Lifting all waka: The Reserve Bank encourages progress with access to the financial system

How good is your financial system if it serves only the interests of the most advantaged?

Not as good as it could be, the Reserve Bank suggests.

In its issues paper Improving Māori Access to Capital, it cited limitations to our financial system which, if left unfettered, can act to the detriment of environmental sustainability, social cohesion and cultural inclusion. It will readily serve the interests of those with the right credentials, but those at the margin may not do so well.

This is the context for the Reserve Bank's recent move to endorse and encourage the adoption of more flexible lending practices with respect to Māori freehold land - whenua Māori - which makes up approximately 5% of land in Aotearoa, New Zealand.

New Zealand's capital markets operate effectively for larger companies, but smaller companies can find it harder to get a good hearing. Many small and medium-sized enterprises turn instead to mortgaging the family home for that capital funding.

Given lower rates of homeownership for Māori, this too may not be an option for many Māori businesses, who may have to turn instead to higher-cost loans from second and third-tier lenders.

Enhancing access to capital for Māori stands to not only help individual families and communities achieve greater economic stability and growth but also contribute to the overall economic development of the country.

What's needed in particular, the Reserve Bank notes, is a resolution to the problem of traditional financial institutions typically hesitating to provide finance secured by mortgages over whenua Māori due to the nature of whenua Māori ownership (which is often characterised by multiple owners and specific legal protections).

In particular, the Reserve Bank argues for 'adjusting regulatory frameworks to better accommodate the communal ownership structures of thereby improving access to capital'.

It also notes the desirability of setting this in the context of ESG and the benefits which can come from investors giving due regard to environmental, social, and corporate governance issues: 'Integrating Māori values into broader investment frameworks in order to not only unlock the economic potential of whenua Māori but also contribute to creating a more inclusive and sustainable economic environment'.

The Commerce Commission has made similar recommendations in their draft report on the personal banking services market study, that also recognises the challenge of accessing capital for housing on whenua Māori. The solutions available so far are noted to be more costly relatively speaking, not entirely fit for purpose, and not scalable. It suggests that regulations and policies in property finance, such as loan-to-value ratio restrictions, along with broader regulations like the AML/CFT Act, may need to be re-evaluated in the context of lending against whenua Māori.

Recognising these challenges, the Māori Land Court has taken the step of issuing a Practice Note which provides guidance to landowners, lawyers and the banking sector when lending against whenua Māori. Although not binding, the Practice Note provides much needed guidance for when whenua Māori is proposed as security for lending.

It outlines:

• the processes through which Māori trusts, incorporations, and individual owners can have mortgages approved
• the registration of mortgages against whenua Māori
• the possibilities for registering a mortgage against the leasehold estate of whenua Māori
• the procedures mortgagees must follow to exercise their power of sale concerning whenua Māori

It also delineates the role and powers of the Māori Land Court under the Property Law Act 2007 concerning these transactions.

By simplifying these processes, the Practice Note attempts to mitigate perceived risks by financial institutions and encourages them to engage more confidently and responsibly with Māori landowners.

The Reserve Bank has endorsed this, expressing its hope that the Practice Note will lead to greater efforts from banks to lend against whenua Māori. It has previously noted research showing that firms with stronger ESG principles realise better economic returns. It also notes the strong parallels of a values-based approach to investment to Te Ao Māori with its focus on long-term outcomes, sustainable management of resources, and a strong focus on the community outcomes of business practices.

This has been offered as exhortation rather than edict.

But the argument is persuasive: a financial system that offers wider accommodation stands to lift all waka.

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