The move for foreclosure by the Development Bank of Samoa (D.B.S.) a fortnight ago, which targeted three local hotels with unpaid debts, caught a lot of people by surprise including the hotels’ previous owners.

On Thursday we finally got to hear from the Government on the D.B.S. loans debacle and how a lot of the debts are historical, going back many years prior to the 2019 measles epidemic and the COVID-19 pandemic that followed.

Prime Minister Fiame Naomi Mata’afa, in response to questions from the media in her first press conference in Apia after returning from abroad, put it bluntly when she pointed to the State-owned bank’s historical debts and emphasised that it was a tough decision for the management.

“They [hotels] have been in trouble way before COVID,” she said, when responding to questions on the hotels being placed on public auction. 

“In all honesty with the D.B.S. it had a certain percentage allocated to different sectors like tourism and agriculture but if you can remember this bank was established to support agriculture.” 

Fiame expressed it succinctly, in that it was a tough decision, but it had to be made if the D.B.S. is to avoid financial ruin.

Looking at the issue from the outset, there are one or two takeaways from this debacle, which we believe are important for our leaders’ consideration as well as citizens of Samoa. 

In order for the D.B.S. to return to its original mandate – when it was established to assist Samoa’s agriculture sector, especially farmers with affordable credit financing – it should return to its past and see what went wrong.

The Prime Minister made reference to the bank’s history in her press conference on Thursday, and highlighted how its loan portfolio was gradually overtaken by loan applications from the tourism sector.

“What had happened is the allocation [of loans] had been taken over by the tourism [sector] and it has come to the point where hotels have not paid their loans, not only has it impacted the sector it has also affected the whole reason why the bank was set up.” 

So how did that happen and what led to the bank’s loan portfolio getting dominated by applications from the tourism sector?

We can only think of two major factors which could have played a role in the D.B.S. going astray in its mandate: political interference in either the application process or the debt recovery exercise.

In early 2020 the Samoa Observer ran a story on the D.B.S. Annual Report 2018–2019 FY which revealed concerns expressed by the bank’s management at that time, after a Cabinet intervention prevented the bank from foreclosing on hotels with outstanding debts.

But that was over four years ago and the local economic environment has since been turned on its head, following the emerging of the COVID-19 pandemic, and the global economic downturn it triggered over the past 2–3 years.

Looking back, what would have been the state of these debt-ridden hotels today, if the Cabinet at that time under the Human Rights Protection Party (HRPP) Administration stayed out of the bank management's way and allowed the process of recovery to run its full course?

Would a new management following the foreclosure of the hotels at that time enabled the D.B.S. to recover its debts and in the process return the bank’s books to a proper balance sheet?

These are hypothetical questions but they need to be asked so we can see what are the opportunity costs, as well as the wider implications of Cabinet’s interference in a matter that should be purely a business transaction.

Another takeaway from this saga is the need for local companies to respect a bank loan agreement, which is basically a contract between a lender and the borrower. 

All loan agreements set out the terms and conditions of the loan, which includes interest payment provisions, applicable security and details on how the agreement can be terminated in the case of a default. All loan agreements are enforceable in a court of law and borrowers should be ready to accept the consequences in the case of a default.

Bypassing the process to seek favours from the Government of the day, in a bid to delay the effecting of foreclosure due to the bank being State-owned, is not good considered good practice for Samoa’s private sector and in fact creates a precedent that over the long-term could threaten the bank’s financial viability.