Subject: Asiamoney: Banking in East Timor



Banking in East Timor

Oct 2003

Markets don't come any more emerging than East Timor. It was internationally recognized only as recently as May 2002. Eric Ellis reports on the unusual problems bankers face in the tiny new nation, which lies east of Java.

Kirk McNamara has problems most retail bankers would love major traffic jams that gather outside his branch and its well-fingered ATM in downtown Dili, capital of the world's newest nation, East Timor.

"Yeah, it gets a bit hectic out there when the United Nations payroll kicks in," says the Australian-born country manager of ANZ Banking Group's East Timor operation. So hectic in fact that in a languid South Seas town of few local customers, and fewer cars, Dili authorities have instituted traffic controls around the branch, and a one-way system on the through street to ease the crush.

But McNamara has other problems that most bankers wouldn't want for love of their job, or the money, for that matter.

Like the time last December when raging mobs beseiged Dili and the symbols of foreign business and East Timor's political leadership, both of which coalesced terrifyingly in the house he rents from East Timor's ruling Alkatiri family.

McNamara is a veteran of stints in Papua New Guinea and the Solomon Islands. But when the rocks came through his front window, forcing him to beat a retreat to the safety of the nearby Australian Army barracks, it provided a moment when "I questioned my sanity".

"PNG was a bit tricky at times but no-one in Port Moresby [PNG capital] ever burnt my house down." he says. Almost a year later, McNamara semi-jokes about the riots now but at the time it had the effect of concentrating his mind, and the ANZ's, about continuing operations in East Timor.

"We talked about it with head office," McNamara recalls, "We weighed it all up, the obvious difficulties of operating here, the significant law and order issues and said that while there were considerable cons, the pros of the future outweighed them."

Fire is something of a feature of banking in the wilds of East Timor. Just 200m down the road from McNamara's office is the branch of Banco Nacional Ultramarino, Portugal's state-owned overseas bank.

Today the BNU branch is one of Dili's biggest buildings, a gleaming four-storey model of possibility in what, just a year after independence from Indonesia, is one of the world's five poorest countries. Staff busy themselves processing telegraphic transfers and explaining the basics of banking to eager East Timorese.

Its all a far cry from 1999 when the building, then a branch of an Indonesian bank, was set alight, gutted and pillaged of thousands of dollars, rupiahs and escudos after Jakarta-sponsored militias rampaged through Dili.

"It didn't matter that the bank was owned by Indonesia," says BNU General Manager Joao Manuel Correia Pinto. "The militia destroyed everything."

With the BNU building restored it was also the bank's offices before Indonesia's 1975 annexation of the former Portuguese colony and the UN presence gradually fading, a lasting peace seems to have broken out in East Timor. But in the country's (very) emerging financial sector, it seems to be shaping as a war between BNU, ANZ and Indonesia's Bank Mandiri.

BNU first opened in Dili in 1912 and has had the longest presence in East Timor, albeit it one with a 24 year gap when Jakarta took over from Lisbon. ANZ arrived with the Australian expeditionary forces in 1999 that helped secure Dili's independence last year. Bank Mandiri is expected to open its first branch by year-end.

The three banks' presence reflects the battle for influence in East Timor by their three home nations; the former colonial power, Portugal; East Timor's liberator Australia and the former occupying powers from Jakarta.

Mandiri's imminent arrival at the time complicates the picture for ANZ and BNU, which both like to say they don't compete with each other. So far the lines have been clear. ANZ is seen as the foreigner's bank, largely because it installed an Australia-connected ATM and East Timor's only SWIFT service that has been a lifeblood for the 10,000-strong community of highly-paid so-called internationals the UN-based staffers who helped charter independence.

While that's been a US dollar bonanza for ANZ, there's also the logistical challenges and dramas of using trusting East Timor's unreliable infrastructure to deploy cash to myriad countries, such is the UN's broad church. "Sometimes the electricity generator just stops," says McNamara. "Getting stuff like that right has been a big issue for us."

Where ANZ has been foreign-oriented, BNU is the agent for Portugal's huge pension scheme in East Timor, despatching the millions of euros Lisbon is dispersing to the families of former local employees in the pre-1975 colonial service.

That provides BNU a solid customer base of East Timorese, where Pinto says the main business will be in the future. He boasts about 5,000 customers, 80% of whom are East Timorese (the other 1,000 are members of various Portuguese official agencies returning to assist the new nation). The average pension dispersed is about Euro 300 a month, says Pinto, who commands a 70-strong staff of 65 Timorese and five Portuguese expatriate managers.

ANZ runs its bank with a staff of 30 - 26 Timorese and four expatriate managers, two of whom are from Samoa and Tonga, where ANZ also has operations.

"My main role here is for the bank to become operationally robust," says McNamara. "There's been a fair bit sloshing through East Timor with the large foreign presence but this has created something of a false economy."

A false economy, and a struggling one dependent largely on foreign aid. The World Bank puts GDP per capita for East Timorese at around $US1 a day, which compares that to the $US100-plus per diems of the internationals, many of whom are now packing up for the next world trouble spot.

The instant cash bonanza of the UN presence in East Timor raised expectations for East Timorese of what independence would bring. Some 98% of the economy is transacted in cash, which also creates security issues for the banks that process it. The country may now have its political liberty but economic freedom is proving elusive. Hopes are very high that the development of the Timor Sea resource fields between East Timor and Australia will deliver that prosperity, and sustain a stand-alone business for its three banks.

"Our challenge is to have a bank that will operate and be profitable when the foreigners leave, contribute and hopefully finance the re-building of East Timor, build reserves, develop a savings culture and the notion of long-term bank and customer relationships." says McNamara.

His remarks are echoed by BNU's Pinto. "I think they'll make it."

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