Highly profitable by global standards, Papua New Guinea’s banking sector has traditionally focused on the government, larger firms and high-net-worth individuals. Despite significant challenges linked to poor infrastructure, inadequate credit information and a largely rural population, commercial lenders are developing innovative means of broadening the sector’s reach.
Framed by the government and the central bank, the Bank of PNG (BPNG), the National Financial Inclusion and Financial Literacy Strategy encourages private banks, microfinance institutions (MFIs), non-bank financial institutions (NBFIs), and savings and loans societies (SLSs) to partner with non-financial actors, like telecoms operators and retailers, to bridge the gap in access. Ongoing upgrades to PNG’s financial infrastructure will improve banks’ efficiency and support alternative means of reaching out to low-income clients.
Narrow Market
With total assets of PGK38.1bn ($15.49bn) as of the end of December 2013, according to BPNG, commercial banks dominate the financial sector, accounting for 76.5% of total assets, far ahead of the 22.4% held by superannuation funds and 1.1% held by life insurers. Yet while the market remains flooded with abundant liquidity stemming from government deposits, totalling PGK22.3 ($9.06bn) in December 2013, banks’ financial intermediary functions for the real economy remain highly constrained. Aggregate lending totalled PGK11.7bn ($4.76bn) by December 2013, only around 32% of GDP, lower than the 33% in neighbouring Indonesia or 52% in Mongolia.
BPNG estimates roughly 85% of the 7.1m-strong population remained unbanked in 2013, while some 78% of the estimated PGK900m ($365.86m) in circulation in rural areas was held outside financial institutions in 2012. Yet although the financial sector counted some 1.8m accounts in 2013, including roughly 1.5m at commercial banks and 240,000 at MFIs, the high level of dual accountholders means the number of banked people remains below 1m. Data on banking penetration also reveals a significant gender gap, with women accounting for only 30% of the total financial services portfolio in 2013, according to BPNG. A 2013 survey by GSM Association, an industry organisation for mobile operators, on women in mobile payments found that 31% of men and 39% of women surveyed hid their savings at home, while 48% and 40% of men and women, respectively, used a bank account for saving. Although from year-end 2012 to July 2013 the number of financial institution agencies jumped from 14 to 771 and branches from 64 to 220, banks’ reach has remained low. The number of bank branches per 100,000 customers rose modestly from 1.8 in 2006 to 1.9 in 2012, and ATMs per 100,000 doubled from 3.81 to 8.4 in the same period, according to the World Bank.
Abundant Liquidity
Given constraints on lending linked to the market’s size and paucity of information on small and medium-sized enterprises (SMEs), banks face the common challenge of excessive liquidity in the domestic financial sector. Central government deposits, which accounted for 17.3% of total deposits in March 2013, down only modestly from 19.5% in March 2009, pose a chronic challenge for the financial system. Funds are typically accumulated in trust accounts as a result of the government’s under-spending of its investment budget. Indeed, capital expenditure disbursements typically average 50%, according to Treasury figures. Despite prodding by BPNG for the Department of Finance to transfer state trust accounts from commercial banks to BPNG in an effort to sterilise them, the number of trust accounts at banks remained a high 76, holding some PGK1bn ($406.5m), while trust accounts at BPNG totalled only PGK177m ($71.9m) as of September 2013.
However, a rise in government deposits of 4.48% in the year to March 2013 lagged broader deposit growth of 9.16%, which was driven by an increase of 11.89% in private sector deposits. The majority of this liquidity is in current accounts rather than term deposits of over one month, with Bank South Pacific (BSP), which controls 56% of deposits, reporting that some 84% of its deposits as current accounts in its financial results for 2013. Constrained in their lending, banks’ aggregate loans-to-deposit ratio remained relatively low at 60.8% in March 2013, according to BPNG figures.
Amidst excess liquidity, prime lending rates trended downwards, while money market rates remained consistently below BPNG’s benchmark interest rate, the Kina Facility Rate. While this has weakened the transmission mechanism for monetary policy, it has also brought down yields on short-term government-inscribed stock. Despite attempts by BPNG to absorb excess liquidity through open-market operations and central bank bill issuance, the level of domestic liquidity has remained high into 2014 (see Economy chapter). Yet while banks have been avid buyers of government securities in recent years as public local-currency debt has grown, new BPNG exposure limits in 2011 capping single borrowers’ loans at 25% of risk-weighted capital and corporate groups at 40% may curb banks’ appetite in 2014.
Bank Structure
Following the banking crisis at the turn of the millennium, PNG’s banking sector underwent widespread restructuring and reconstruction, reducing the number of commercial banks from seven to four and the total number of branches from 485 to 195 in the decade to 2006. The market hosts three foreign-owned lenders – Australia’s ANZ Bank and Westpac, both present in PNG since 1910, and Malaysia’s Maybank active since 1994 – alongside the dominant force on the market, locally owned BSP.
Established in 2007 and held by the state-owned Independent Public Business Corporation (IPBC), the National Development Bank (NDB) primarily targets SMEs and microfinance. Both ANZ and Westpac, operating 15 and 16 branches, respectively, have clustered their networks in urban areas, while Maybank’s two branches in Port Moresby and Lae have focused on serving Malaysian firms in PNG. BSP, with its 44 branches and 40 smaller rural outlets in 2013, thus holds an unofficial monopoly on rural banking. The bank, which also operates in Fiji and the Solomon Islands, counted 1.27m accounts in PNG by year-end 2013. Westpac counts roughly 150,000 accounts and ANZ over 100,000.
Local Major
By December 2012 BSP controlled 49.5% of outstanding loans and 52.76% of deposits, according to its 2013 annual general meeting, outpacing ANZ with 26.38% and 25.23%, respectively, and Westpac with 19.91% in outstanding loans and 16.44% in deposits. The locally owned bank controlled 46% of loans and 56% of deposits in 2013.
Following a 2002 merger with the state-owned PNG Banking Corporation, 27% of BSP was floated on the Port Moresby Stock Exchange (POMS ox). While the state remains the single largest investor in the bank with a 17.75% stake held through the IPBC and a 12% stake held by state-owned Motor Vehicle Insurance, most major domestic institutional investors hold smaller stakes. The National Superannuation Fund (NASFUND) has 10.93%, Nambawan Super owns 10%, Western Province landowner fund PNG Sustainable Development Programme has 6.17%, the Teachers’ SLS holds 3.7%, Credit Corporation owns 8.06% and the International Finance Corporation has 9.6%. With a short-term rating of “B” and a “B+” long-term rating from Standard & Poor’s (S&P), the bank saw its total assets grow 18.58% to PGK15.82bn ($6.43bn) in 2013, while its loan book expanded 10.35% to PGK5.26bn ($2.14bn). The market leader derives a smaller share of its profits from the foreign exchange market – 20% in 2012 compared to 45% each for the two Australian banks – but has driven stronger growth in lending margins and fee revenues, particularly those linked to transactions.
While its return on equity (ROE) is slightly lower than its two competitors, at 29% in 2012 compared to ANZ’s 32% and Westpac’s 31%, its larger size yielded pre-tax profits of PGK535.4m ($217.64m) in 2012. This compared to PGK291.4m ($118.45m) for Westpac and PGK440.2m ($178.94m) for ANZ. In the year to September 2013 BPNG reported an aggregate ROE of 21.8% and return on assets of 2.6% for the sector as a whole. As BSP’s reliance on wholesale funding has trended downwards, from 66% of its funding mix in the fourth quarter of 2012 to 64% by the fourth quarter of 2013, according to its financial statements. It also retains ample space with liquid assets accounting for 40% of deposits at the start of 2013, according to S&P.
Non-Bank
Although banks still dominate the financial sector, non-bank intermediaries such as NBFIs, SLSs and MFIs play an increasingly important role in catering to individuals outside the banking system and smaller enterprises unable to access collateralised bank lending. The 22 licensed SLSs include professional-based SLSs like PNG Power and PNG Ports, superannuation contributors and regionally focused societies backed by local governments. The largest SLSs are the Teachers’ SLS and the Police and State Services SLS, while the largest regional society is the East New Britain SLS. Barred from borrowing funds, these societies represent small-scale savings and are only able to extend loans to members not exceeding their savings and up to 60% of total accumulated savings in aggregate. Combined the 22 SLSs accounted for only 2% of total lending by March 2013, according to BPNG.
Other Lenders
Seven licensed credit firms are more active in the lending space, predominantly in payday advances to cover school fees, medical expense and leasing. “While banks finance larger projects, the majority of financial institutions’ lending, which is mostly short term, is in the PGK250,000 ($101,625) range, up to a ceiling of PGK10m ($4.06m),” Robert Allport, Credit Corporation’s CEO, told OBG. Growth in NBFIs’ lending has remained strong in recent years, rising 21.1% year-on-year (y-o-y) in the first quarter of 2012 and 32.2% in the first quarter of 2013, according to BPNG.
“Growth has been driven by existing customers expanding rather than new clients entering the system,” Allport said. “In particular, we have seen a significant increase in trucks and heavy equipment financing.” Credit Corp is the largest and most diversified NBFI with total assets of PGK1.04bn ($422.76m) as of December 2013. It controlled roughly 30% of the PGK527m ($214.22m) in outstanding NBFI lending in March 2013 and reported 5.79% growth in operating profits to PGK85.2m ($34.6m) in 2013. Also active in Fiji, the Solomon Islands and Vanuatu, Credit Corp has a property investment arm alongside its financing and leasing business. Listed on POMS ox and one of the most traded stocks, Credit Corp counts NASFUND, Nambawan Super and the Teachers’ SLS as its three major shareholders, holding 18.7%, 15.8% and 15.3%, respectively. Although BSP made a share-funded, PGK250m ($101.62) takeover offer for Credit Corp’s financing arm in mid-2013, the offer was defeated by shareholders in October 2013 given that key investors were already overweight on BSP shares. However, a cash-funded acquisition in 2014 would likely succeed.
The second-largest NBFI by assets, Finance Corporation (FinCorp) boasts a larger customer base with 20,000 active borrowers and assets of PGK200m ($81.3m) in 2013. The Kina Group’s asset finance subsidiary, Kina Finance, is also a leading player in the NBFI market alongside its stockbroking and funds management affiliates. The latest entrant to the sector licensed in 2006, Heduru Moni, which trades as Moni Plus, serves roughly 15,000 borrowers and was awarded a foreign exchange dealer licence in 2013.
Microfinance
Supported by the UN, Asian Development Bank and the Australian Agency for International Development, first under the Microfinance and Employment Project and since 2012 under the Micro-finance Expansion Project (MEP), PNG has witnessed rapid growth in the reach of its licensed MFIs. Indeed, the number of MFIs rose from one to four between 2008 and 2013, while the number of branches rose from 17 to 27 and agents increased from 68 to 771 over the same period, according to BPNG. Extending loans ranging from PGK200-4500 ($81.30-1829), MFIs cater to around 200,000 customers, although detailed data is unavailable from BPNG. The oldest MFI, Nationwide Microbank, is the largest MFI in the Pacific with assets of PGK63.61m ($25.86m) in 2013. Originally established under the MEP with pilots in Wau and Lae in 2004, it was granted a nationwide micro-banking licence by BPNG in 2008 and caters to roughly 130,000 clients.
The second major MFI, PNG Microfinance, has around 90,000 clients and was established in 2004 by the PNG Sustainable Development Programme (PNGSDP), a charitable trust established in 1999 to manage funds from the Ok Tedi mine. PNGSDP raised its stake in the MFI from 48.65% to 83% in 2010, when BSP sold its stake. A much smaller MFI, Kada Poroman Microfinance, caters to just under 20,000 clients in four local government districts around Kokopo. In 2013 the NDB established the fourth and newest MFI, the People’s Micro Bank. Aggregate lending by MFIs remains marginal at 0.57% of total lending in March 2013, according to BPNG, but has grown rapidly in recent years, with outstanding loans rising 54.8% in the year to March 2013. The government’s financial inclusion strategy should support strong growth in both accounts and lending in the coming two years (see analysis).
Oversight
Although the regulatory barriers to entry into the lending market remain low, with minimum capital requirements of PGK15m ($6.09m) for commercial banks and PGK1.5m ($609,750) for licensed financial institutions, the structural costs of doing business in PNG remain high given inadequate transport and communications infrastructure. Yet following enactment of the Bank and Financial Institutions Act in 2000, the central bank has sanitised the commercial banking market. All banks maintain capital adequacy ratios (CAR) well above BPNG’s 12% minimum, with BSP reporting a CAR of 19.4% as of the end of 2013. The sector’s aggregate CAR reached 28.7% in December 2013, according to BPNG. The sector’s loans-to-deposit ratio remained at around 50% as of December 2013, while the ratio of non-performing loans to total loans was 2.1% and 0.9% of total assets, according to BPNG.
In the second half of 2013, the IMF considered banks to be largely insulated from the slowdown in the real estate market due to conservative lending to the property sector. This did indicate a likely slowdown in growth. “There is no question that the PNG economy will continue to grow, but not at the speed that we have seen over the last five years, a factor highlighted by the decreasing appetite for residential housing and rentals,” Garry Tunstall, Nambawan Super’s CEO, told OBG. However, with property accounting for a mere 6% of the loan book in 2012, according to the World Bank, this also represents a great opportunity. “Since property investors in Port Moresby are generally not highly leveraged, they can absorb the impact of yields normalising from historically high levels,” Mark Baker, ANZ’s managing director in PNG, told OBG.
Making Changes
While the financial system remains highly liquid and solid, the regulator is continuing to overhaul its regulatory functions by improving oversight of systemically important institutions, implementing the third stage of International Financial Reporting Requirements, and moving towards implementing elements of Basel II and III standards. Although BPNG has implemented elements of Basel I with its CAR and liquidity requirements, it has omitted market risk in the calculation of risk-free assets given the lack of a secondary market for government securities. Although Treasury bills, central bank bills and government-inscribed stock are considered risk-free, they are held until maturity by banks and superannuation funds that are thus unable to mark them to market. Nonetheless, in 2014 BPNG is reviewing and backfilling some Basel II and III guidelines by developing operational risk standards and non-prudential standards for consumer protection. It is also striving to improve the efficiency of payment systems, and having implemented a real-time gross settlement (RTGS) system for high-value transactions, it plans to migrate low-value transactions to an automated electronic settlement process in 2014. The central bank is also eager to foster more competition in both banking and non-bank sectors, like foreign exchange. In the meantime, banks have also been investing in their back office systems, both to handle implementation of RTGS, and to improve the automation and efficiency of their operations.
Legislative Changes
The central bank is also pressing ahead with a number of legislative reforms in 2014 that should place vulnerable parts of the financial system on a firmer footing. Following a review of the SLS Act of 1995, a new bill will be presented to Parliament in 2014, raising minimum capital requirements to PGK100,000 ($40,650), requiring SLSs to register under the Companies Act of 1997, providing for mergers and acquisitions under the bill, and removing limits on deposit taking, as well as interest rate ceilings. By placing SLS within the jurisdiction of BPNG’s licensing and prudential supervision, the new rules delineate the strict responsibilities for management, as well as industry association Federation of SLSs. Despite being registered under the Companies Act of 1997, SLSs will still be structured as mutual unions in both shareholding and taxation to support the competitiveness of SLS vistion in 2014 to amend its anti-money laundering rules to implement all 49 of the Financial Action Task Force’s (FATF) recommendations – it complied with only eight, according to the FATF’s last evaluation in 2011. Since the enactment of the Proceeds of Crime Act in 2005, the Financial Intelligence Unit of the Royal PNG Constabulary has tracked a set of “know your customer” guidelines issued in 2007. While the rules require 100 identification points for opening a bank account, they were relaxed to 50 points for basic “pay-as-you-go” accounts targeting rural and low-income clients.
Driving Retail
The launch of such scaled-down accounts has been a key driver of growing retail penetration in PNG. In 2011 BSP was the first to launch such an account, known as Kundu, waving the monthly operating fee in favour of a PGK7.50 ($3.05) opening fee and charging only PGK1 ($0.41) per deposit and withdrawal. Through a network of 44 BSP Rural branches, up to 20 agents per branch are equipped with tablet computers to set up an account within five minutes and immediately provide a debit card and mobile banking ID. By July 2013, BSP reported 120,000 such accounts and 100% growth in transactions in the first half of 2013, with the aim of reaching 200,000 and expanding BSP Rural to the Solomon Islands in 2014. ANZ and Westpac have followed suit with their own “instant-issue” cards in 2013. In the first quarter of 2014, BSP and ANZ unveiled fee-free accounts for students under 25 and minors in a bid to reach a new generation of clients, with Westpac expected to follow suit. The three main banks are also segmenting their highvalue clients through priority banking, with the launch of BSP First and ANZ Signature Priority Banking.
Expanding Acces
While all banks have continued to expand their branch networks gradually, the emphasis has shifted to non-branch access points such as ATMs, electronic funds transfer at point of sale ( EFTPOS) and mobile banking platforms to drive channel productivity. BSP has a wider reach with 300 ATMs and over 10,800 EFTPOS by year-end 2013, compared to ANZ’s 66 ATMs and over 750 EFTPOS, and Westpac’s 33 ATMs and 69 in-store access points using EFTPOS. By late 2013, BPNG reported over 900 non-bank financial access points, ranging from retail stores and post offices to lottery kiosks and pharmacies, a significantly higher number than bank branches. BSP is also developing its agency network, working with partners like retailer Super Value Stores to establish 1000 containerised trade stores that will act as agents by the end of 2014. Banks typically charge monthly rentals for their EFTPOS, with BSP charging PGK50 ($20.32) and 1% fee on transactions, but not cash-out. While the expansion of infrastructure has driven up costs, particularly for BSP, which saw its cost-to-income ratio drift up from 53% to 55% over 2013, the initiatives have strong support from both the government and BPNG.
Conscious of the two-tier nature of the PNG economy, authorities have sought to develop policies aimed at the large informal economy, which accounts for roughly 85% of employment. The National Informal Economy Policy, issued in 2011 by the Department for Community Development in conjunction with the independent Institute of National Affairs, proposes a two-pronged strategy involving financial inclusion and more efficient delivery of public services to households in the grey economy. While efforts to promote financial inclusion focus on key areas – agent and mobile banking, diversification of financial service providers, reform of public banks, financial identification and consumer protection – authorities face significant challenges regarding information on the composition and financial capacity of households operating in the large informal sector. A signatory of the Money Pacific Group, PNG aims to bank an additional 1m customers by 2016. While ambitious, the strategy is spearheaded by a Centre for Excellence in Financial Inclusion established in October 2013 which acts as coordinator of various initiatives, including the MEP and financial literacy courses that are due to be integrated into core curricula from the primary school level onwards.
Rising Intermediation
Banks’ efforts to reach the unbanked, including both individuals and increasingly mid-sized enterprises, are driven by strong competition in lending. While abundant liquidity has put downward pressure on lending rates, bank credit to the private sector has grown apace. Despite cooling economic growth, bank lending has accelerated, from average growth of 2.5% in 2011 and 2012 to 22% y-o-y by June 2013, according to the World Bank. While lending growth slowed to 17.5% in 2013 as a whole, according to BPNG, broad money supply rose 11.9%, largely driven by an expansion in banking assets. Lending to households remained relatively flat over the period, and growth in lending was driven by building and construction of hotels, restaurants and state-owned utilities, among other things, according to the World Bank. This growing leveraging of local currency by private firms represents a departure from tradition in PNG, where companies have usually funded themselves through retained earnings and foreign investment.
“Since late 2012, as profitability and cash flow have been compressed, these businesses have turned to banks for financing,” Tim Bulman, the World Bank’s country economist for PNG, wrote in a December 2013 update. With growing public investment both on-budget and through state-owned enterprises in 2014, the competition between banks for public business is heating up. “While government departments bank largely with BSP, the state-owned enterprises market is more commercialised, with larger firms maintaining multiple banking relationships,” Baker told OBG.
Outlook
Although lending growth will cool in line with the wider economy in 2014, bankers have their eyes set on significant public infrastructure spending to sustain their loan books. “This market has always proven to be very resilient and even if we go through some rough time periodically, the market tends to stabilise itself over the medium to long run without a real crisis,” Allport told OBG. Financial service providers are making increased inroads into PNG’s unbanked population and lenders’ role as financial intermediaries is growing. Seeing through reforms will be key to making the financial system more efficient and broad-based.
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