Interview: Vishnu Mohan, Ian Clyne, Ashleigh Matheson
What measures are in place to ensure transparency and good corporate governance in the sector?
VISHNU MOHAN: Banking is extremely well governed here compared with similar developing countries. The central bank is very dependable and well versed. Because global financial markets evolve and change rapidly, this is an ongoing learning process for the entire sector and not just the authorities. Given that, the conditions here are good and anyone coming here will be pleasantly surprised with the governance interaction. My view is that the perception of Papua New Guinea or a comparable developing country internationally has changed as a result of the financial crisis, which was caused not by emerging markets but by the developed markets.
IAN CLYNE: We have a strong central bank in terms of corporate governance and transparency. BSP is the largest bank in PNG; we are a major publicly listed company on the Port Moresby Stock Exchange, so have both Bank of PNG and securities exchange requirements to meet. We have one Malaysian and two Australian institutions, all subsidiaries of major international banks that should have an embedded transparency and corporate governance culture. In terms of anti-money laundering and “know your customer” compliance, BSP has invested significantly in operational risk infrastructure, IT software and related platforms, and is the leading bank in PNG in terms of governance in this area. We report far more suspicious transactions to the Financial Intelligence Unit than any other institution in PNG.
ASHLEIGH MATHESON: A lot of the prudential standards set by the central bank mirror those in other countries. Foreign banks operating here are governed by the standards set in their headquarter country, so our standards are generally higher than those required by PNG’s legislation. We are regularly inspected by the central bank, but we also have our own internal and external controls. The understanding of corporate governance culture varies. If one is dealing with multinationals then it is generally very strong. Transparency and corporate governance in the private sector is not as strong as it could be. The PNG Institute of Directors is building governance standards but there is a long way to go. The stock exchange follows a good model and sets the standard of what is required of existing and new listings.
Which products and reforms would help increase the liquidity and sophistication of the sector?
MATHESON: Liquidity is not currently an issue, and while the central bank has mopped up a significant amount of surplus liquidity over the last few years, the system remains flush with funds. The local banks all carry a level of government debt, and it would help in situations of tight liquidity to have clear policies from the central bank for the repurchase of treasury bills and inscribed stock. The knock-on effect would potentially be the encouragement of secondary markets for trading in government paper. The products offered by the banking sector are not as sophisticated as in other markets. Offerings are of the basic order and at present the market is not seeking anything different. The banks will introduce new products if required. Large multinationals usually borrow offshore for major projects, and generally the borrowings are in the currency of the major revenue streams. It appears that in 2012 the government will go to the market through a mix of inscribed stock and treasury bills. Interest rates on these are likely to range between 1.25% for short-term instruments and 5.25% for longer-term bonds.
CLYNE: From a corporate banking perspective, product ranges in PNG are very standardised, and similar to what one would expect in any emerging market. In terms of retail, there needs to be far greater inclusion.
Access to lending for retail and small and mediumsized enterprises (SMEs) outside the major towns is still very difficult, but BSP is looking for solutions to take banking into rural areas. Once retail customers have access to an account, banks can consider lending based on account activity and cash flow. There are potential lending opportunities in the retail and SME sectors that we are currently not servicing, with none of the banks having strong offerings for SMEs. BSP is building an automated retail/SME lending platform with scoring models, as it is impossible to effectively service this sector manually. It is difficult in terms of cost, timeliness, efficiency and governance. I believe that in 12-18 months we will be able to significantly increase our retail and SME lending levels. The strength of this market in PNG is its simplicity, and this has helped PNG overcome the challenges of the global financial crisis.
MOHAN: There is a lot of opportunity to introduce more products, especially in corporate banking, which is largely run-of-the-mill overdrafts, loans, etc. There is plenty of room to move things to the next level, including an opportunity to develop a capital market with bond issues and the like. While there may be an issue with ratings, it is exactly this challenge that international organisations should take up and make happen. This would help the country develop and prosper, especially considering that PNG does not have the strongest image abroad. However, the economy is resource-based and offers fantastic opportunities in mining, agriculture and hydrocarbons. In addition, there are numerous ventures for project finance and credit facilities. For example, ANZ was the mandated lead arranger for the PNG liquefied natural gas project which had a commercial financial arrangement of $1.9bn, of which ANZ funded $400m, and was oversubscribed when it was taken to market. This proves that there is an appetite for investment opportunities here. It is merely a question of replicating this success in other profitable sectors similar to the mining industry.
Given that three large banks already dominate, is there room for other banks to grow in the market?
CLYNE: The market is very small in real terms. The population is about 7m, but for retail banking there is a potential pool of 2m customers, and many of them have very low incomes. They can only be cost-effectively serviced using electronic banking. In corporate banking, each of the banks have 10-15 large strategic relationships, which are key to their performance. If we allow new entrants in, they will only seek to service this already competitive corporate sector, and all that would be achieved is greater competition for a limited client base. It will not address the need to expand banking services to remote rural communities, or service lowincome workers in the major cities and towns. Instead, the outcome would be to potentially weaken the existing banks to the detriment of the sector as a whole.
In small, emerging-market countries, new entrants face very high risk, and may undermine the sector’s stability and profitability. If PNG has a marginally profitable banking sector, then we have a high risk of a major financial crisis given the volatility of the market, and the shortterm nature of bank funding in PNG. Any new entrant must be prepared for a long and costly entry. It is difficult to identify international banks that would want to take on the political and sovereign risks, especially considering the size of the market. BSP’s corporate business subsidises our retail banking. If we suffer a reduction in corporate profitability, we would have to consider closing unprofitable retail branches in remote areas. We have 38 branches, and 20 are either very marginally profitable or losing money, so we could close 20 branches. Retail banking is not very profitable in PNG unless you move customers to electronic solutions.
MATHESON: The market is already highly competitive; the barriers to entry here are great. Costs of buying or renting property are high, and getting things done is extremely costly. There are also labour challenges and constraints, and competition for high-quality staff is extreme. The opportunity for a new entrant would be to find a niche rather than retail or branch banking. The service we provide to the average customer costs us money, and the losses are subsidised by our other services; it’s the 80/20 rule that makes us profitable. Any new entrant to the banking sector would want to avoid running a branch network, if it can. We have a responsibility beyond making money; the challenge is to find a sustainable way to deliver it to our wider audience.
MOHAN: Healthy competition is welcome, though the market does not have much room for another major competitor. A lot of wealth has been created in PNG and more will be amassed over the next few years. One of the most positive aspects of this is that it will inevitably filter down throughout the economy. We have already seen the creation and growth of a middle class, and we can expect this population to continue to grow in its size, wealth and disposable income. So there are likely to be opportunities for new entrants, particularly in retail banking, but it will require different strategies for different players. While there might not be room for a full-scale commercial bank, there will be opportunities for niche market players to exploit, whether in the retail market, single-project finance or any other such segment. At present I would consider the current market structure to be adequate for PNG.
What banking technology can be used to access the untapped market, and what is the main challenge in providing services in remote areas?
MOHAN: PNG is a cash-dominated society; a conservative estimate would be that at least 30% of hard currency is out of the formal banking loop. The mobile phone bypassed an entire generation, but the uptake of mobiles by the younger generation may change this. The number of mobile users in PNG is around 1.3m, which is significant for a country of only about 7m people where 80% of the population is rural-based. As such, the mobile phone has and will do much to draw new users to financial services. ANZ will launch mobile phone banking in 2012 to provide access to these populations and bank the unbanked. From a currency perspective, the manufacturing sector has not developed as strongly as some others. Although industrialisation will continue to grow, it will not rise to the extent needed to use up the foreign currency coming in, so the central bank will have to continue to issue PNG kina back into the market. The banks will be in a liquid situation, and the central bank will have to find new ways to absorb the funds.
CLYNE: Digicel’s mobile network expansion has allowed BSP to bring new technologies to PNG, making servicing retail customers more cost-effective. The only profitable way to do this is with electronic funds transfer at point of sale (EFTPOS) technology and ATMs, which are cheap for customers and banks and give seven-daysa-week access. Due to the expansion of our EFTPOS and ATM networks, BSP has seen a major increase in the number of electronic transactions, and a 17% reduction in branch transactions, so our strategy is working.
The future of retail banking in PNG is about providing access in rural areas. We need to roll out wireless EFTPOS technology throughout the country. BSP has 5600 EFTPOS machines and 240 ATM machines in PNG, and is running EFTPOS pilot programmes in rural locations.
We have also piloted a tablet computer solution with a Bluetooth card swipe, which allows us to open new accounts and issue a working debit card in five minutes anywhere with mobile network coverage. We have 350 tablets already activated. This will revolutionise the account acquisition process in retail banking. In June 2012 we launched the Green Gold initiative to increase use of electronic banking. We aim to acquire 250,000 new customers during the Green Gold scheme.
MATHESON: The banks are using more technology and have started providing mobile banking services. We have launched a mobile banking platform, one of the first steps in a number of initiatives to bank the unbanked. We have grown our customer base by approximately 18% in the time since we launched a new basic account product five months ago. The offering that has two main features, one of which is that it only charges a fee when a customer makes a transaction.
Through the feedback that we received from the unbanked population, we understood that high fees combined with low deposits in the rural areas were eating away their savings, and we responded accordingly. The other issue with the unbanked in the villages is the lack of identification. The new product had a fantastic response and uptake in a short space of time.
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