Papua New Guinea: Improving Financial Access and Entrepreneurship Development Project

Finance / Banking systems and nonbank financial institutions - Finance sector development - Inclusive finance - Small and medium enterprise finance and leasing

1. Resource-rich but inherently vulnerable. PNG has substantial natural resources but is a fragile and conflict-affected, lower-middle-income country with an estimated population of 9.6 million and per capita gross national income of $2,460 in 2020._The mineral sector (mining, petroleum, and natural gas) contributed 23% of gross domestic product (GDP) in 2020, while agriculture, forestry, and fisheries contributed another 19% (footnote 2). MSMEs account for about 25% of GDP (of the formal economy) and 24% of the labor force._MSMEs are mainly engaged in retail and service industries and operate in urban and peri-urban settings. Despite its wealth of natural resources, PNG remains politically and socially fragile with high rates of violent crime, ethnic violence, and one of the world's highest rates of gender-based violence (GBV)._It has the lowest life expectancy in the Pacific region (64.4 years in 2019)._An estimated 48% of children born in PNG are stunted or chronically malnourished (double the rate of countries with a comparable GDP per capita), risking cognitive limitations in a population where a majority of the workforce has completed a maximum of grade ten education._The United Nations Development Programme's Human Development Index, which ranks PNG 155th out of 189 economies, reflects significant fragilities._PNG is also prone to disasters caused by natural hazards. Since 2016, PNG has experienced droughts, earthquakes, and volcanic eruptions.

2. Developing banking sector. The PNG banking sector includes four commercial banks, four licensed microfinance banks, sixteen savings and loan societies (SLSs), and several unregulated semiformal and informal microfinance institutions (MFIs). Competition between the four commercial banks is weak, limiting services for the financially underserved and unbanked, including women and women-owned or women-led MSMEs, and contributes to low financial intermediation and reliance on informal financing. Microfinance banks that target the underserved and unbanked segments provide limited and varied quality of financial services. Given the weak competition, less than half of the working-age population have an account at a formal financial institution, which is even lower for women._With low levels of access to finance, the sector contributed to only 2.7% of GDP in 2020. A low ratio of private sector credit to GDP in PNG, estimated at 15.6% in 2020 (which is among the lowest globally), confirms low levels of financial intermediation (footnote 1).

3. Low levels of financial literacy (of individuals and MSMEs) and limited capacity of MFIs. During 20122016, individuals and businesses opened more than 1.2 million new deposit accounts. By December 2020, almost 50% of the targeted two million new bank accounts under the second National Financial Inclusion Strategy, 2016-2020, were achieved. Despite the progress made, more than two-thirds of the PNG population still lack access to formal financial services despite these significant achievements._Women are at a disadvantage as they have lower levels of formal education, limited mobility, and exposure compared to men. Given the lack of access to finance, more so in rural areas, there is a critical need to continue with gender-sensitive financial literacy programs across all segments of the PNG population. PNG's 2016 Small and Medium-sized Enterprises (SME) Policy states that only 5.4% of the 49,500 SMEs have obtained bank loans for their operations. Commercial banks' risk averseness, compounded by MSME's lack of financial management and business planning capacity, and limited financial literacy, contributes to low access to finance. Despite ongoing capacity improvements, MFIs also have weak capacity on MSME and agribusiness financing; low capacity on social performance management, gender-sensitivity, and client protection; inadequate information systems to generate required data; and gaps in governance and human resource management. Improving the capabilities of individuals, MSMEs and MFIs will contribute to increased access to finance.

4. Limited use of digital financial services. PNG's geography and remoteness contribute to infrastructure limitations and restricts the reach of financial services by high costs for physical presence. The poor and the women are constrained by cost, time and safety issues in travelling distances to access financial services. The cost of accessing financial services by remote communities, poor and women can be substantially reduced with the use of DFS. Some regulated financial institutions have since shifted to use DFS and mobile money to improve access to financial services. In contrast, the smaller financial institutions are constrained by limited capacity to expand the provision of DFS and capitalize on improved communications infrastructure.

5. Gaps in the microfinance regulatory environment constrain the growth of microfinance institutions. The regulatory framework for SLS has been reformed, putting it on a firmer footing to expand saving, credit, and payment services. The Bank of Papua New Guinea (BPNG) issued banking licenses to some SLSs that commenced operating as microfinance banks; however, the licenses impose a similar regulatory framework as for a commercial bank. The onerous regulatory framework constraints the MFIs growth potential and their ability to reach more of the underserved and unbanked segments of the market, build a capital base, and generate competition with commercial banks. MFIs do not pose a threat to financial stability, and improved regulation can support their growth while protecting the financial system's integrity.

6. Lack of collateral to access financing. Formally registered micro and small businesses in PNG typically have limited collateral and limited financial information. The Personal Properties Securities Act established a framework for using movable assets as collateral. However, financial institutions have been reluctant to accept movable assets as collateral for loans because they lack confidence in enforcing security interests. Financial information opacity and unacceptable collateral lead to the high cost of smaller loans. PNG also has a complex community land titles system._Women are culturally disadvantaged. In the event of insolvency, the recovery rate is 24.9%, while the cost of recovery is 23.0%this adds to the reluctance for lending without significant collateral._Lending to individuals and MSMEs is considered risky and is costly due to required due diligence. A risk share facility for microfinance banks was trialed under MEP. Building on the facility, a credit guarantee scheme will improve financial access and will be an important tool supporting gender equity and economic recovery.

7. The project aligns with government strategies. The government's Vision, 20102050, acknowledges the need to increase people's participation and ownership in economic progress through education, access to finance and resources, and the development of entrepreneurial skills._Vision 20102050 recommends greater participation of women at all levels of society, greater attention and allocation of resources to support interventions to help achieve gender equity. The PNG Development Strategic Plan 20102030 also acknowledges that financial services have failed to reach the majority of the population. The depth of services remains thin and underdeveloped, especially in rural areas._The plan stresses the role of informal financial institutions that operate savings, credit, and other financial services and acknowledges that a suitable regulatory framework for these institutions is needed. A lack of access to credit is a significant impediment to the development of small- and medium-sized enterprises. The relevant pillars of the government's strategic plan to develop SMEs are in sector-specific strategies and policies, including (i) its Financial Sector Development Strategy, 20182030 (FSDS), (ii) SME Master Plan, 20162030 and SME Policy, 2016, and (iii) National Financial Inclusion Strategy, 20162020 and National Financial Inclusion Policy 2018, all of which target financial inclusion, private sector development, and finance sector development._

8. Gender disparities in financial inclusion. The Pacific Financial Inclusion Programme (PFIP) estimates that over 80% of the population in PNG is financially excluded and that less than 10% of the overall female population is served by formal financial institutions. The gender gap in financial inclusion in PNG is higher than in the rest of the region and has likely widened. In 2015, only 30% of all bank accounts were opened by women. The difference in formal financial inclusion (i.e., adults with bank accounts) between men and women is 29%, which is the highest in the South Pacific. The gender gap in the usage of formal financial services is quite significant, with men using up to two times more financial products than women. In the survey conducted by the PFIP, only 7% of female respondents borrowed from formal financial institutions, but as many as 70% of the women do borrow, indicating a demand for credit, but they borrow from informal sources. About 24% borrow from neighbors, 26% borrow from close relatives, and as many as 36% borrow from moneylenders.

Provision of quality financial services to all at affordable prices and in a convenient manner (Medium-Term Development Plan III for 20182022)

Access to financial services and entrepreneurial capacity for households and micro, small, and medium enterprises improved

Financial capabilities and capacities of households, micro, small, and medium-sized enterprises, and participating financial institutions improved

Use of digital financial services increased

Legal and regulatory environment for microfinance strengthened

Establishment and capacity of Credit Guarantee Corporation supported