Papua New Guinea: Banking in evolution

Confidence among players in Papua New Guinea’s (PNG’s) banking industry and the launch of new microfinance and mobile banking initiatives highlight the sector’s potential to grow amid the country’s natural resource-based surging growth. However, the Bank of PNG (BPNG), the central bank, remains concerned about increasing levels of liquidity.

In April, BPNG said in a monetary policy statement that GDP would hit 8% in 2012, with annual headline inflation also set to reach 8%. The central bank also stated that gross foreign exchange reserves are expected to rise to around $5.01bn by the end of 2012, leading to growth in money supply and liquidity. Broad money supply, meanwhile, is expected to increase by 14.8%, and monetary base and private sector credit will grow by 33.2% and 7%, respectively.

However, Loi Bakani, the governor of BPNG, warned that a rise in liquidity due to three factors – foreign exchange reserve build-up related to dollar-denominated mineral tax earnings, high export earnings and inflows associated with the PNG liquefied natural gas (LNG) project – “poses a threat to the soundness of the financial system and to macroeconomic stability”. He added that BPNG has been actively involved in the foreign exchange market to ensure stability in the movement of the kina exchange rate.

Underlining a heating up of the banking sector, in March the Bank of South Pacific (BSP), the PNG’s largest bank, recorded a net annual profit of $326.56m. Kostas Constantinou, the group chairman of BSP, said the results were “achieved on the back of the strong domestic growth of the PNG economy, driven by the PNG LNG project-related activities and other resource projects in various stages of development”. In February, the state-owned National Development Bank (NDB) also recorded a profit of $4.49m in 2011, a 600% increase year-on-year (y-o-y).

The BPNG’s cautionary notes on macroeconomics contrast with the sector’s overall expansion, new grassroots services into rural areas and optimism among long-term domestic players such as ANZ PNG, which was established in 1976. While speaking with The National in March, Vishu Mohan, the CEO of ANZ PNG, said, “[PNG] has the potential to become one of the highest per-capita GDPs in the region. We had a good financial year last year ... [and] the PNG economy is doing very well.”

The banking sector is poised to expand further this year as well: in May, BPNG granted the country’s first mobile banking licence to Digicel Financial Services, a subsidiary of telecommunications market leader Digicel, with the aim of enabling clients to access their bank accounts on mobile devices or convert cash to electronic money. While recognising the importance of such new innovations in reaching the country’s unbanked population, the bank stressed that it would regulate the provision of the new service to ensure security.

“The challenge for BPNG and other regulatory bodies is to ensure that [mobile] transactions conducted are cost-effective, efficient, and pose a low risk [for] consumers. This requires close coordination with all the stakeholders,” the bank said in a May 4 statement.

The potential for banking to expand into PNG’s more remote areas – the World Bank reported the rural population to stand at 87.5% in 2011 – was also boosted by the April launch of a new microfinance project by the government, the Asian Development Bank (ADB) and the Australian Agency for International Development.

The microfinance expansion project is “expected to generate jobs and boost growth in some of the country’s poorest and most isolated regions by strengthening industry regulation and bolstering the ability of financial institutions to deliver a wider range of financial services,” the ADB said in a statement.

While such increases in microfinance services can be expected to boost the rural economy, the ADB said in a February briefing that commercial banks need to lower lending rates to ensure diversified business sector growth takes place across the country, and that the government could help by intensifying efforts towards a better investment climate.

“Despite very high levels of liquidity, private sector lending continues to decline and the commercial banking sector appears unwilling to lower lending rates to attract borrowers. ... [T]here is a need to review the relatively weak level of competition among the few commercial banks operating in PNG,” wrote the ADB.

That said, while BPNG is focused on keeping inflation stable as resource revenues begin to accelerate, banks’ recent efforts to reach out to new customers via microfinance options and mobile banking should ensure sector expansion.