Offshore Financial Center (OFC) Assessment of Samoa’s financial system undertaken by the IMF from 27 February to 8 March 2007, the assessment recognizes considerable improvements being achieved over the past years in terms of the prudential oversight of the licensed financial institutions. Such progress encompasses efforts by the Central Bank of Samoa (CBS) and the Samoa International Finance Authority (SIFA) towards strengthening the existing legislative and regulatory frameworks, policies and procedures for the prudential supervision of both domestic and international banks in Samoa.

13. Equally important, such improvements bring Samoa’s financial system significantly in line with internationally recognized standards as promulgated by the Basel Core Principles of the Basel Committee as compared to the previous IMF assessment.

14. On the domestic front, several recommendations to further improve the regulatory role of the CBS in accordance with current international standards have been noted and future efforts shall focus to incorporate and develop as appropriate, the necessary changes in terms of the relevant legislation, prudential statements, regulations, guidelines and the staff capacity towards proper management of the CBS’s supervisory responsibility.

15. With regards to the international finance sector, the regulatory authority (SIFA) notes the recommended action plan and shall review the current legislation and prevailing prudential requirements as a result, with a view to further improving the supervision of international banks as per international standards.

Samoa: Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision
Author: International Monetary Fund