A Golden Opportunity For Kiwibank And New Zealand

The Government is to be applauded for its repurchase of Kiwibank. It now has the opportunity to introduce some real competition into the banking system that is dominated by the big four Australian-owned banks.

The Government is taking on the supermarket duopoly due to their excessive profits in the vicinity of $430 million a year. These profits pale into insignificance when put against the big four Aussie banks. (In the calendar year 2021, they amassed $5.49 billion in profits – more than ten times the excessive profits of the supermarkets.)

To introduce real competition into our banking system, Kiwibank will need a significant injection of fresh capital, and that money should come from the Government if it is committed to introducing competition and reducing the huge flow of profits across the Tasman.

The Government could also look at having Kiwibank provide capital for small business as this sector is currently starved of development funding from the banks. This lack of funding impacts directly on New Zealand’s productivity as small businesses, which make up a significant portion of our economy, find it difficult to upgrade plant, machinery and systems.

There is a precedent here, as Kiwibank currently has an affiliate, New Zealand Home Loans, that has 70 locally-owned businesses across New Zealand and a loan book in excess of $7 billion. New Zealand Home Loans has a different business model than most banks in that they are dedicated to having their clients pay off their loans earlier, saving them collectively millions of dollars in interest each year.

We suggest that Kiwibank set up another affiliate – New Zealand Business Loans seems like a good name. It could be based on the Development Finance Corporation model, which was established in 1964 as a joint venture between the New Zealand Government, the Reserve Bank of New Zealand, and the major trading banks of the time. In 1973, the Government assumed full control.

The DFC operated two venture capital funds: the Applied Technology Programme and the Small Business Venture Capital Fund, which were both later merged into a single DFC Ventures fund.

The concept of the Development Finance Corporation worked well* and provided much needed venture capital for a significant portion of our economy whom the traditional banks were failing. This can happen again but it will require an injection of capital from the Government.

(*Footnote: DFC later veered from its original mission. In 1988 it was sold to the National Provident Fund and Salomon Brothers and put into liquidation after ill-fated investments in financial and property speculation saddled it with a mountain of debt.)

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