PNG extends financial services to rural areas

The cash-based economy of PNG is currently undergoing a rapid change, with increasing revenues from large liquefied natural gas projects the main driver of the banking sector’s growth. In 2013, the number of active bank accounts in PNG amounted to only 1.5m, compared to a population of 7m. However, with new money flowing into the country, the banked population is expected to continue to grow throughout 2014.

PNG has just a handful of banks: Bank South Pacific (BSP), Australian banks ANZ and Westpac, Malaysia’s Maybank, the National Development Bank (NDB), and 4 licensed microfinance institutions all of which mainly operate in major urban centres. According to the latest estimate from the Asian Development Bank (ADB), as of 2011 nearly 85% of the county’s population did not have access to financial services.

Efforts to bring more people into the formal banking system are being supported by the Bank of Papua New Guinea, PNG’s central bank, which is running an initiative to target residents in rural and isolated areas. This refocusing of the banking sector will ensure greater access to financial services through financial education, deployment of mobile and electronic banking channels and accelerated microfinance programmes.

Traditional commercial banking models have proved very costly for servicing rural areas, due to the lack of buildings, rocky geography and limited infrastructure, while the transportation of money by plane to isolated regions is considered insecure. Mobile end-to-end banking provides a cost-effective solution for tackling the country’s current needs but poses its own challenges.  

Cultural adjustment

Indeed, the biggest challenge for PNG’s banking system is that customers are accustomed to doing business in cash. Efforts to change this have been under way for nearly five years. The redesign of the banking sector in PNG started with the EasiPAY service, introduced by the mobile operator Digicel in 2009, followed by the roll-out in 2011 by BSP of a flat-fee basic bank account, called Kundu.

PNG’s banking infrastructure has continued to develop, with the introduction of electronic inter-bank funds transfer and real-time gross settlement capabilities in October 2013. It is expected that a significant increase in the use of electronic banking will follow as the funds transfer process becomes more reliable and efficient. BSP aims for substantial expansion of its electronic funds transfer at a point-of-sale system (also known as EFTPoS) and ATM network, investing $95m in developing an operational centre in Waigani, Port Moresby. This investment includes the implementation of a new trade finance platform, on which development started in 2013. Westpac also aims to expand its activities in PNG. The bank has plans to introduce merchant terminals in stores and to construct a new operational centre in Port Moresby. Additionally, Westpac is building a new commercial centre in Lae to streamline its operations.

Banks are also focusing on rural expansion. As of May 2014, BSP operates 295 ATMs and plans to open an additional 35 scaled-down branches each year in rural regions. This should give BSP an edge over its rivals in terms of its network. Westpac currently has a total of 16 operating branches and 30 ATMs, predominantly in urban areas, while ANZ operates 42 ATMs and 12 branches.

Concerns about profitability have made retail banks reluctant to enter the rural market due to the low population densities and disposable incomes prevalent in these areas. Furthermore, convincing rural residents to use online services for regular transactions, when these customers have very little experience with the internet, is a significant impediment for the commercial banks. These factors mean that, over the medium term, banks in rural areas are expected to run at a loss.  

Microfinance key to diversification

These rural banks will be at the vanguard of new loan mechanisms that are expected to encourage greater participation from rural residents. Several licensed microfinance operators, such as Nationwide Microbank and PNG Microfinance, are working under the supervision of the Bank of Papua New Guinea. It is hoped that, with only around 15-20% of the population currently accessing financial services, the government-initiated microfinance schemes will help expand the financing options available to workers in the informal sector. To support these efforts, the government is cooperating with international institutions, including the Microfinance Expansion Project funded by the ADB.

For its part, the NDB has launched its micro-financing arm, the People’s Micro Bank, which is offering loans from PGK5000 ($1825) to PGK100,000 ($36,500) to family owned businesses with fewer than 10 employees. Loans larger than PGK100,000 are also possible through the NDB itself.

“We estimate that about 10% of SMEs are owned by Papua New Guineans, and we want that to be increased by 70% within the next 30 years. It is a challenge, but we believe, and indeed it has been proven worldwide, that SMEs are the backbone of the economy,” Moses Liu, acting managing director of NDB, told OBG.

In line with the government’s financial inclusion programme, the Bank of Papua New Guinea wants to see the extension of financial services to additional 1.5m unbanked low-income people by 2015, partly by increasing access to education. To further optimise the results of this initiative, the Centre for Excellence in Financial Inclusion was established in 2013. By providing greater access to financing for smaller businesses, these steps will enable the diversification of the country’s economy away from the dominant extractive industries towards other sectors.

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