As Tonga transitions to a digital economy, the role of the UN Capital Development Fund (UNCDF) as a partner has been deemed “essential” by the CEO of the country’s only development bank.

Economist and former diplomat, Emeline Tuita, has been the CEO of the Tonga Development Bank (TDB) since 2022 and describes UNCDF as a “primary partner” that “understands the needs of TDB.”

Under Tongan law, TDB retains both a development and commercial function, and is subject to both the Government’s monetary and fiscal policies. UNCDF’s support, Ms Tuita said, helps the bank balance this role and meet its responsibilities on both fronts.

UNCDF has worked with local partners since 2008 in Tonga to strengthen financial inclusion, foster financial literacy, and build climate resilience.

The South Pacific nation’s economy is vulnerable to external shocks and the country hit global headlines in 2022 when the Hunga Tonga-Hunga Ha'apai underwater volcano erupted and caused a tsunami.

Besides volcanic activity and tsunamis, Tonga is prone to cyclones, storms and droughts, with the World Bank estimating that losses from natural disasters amount to 14 percent of GDP and could increase if these events become more frequent. The country’s key income-earning sectors are agriculture, remittances, and tourism.

TDB has been a key partner in both past and present UNCDF-led initiatives, and currently provides significant support to the Pacific Insurance and Climate Adaptation Programme (PICAP) and Pacific Digital Economy Programme (PDEP).

Three joint UNCDF-TDB projects epitomise the impact of this partnership on the country’s economic development so far, while laying the foundations for future collaboration.

They include the volcano recovery fund for Micro, Small, and Medium-sized Enterprises (MSMEs), parametric insurance against climate disasters, and the Ave Pa'anga Pau digital payment system.

Volcano Loan Facility
Many Tongan MSMEs, particularly those reliant on agriculture, were impacted by the volcanic eruption of 2022 and found themselves struggling to recover from a lack of financial support.

The ash and debris from the eruption disrupted essential services, damaged infrastructure, and hampered economic activity.

In response, UNCDF, TDB and the UN Development Programme (UNDP) launched a volcano recovery fund administered by TDB for MSMEs impacted by the calamitous event.

By June 2023, 157 interest-free loans were provided to MSMEs and other individuals.

According to Ms Tuita, the fund has helped TDB augment its existing credit operations and venture into new markets.

“[Through the loan scheme], we were able to support individuals who were exporting [for example] handicraft, simply because the size of the loans that we were giving out on average is something like T$1500. It is something that other commercial banks here would not normally be interested in because it is a lot of work,” she said.

In February 2022, UNCDF support allowed TDB to enable fee-free transactions on its inward remittances digital service, Ave Pa’anga Pau, further easing the burden on Tongans sending financial support to their friends and families affected by the disaster. This exemption ended in March 2023.

Parametric Insurance
Tonga’s vulnerability to tropical cyclones is exacerbated by the lack of post-disaster financing options, such as insurance, for response and recovery, particularly at the micro-level. A 2016 survey found that only 13% of Tongans had access to any form of insurance.

To enhance the country's resilience, UNCDF, through the Pacific Insurance and Climate Adaptation Programme (PICAP), and TDB, introduced a parametric insurance scheme in 2022 initially with FijiCare Insurance as the private sector partner, before regional insurer, Tower Insurance, took over in 2023.

The bank is already seeing the new insurance scheme positively impact the mindset towards saving and budgeting among its customers, while at the same time improving their creditworthiness.

Ms Tuita said the product is affordable and relevant to the financing needs of TDB’s customers that are all too familiar with the adverse impacts of extreme weather.

“Parametric insurance has the right feel, and it is at the right kind of scale that creates an affordable product that can be easily picked up by our MSME clientele,” the CEO added.

The scheme is unique in that it dispenses with loss verification and leverages digital technology to expedite payments and improve accessibility to the product among the country’s rural population.

Payouts are processed through digital channels, such as bank accounts and mobile wallets, and reach the policyholder quicker than traditional insurance products, enabling faster response and recovery in the aftermath of a disaster.

Ave Pa'anga Pau
Tonga’s remittances industry is one its primary income earners. A survey found that 83% of households received remittances in the country, with the total value of the industry amounting to 44% of GDP.

In addition to supporting disaster recovery and resilience-building efforts, UNCDF supported the development of TDB’s Ave Pa'anga Pau digital payment system which made it easier for the sizeable Tongan diaspora and for seasonal workers to send money home.

Ms Tuita describes Ave Pa’anga Pau as the ‘jewel’ of the TDB-UNCDF partnership that has helped improve financial inclusion and access to other financial services in the country.

Like parametric insurance, the platform has had a twofold impact: it has facilitated the flow of hundreds of millions of dollars’ worth of remittances into Tonga and improved the creditworthiness of a segment of the population that is typically considered ‘high risk’ by lenders.

“Ave Pa’anga Pau is rapidly becoming the alternative to other money transfer operators,” Ms Tuita said.

“It is not because they are good at competing market-wise, but because we have been able to develop it as a gateway towards being able to have access to capital for your needs.”

The digital platform is user-friendly and allows individuals and businesses to access a range of financial services, including payments, transfers, and saving, through their mobile phones.

It promotes financial literacy and inclusion, empowering users to manage their finances effectively and access credit when needed, while enhancing transparency and security by reducing the reliance on cash transactions.

Conclusion
In 2027, TDB will celebrate its 50th anniversary. The bank’s partnership with UNCDF will be one year shy from being two decades old by then.

The volcano recovery fund, parametric insurance scheme, and Ave Pa'anga Pau reflect the significant strides the partnership has made over the years.

All three initiatives have contributed to enhancing economic resilience, disaster preparedness, and financial inclusion in the country.

The UNCDF-TDB partnership will continue to play an important role in supporting Tonga build an economy that delivers prosperity and better living standards to its people and as it adapts to a changing climate.

Editor's Note: UNCDF is currently working with TDB on two further initiatives: the Credit Scoring for MSMEs aimed at improving access to finance and the Credit Guarantee Schemes for migrant workers through the Pacific Digital Economy Programme which will be covered in later articles.