Digging up value: Banks use new methods to attract depositors

Though the country may appear to lack liquidity, Papua New Guinea may have billions of kina hidden outside the banking system. According to Tony Westaway, managing director of Nationwide Microbank, residents tend to store cash at home, or hide large sums underground in bamboo pipes and in tin cans. The reasons are many: some people do not understand banking, while some do not trust banks and others simply cannot physically reach bank branches, given the topography of PNG and the limits on transportation.

However, this situation is fast changing. The banks, have had profits squeezed by central bank policies on exchange rates and lending, and are looking for new sources of growth and profits. The underserved are a prime target for these institutions, as reaching them will result not only in more business, but also potentially higher margins. The unbanked, meanwhile, are becoming more interested in financial products. These products create opportunity and in some cases bring them freedom not previously available. Westaway likes to tell a story of a family in rural PNG that had not left their village in years, because they had buried their cash and were afraid of theft. After opening an account with Nationwide Microbank, they were able to travel without concern for their assets. THE 80%: An estimated 80%-plus of the country is unbanked, according to public comments made by central bank officials in 2013. The actual number is probably higher, with the total population at or above the official estimate of 7.3m (the population estimates are rough, and some researchers have suggested that the total is closer to 10m). For a number of years, the government has directed considerable attention towards getting more of the unbanked on the financial grid. In 2009, the country committed to the Money Pacific Goals 2020: teaching children about finance, putting into place simple consumer protection measures and doubling the number of people with access to financial services. The government’s various development plans, such as the Development Strategic Plan 2010-30, the Inclusion Policy 2011-15 and PNG Vision 2050, also emphasise getting more people in the country into the banking system.

In 2013 in Kuala Lumpur, the central bank committed to the Alliance for Financial Inclusion’s Maya Declaration. In doing so, it said it would add 1m people to the roles of the banked by the end of 2015, create a generation of people with an understanding of finance and encourage the use of technology to support inclusion. The Centre for Excellence in Financial Inclusion was established in 2013, and it coordinates the country’s strategy for financial inclusion. “The government has created a great enabling environment for microfinance to grow,” said Westaway.

The international community has been actively supporting the relevant developments. The UN, for example, has made grants to Nationwide Microbank for the creation of electronic solutions, has backed the adoption of e-payments and has undertaken considerable research on inclusion in PNG.

The Australian Department of Foreign Affairs donated A$14.15m (S11.5m) in 2014 to the Pacific Financial Inclusion Programme, which has been working towards bringing more Pacific Islanders into the financial world since 2009. The IMF has called for PNG to serve more of the unbanked to ensure stable growth. The Microfinance Expansion Project, a $24.9m programme in operation since 2010 and supported by the Asian Development Bank and the central bank, is working toward that end. It aims to raise the capacity of local institutions to make loans to low-income individuals and small businesses.

The Private Sector

The private sector has also been very active, with the commercial banks looking to make their balance sheets broader and deeper in terms of coverage as they see the opportunities of financial inclusion. BSP is employing a three-pronged strategy. It is building its presence by expanding the BSP Rural brand, which was started in 2009 and had 41 branch locations throughout PNG as of end-2014. It is growing its ATM and electronic funds transfer at point of sale (EFTPOS) networks in order to reach more people. EFTPOS locations increased from about 10,000 at the end of 2013 to more than 11,600 at the end of 2014. And the bank is utilising mobile banking and its Wontok Money to reach places where full branches are not cost effective.

Lowering Costs

The nation’s banks are competing to extend services to lower-income groups. To make banking more affordable, BSP has offered the Kundu account since 2011. The Kundu Standard has no monthly fees and low branch deposit fees – PGK3 ($1.13) at branches and PGK1 ($0.38) at agencies. Fund transfers are PGK0.50 ($0.19) and cheques are processed for free. Westpac started Choice Basic, also in 2011. The account attracts no monthly service fees, and transaction charges are only PGK1.50 ($0.57).

Additionally, Westpac’s Everywhere Banking programme combines education, Choice Basic and the use of in-store banking merchants – stores authorised to provide some banking functions. This combination offers customers access to a wide range of services: deposits, withdrawals, transfers, bill payments, statements and balance inquiries. “Initiatives like the in-store banking scheme encourage communities to reach out to the banking sector while transacting with efficiency closer to their homes,” Geoff Toone, managing director of Westpac Bank PNG, told OBG.

In addition to the four commercial banks, other institutions are able to serve the needs of the rural and the poor in PNG. The country has a total of 11 licensed financial institutions (LFI). Many are nonbank financials, which are not allowed to take spot deposits, but can take time deposits, make loans and offer other services, like foreign exchange. They will often provide credit to customers who are not normally considered by commercial banks. PNG also has 21 savings and loan societies and many unlicensed institutions that provide short-term credit. These small players add up to a large base to build inclusiveness.

Microfinance

PNG has a number of microbanks. PNG Microfinance was established in 2004 and claims the title of the country’s first such institution. Its original shareholders were BSP, PNG Sustainable Development and the International Finance Corporation. The bank offers simple and relatively cheap products. Its Financial Inclusions Savings account, for example, has a fee structure that is affordable for most Papua New Guineans. The minimum opening balance is PGK20 ($7.56). The monthly fee is PGK1 ($0.38). Customers are allowed to make unlimited free deposits and a fixed number of free withdrawals. The bank has nine branches and five service centres. Nationwide Microbank was also founded in 2004, with assistance from Australian Aid and the Asian Development Bank, originally as Wau Microbank. It currently has 12 branches across the country and 150 agents. The bank’s loans range from PGK200 ($75.70) to PGK200,000 ($75,700). Kada Poroman Microfinance was founded as Kokopo Microfinance in East New Britain Province in 2006. The controlling shareholders are four local-level governments. People’s Micro Bank, which is owned by National Development Bank, received a licence in early 2013. It gives loans ranging from PGK500 ($189) to PGK500,000 ($189,000). Women’s Micro Bank was inaugurated in August 2014.

The microfinance sector has approximately 500,000 account holders, according to Business Advantage PNG. Microfinance was stagnant for a number of years. Between 2011 and 2013, the sub-sector’s assets remained stuck at around PGK150m ($56.8m), according to central bank data. But by September 2014, the total jumped to PGK172.9m ($65.4m). At the end of 2014, total assets were PGK217m ($82m). Demand is strong in the Highlands, Momase and the Islands regions, the central bank notes.

Challenges 

According to the governor of the central bank Loi Bakani, in comments made in 2013, 85% of the people in PNG live a largely unmonetised existence. They are usually subsistence farmers, have no assets and have little understanding of finance. They also have trouble meeting requirements for opening accounts, as they often lack the necessary documentation and can face a certain amount of discrimination, according to comments made by the governor. They are considered unreliable and high risk. During much of their history, the micro-banks have had difficulty making loans, primarily taking deposits instead.

Security problems make it difficult to serve some areas. In 2014, BSP was forced to close 12 rural branches because of robberies. The branches were in Morobe, Eastern and Western Highlands, East New Britain, Chimbu, Enga, Jiwaka and Madang Provinces. The efforts to achieve inclusiveness face other challenges. While technology is helpful, implementation can be difficult. Westpac’s Everywhere Banking has had to contend with a high level of failures – as a result of forgotten PINs or too many PIN attempts – and low levels of use at some merchants. In late 2013, the bank reported that 70% of merchants conducted fewer than 50 transactions in the month of September.