Loi Bakani, Governor, Bank of Papua New Guinea: Viewpoint

Loi Bakani, Governor, Bank of Papua New Guinea

Viewpoint: Loi Bakani

One of the main aims of Papua New Guinea’s banking sector is to foster the development of micro-, small and medium-sized enterprises (MSMEs). In emerging markets such as PNG, MSMEs play a critical role in economic growth. However, the expansion of small businesses has been slow in comparison to other countries in the region – there are an estimated 49,500 small and medium-sized enterprises (SMEs) in PNG. The government’s SME Policy 2016 aims to create a vibrant sector with 500,000 SMEs by 2030, contributing to 50% of total GDP.

The growth of MSMEs in PNG is constrained by limited infrastructure, innovation, funding and access to markets. In a survey of the top-10 obstacles to SME growth in PNG conducted by Tebbutt Research in 2014, access to finance, loans and capital was ranked second, and difficulty dealing with banks was placed fifth. High fees and interest rates, complex documentation and stringent collateral requirements were also cited as major obstacles to accessing finance.

The MSME segment is underserved because it is perceived by financial institutions to be risky, costly and difficult to engage in due to insufficient assets, volatile markets, low survival rates and low capitalisation. Credit officers often lack the financial skills required to evaluate the loan proposals of MSMEs, and the legal framework is not strict enough to enforce quick recovery in the event of default. These factors heighten the risks involved in lending to MSMEs.

Access to finance, and particularly to credit, is a critical factor in enabling small businesses to grow. In light of this, the government has partnered with international donors and piloted initiatives to improve access to finance. The World Bank’s SME Access to Finance Project, and a risk-share facility under the Asian Development Bank’s Microfinance Expansion Project, will help to improve access to credit for small businesses in PNG. As part of a project to address business banking needs, Bank South Pacific developed a new SME lending strategy and product, known as the SmartBusiness Loan. The National Development Bank – both directly and through its subsidiary, People’s Micro Bank – offers a range of products and services to suit business needs at affordable prices. Kina Bank is also in the process of acquiring retail and commercial banking business in PNG, which is expected to boost their ability to serve the retail market, including MSMEs. In addition, Credit & Data Bureau offers services to verify the credit history of prospective clients in order to minimise their default risk.

Banks need to adopt MSME-centric approaches if they are to address their particular needs. By embracing innovative technologies, the cost of credit assessment and offering can be reduced. Digital platforms that use algorithms for loan assessments require minimal human intervention and therefore can be completed quickly. Payment platforms can reduce both the cost of cash handling and transaction times. Moreover, good financial management services are critical to the success of small businesses.

In addition, banks can look to create new asset classes by allowing retail and private banking customers to invest in MSME customers, effectively sharing risk by using peer-to-peer lending platforms. Furthermore, banks should make use of credit ratings in determining the loan quantum to provide to a small business. Banks can also help MSMEs offer development programmes, since their ability do so is often limited. In the event of business failure, banks provide a potential avenue for MSMEs to seek early assistance for rehabilitation. Moreover, banks can make use of credit risk guarantee schemes – the government has already approved the establishment of an SME Credit Risk Guarantee Corporation to facilitate lending. In PNG, the MSME market has significant potential for growth. Small businesses, if they are carefully managed, offer a new market to diversify portfolios while generating stable income for financial institutions.

Anchor text: 
Loi Bakani

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Papua New Guinea 2019

Banking chapter from The Report: Papua New Guinea 2019

Cover of The Report: Papua New Guinea 2019

The Report

This article is from the Banking chapter of The Report: Papua New Guinea 2019. Explore other chapters from this report.