The Japanese Finance Ministry will help create a framework for handling international remittances in Pacific Island nations and territories as major banks that process such transactions increasingly withdraw from the region, Nikkei has learned.
When banks that lack extensive international networks send money across borders, they rely on intermediary financial institutions known as correspondent banks to move the payments. Western financial institutions have traditionally provided these services, but in recent years many have pulled back from Pacific Island countries.
At a Japan-Pacific Island finance ministers meeting to be held in Samarkand, Uzbekistan, in May, Japan will lead in calling for discussions on the creation of a centralised settlement institution, tentatively named the Pacific Payments Mechanism, to complement the role of correspondent banks. Japanese Finance Minister Satsuki Katayama will attend the meeting.
The mechanism aims to reduce transaction costs by processing international remittances from multiple island nations in a centralised manner. It would also seek to streamline anti-money-laundering screening and other compliance procedures. Japan will explore whether digital payment technologies developed by Japanese banks could be put to use in the endeavor.
At the meeting, Japan will propose establishing the centralised settlement institution in coordination with private-sector services and encouraging it to become financially self-sustaining. Japan also plans to work with other developed economies such as Australia, New Zealand and the U.S on the initiative.
The World Bank is set to begin studies on establishing the settlement institution as early as May. The World Bank to date has approved US$76.9 million to support island nations under its Pacific Strengthening Correspondent Banking Relationships (CBR) Project, a programme to which Japan has also contributed.
If international remittances become unavailable, island nations would face difficulties accepting foreign investment and conducting trade. For Pacific Island countries, this could also disrupt tourism income earned in foreign currencies and remittances sent home by overseas workers — both critical parts of many economies in the region.
International money transferring services operated by global financial institutions have become more costly because of stricter anti-money-laundering requirements, and there is a growing tendency to avoid higher-risk businesses. As a result, operations in small island economies have reportedly been contracting since the 2000s.
According to data compiled by Japan’s Finance Ministry using information from SWIFT, the global interbank communication network, about 60 percent of contracts for international remittance services in island nations are believed to have been lost between 2011 and 2022.
Japan’s support for building a payments network for island nations is driven in part by a push to check China’s influence in the region. Since 2019, the Solomon Islands, Kiribati and Nauru have severed diplomatic ties with Taiwan and established relations with China.
In recent years, China has increased its influence through massive investments in infrastructure development in island nations. Japan appears to be aiming to use the new payments network as a bulwark against the expansion of yuan-denominated settlements in island countries.
