Interview

What has been the impact of the country’s economic performance on its banking sector?

FLEMING: Papua New Guinea’s financial sector is robust. The country’s GDP is growing, both liquidity and profitability in the banking sector are strong, and non-performing loan levels are at between 1.2% and 1.3%. Given the concentrated nature of the sector, the country’s four major banks profit from good exposure and continue to invest in future growth.

However, the banking sector is also most connected to the state of the economy: when the economy faces challenges so to does the banking sector. The biggest challenge is the shortage in foreign currency. With global commodity prices recovering we expect an improvement for the medium term. Nonetheless, for the coming years it will remain a continuous challenge. The market is waiting for the next large source of foreign direct investment (FDI) coming in, which is a problem in itself. Structural adjustments are being made by the central bank, in the form of gradual depreciation, but the main focus should be on making the country less dependent on its trade imbalance and periodical FDI surges. The kina has been depreciating since 2012, and PNG needs a continuous stream of foreign currency coming in, which is a responsibility of the private and public sector. If firms do not have sufficient foreign currency they should not import. Many companies follow the profit method despite not having the resources.

How can the banking sector serve the country’s ambition to diversify its economy?

FLEMING: The shortage of foreign currency is a challenge but the kina’s liquidity remains strong. This opens up new opportunities for local companies to make domestic investments. The banking sector is especially looking at driving the small and medium-sized enterprises segment. Despite great potential, banks have become more careful about who they do business with. Economic challenges are expected to keep the market sluggish and dependent on the extractive industries.

Bankable sectors are, in the current climate, hard to find, although the extractive industries and infrastructure remain most attractive. The recovery of global commodity prices might also offer an impulse for the medium term. Sectors linked to the extractive industries, such as transport and the overcrowded property market, have been hit hard over the last few years. The banking sector can help make these sectors less dependent on the performance of extractive industries. For example, the first home ownership scheme was very successful in offering long-term assets to the local population, as a result opening up a new source of demand for real estate companies.

To what extent can technology be used to make banking more profitable?

FLEMING: There is already a mobile banking presence in PNG, with around 90% of BSP’s 10m reported transactions made electronically and around 860,000 made in physical branches. Mobile activity is also very high and is likely to grow even further over the coming years. The banking sector has made huge investments in improving mobile coverage and facilities. The next phase will be about reducing overall reliance on cash in the market as a whole, also in rural areas. The main issue is how to increase acceptance of technology to guarantee those mobile transactions can be facilitated.

The biggest market shift will be when convincing local merchants and trade houses to conduct their transactions electronically. Many of them, who are not always Papua New Guinean, are against electronic payments because they are reported and thus taxable. When available, they often add a surcharge for electronic transactions. One example of the measures being taken to improve trust is reducing the merchant fee. At the moment it is still cheaper than going to the bank to deposit, but customers are not always aware of this.