Papua New Guinea's banking sector streamlines services to increase financial inclusion

In an effort to diagnose limitations across Papua New Guinea’s banking industry, a joint review team has conducted a comprehensive health check of the financial ecosystem. Following a series of intensive studies by the World Bank and IMF beginning in 2011, as well as efforts by the Department of Treasury and the Bank of PNG (BPNG), bottlenecks were identified in a handful of areas, including in capacity, technology, and financial literacy and inclusion. The outcome of the review team’s work was published in the Financial Sector Development Strategy (FSDS) 2018-30, which recommended adopting a phased approach to remedying the systemic issues.

The implementation of these findings will be coordinated by the Financial Services Council (FSC), a new body comprising the secretary for Treasury, the governor of BPNG and the chairman of the Securities Commission of PNG (SECOM). The FSC has been tasked with overseeing multiple changes to the financial services sector, including the restructuring of regulatory and supervisory arrangements, the expansion of capital markets, the development of the national payments system and the facilitation of greater financial inclusion.

Capacity

The sector is dominated by four commercial banks: two Australian institutions, Westpac and the Australia and New Zealand Banking Group; as well as two local banks, Bank South Pacific (BSP) and Kina Bank. Together, they account for more than 90% of bank and credit institutions’ total assets. Measures to improve overall financial capacity have been highlighted as key to supporting the economy going forwards. While progress has been made in recent years, regulatory and supervisory arrangements remain hampered by limitations in human resources, which have created a legacy of inefficient coordination and implementation.

Other notable challenges include the lack of predictability in the regulatory environment, varying levels of government capacity, and obstacles in infrastructure and legal procedures, all of which have hindered economic growth. Within the financial realm, the tight foreign currency market, lack of competition among financial service providers, high level of cash usage, low level of concentrated lending, and limited access to capital due to illiquid secondary markets are all major concerns that result from the government’s limited regulatory capacity.

To address these capacity constraints, the FSDS 2018-30 is looking to significantly boost coordination and integration of the supervisory and regulatory bodies. As part of this strategy, the prudential supervision of general insurance will be passed to the central bank, ending the separate supervision of general insurance and life insurance companies by BPNG and the Office of the Insurance Commissioner, respectively, the latter of which falls under the remit of the Department of Treasury.

The FSDS 2018-30 has also identified three key measures to broaden and strengthen financial regulation. First, the role of SECOM as an independent securities market regulator will be enhanced. Second, SECOM will become the primary supervisor with respect to landowner trust funds, a segment that has long been affected by the absence of supervisory oversight. Lastly, to strengthen consumer protections, a channel will be established through which the Centre for Excellence in Financial Inclusion (CEFI) can respond to consumer complaints. To assist with these efforts, SECOM will report to the secretary for Treasury, rather than the minister of trade, commerce and industry, as before.

Technology

Prior to the FSDS 2018-30, a detailed plan was implemented to develop an electronic central depository system to help modernise the banking system and boost inclusion. Since the passage of the National Payments System Act 2013 and the establishment of a payments oversight unit within BPNG, a number of key measures focused on soft and hard infrastructure have been enacted. The year 2013 saw the establishment of the Kina Automated Transfer System, a real-time gross settlement (RTGS) system, in 2015. It runs on the international SWIFT network and has significantly sped up processing times and reduced the level of counterparty risk inherent in deferred net settlement systems.

The modernisation of payments systems is set to continue under the FSDS, with further steps to be implemented between 2018 and 2022, including the installation of a central payments switch. This will enable payment interoperability across all authorised electronic retail payments platforms, which should increase competition among payment service providers. The updated payment system is also set to improve the settlement of capital markets transactions and reduce the cost of international remittances. By and large this should help PNG improve its ease of doing business rating, with the country ranking 108th out of 190 countries in the World Bank’s “Doing Business 2019” report.

The main elements of a modern payment system are expected to be operational by 2022, including the central switch and the securities settlement system. However, the system will likely require further attention with regard to international remittances, so that nationals living in other countries can send funds back to PNG at a reduced cost.

Financial Inclusion 

The establishment of a national payments system is also geared towards shifting the country away from its current cash-oriented payment practices and boosting financial inclusion. Progress has already been made in recent years following the adoption of the Financial Inclusion and Financial Literacy Strategy 2014-15 and the National Financial Inclusion Strategy (NFIS) 2016-20. The proportion of the total population using formal financial services was estimated at 25% in 2018, according to data presented in the FSDS. While lower than most regional counterparts – the World Bank reports the rate of neighbour Indonesia stands at 48.9%, for example – figures have increased from around 15% just a decade prior.

However, levels of financial literacy remain inadequate, and many adults are unable to make informed financial decisions. Outlined in the NFIS 2016-20, the state is committed to working with private banks and development partners to further extend the availability of digital financial services. However, banking fees are generally prohibitive for rural populations. For financial inclusion efforts to really take effect, these fees will need to be lowered to better suit those with only small amounts to transact.

Under the FSDS 2018-30, the CEFI will serve as the apex financial inclusion institution and take the lead role in implementing the complementing agenda, replacing the BPNG and Microfinance Expansion Project, which was originally designed to boost financial access and literacy in remote and rural areas. Financial inclusion efforts should also be aided by the completion of the Coral Sea Cable System and Kumul Submarine Cable projects in the coming 12 months, both of which will drastically expand cheaper and faster internet services. In addition, a project backed by the US, Japan, New Zealand and Australia – announced at the APEC Leaders’ Summit in Port Moresby in November 2018 – aims to increase the nationwide electrification rate from 13% to 70% by 2030. “The cables and the electrification scheme will lay the groundwork for better digital banking access and options and, by extension, financial awareness,” Robin Fleming, Group CEO of BSP, told OBG.

Horizon 

Creating a more liquid equity market will aid the overall development of the financial sector. While the Capital Markets Act 2015 and the Securities Commission Act 2015 provide a comprehensive legal framework, problems still exist in terms of corporate governance and financial disclosure practices. While a long road lies ahead for meeting financial inclusion objectives, the country’s existing system has a number of encouraging characteristics that the FSDS can build on. These include an established, albeit small, primary capital market for equities and government bonds, a modern core banking system, key infrastructure for digital banking such as the SWIFT-based RTGS system, as well as a functioning framework for superannuation savings.

Reducing the amount of financially underserved people is a key pillar of the FSDS 2018-30. As set out under the Alliance for Financial Inclusion’s Maya Declaration, the government committed in December 2016 to reach more than 2m underserved low-income people, half of them women. As such, the effective implementation of the FSDS 2018-30 and NFIS will play a key role in extending services to such populations. With shortcomings in PNG’s financial ecosystem set to be addressed under the newly adopted strategy, the sector’s contribution to economic and social development should accelerate.