Bolstering SMEs will require offering new options for financing

While the new financial inclusion policy aims to expand access to and usage of financial services – Bank South Pacific (BSP) estimates some 98% of its over 1m accounts in Papua New Guinea are used for transaction purposes only – facilitating access to funding for small and medium-sized enterprises (SMEs) will be key to broadening economic growth. As the Department of Commerce and Industry (DCI) circulated its draft SME policy in early 2014, the Treasury and Bank of PNG (BPNG) have been trying to develop the infrastructure necessary for bank lending. There is significant pent-up demand for credit, with only a quarter of the estimated 20,000 SMEs in PNG having access to finance, according to the International Finance Corporation (IFC), of which only 5% are owned by women. Development partners are supporting risk-sharing facilities (RSF) with commercial and micro-banks. The new Credit and Data Bureau (CDB) is also set to expand the type of information collected when a new personal mobile collateral registry becomes operational in 2014.

Limited Reach

Although banks’ lending to businesses and households rose 22% in the year to June 2013, according to the World Bank, lending has remained concentrated among larger companies and state-owned enterprises. While ANZ and Westpac claim some 15% of their loans go to SMEs, business is concentrated in urban areas where they have reach. Non-bank financial institutions provide another source of funding, although collateral requirements constrain lending to SMEs. A 2012 World Bank enterprise survey found that only 18.1% of SMEs in PNG had access to bank loans.

One of the challenges stems from the paucity of credit information available to lenders, although coverage of the fledgling CDB has been growing. “Improving transparency and accountability is the only way to develop access to finance in PNG, as for too many years borrowers have acted with impunity, feeling that they could default on their debts without any consequences,” Bruce Mackinlay, the CDB’s managing director, told OBG.

Established in 2008, the bureau counts 200 members, including banks, microfinance institutions (MFIs), savings and loans societies, and other nonbank lenders and retailers. By 2013, the CDB had compiled credit histories on 150,000 individuals and 16,000 businesses, covering a total of PGK150m ($60.97m) of outstanding debt out of a total of PGK7.13bn ($2.9bn) in loans to the private sector. By the end of 2013, CDB also helped members recover PGK56m ($22.7m) in defaulted debt.

Risk Sharing

In a bid to reduce the barriers to borrowing for SMEs and insulate lenders from potentially excessive losses, the IFC and the World Bank’s International Development Association rolled out an RSF in conjunction with the DCI in September 2011. Under the RSF, loans of up to PGK50,000 ($20,325) to domestic, privately owned SMEs with annual turnover of under PGK15m ($6.09m) and between three and 150 staff are bundled together, with the donors covering 50% of the risk for a fee. Under the scheme, administered through participating banks like BSP and MFIs like Nationwide Microbank (NMB), SME owners also benefit from financial education and IT training, but are not informed of the RSF. The project aims at covering PGK300m ($121.9m) in new SME loans by 2016, spread over 300 firms, 150 business owners and 300 women entrepreneurs. While the IFC’s RSF is open to all participating lenders, BSP and NMB have been the most eager users to date.

Yet the abundant liquidity in the banking sector, coupled with the limited number of bankable SMEs with transparent accounts, has hindered the use of the RSF. By June 2013 results were still lacklustre with new SME loans written by BSP under the RSF totalling PGK15.3m ($6.2m), a small share of BSP’s total SME portfolio of PGK480m ($195.12m). The Small Business Development Corporation, an agency within the DCI that was established in 1992, operates a smaller RSF covering 70% of risk on SME loans through commercial banks like ANZ, which also participates in the IFC’s RSF, alongside its training courses. The scheme remains limited in scope, however, with loans between 2007 and 2011 totalling only PGK3m ($1.2m). Despite the IFC’s covering of half of the risks involved in lending to SMEs, banks have continued to face the challenges posed by often-opaque informal SMEs.

SME Policy

Cognisant of the need for a concerted approach to addressing the challenges faced by SMEs, the DCI elaborated a dedicated SME policy, a draft of which was circulating for comment in the first quarter of 2014. The plan, which aims to grow the number of SMEs tenfold to 500,000 by 2030, creating some 2m new jobs, builds on a 12-point SME stimulus package announced in November 2012. The main elements of the package include: offering tax incentives; streamlining the process for establishing companies by creating an online registration platform for the Investment Promotion Authority, which came on-line in 2014; elaborating a list of businesses reserved for indigenous firms; recapitalising the National Development Bank (NDB); and rolling out subsidised loans. “Actual statistics are hard to get in PNG, but we estimate that about 10% of SMEs are owned by Papua New Guineans,” Moses Liu, NDB’s acting managing director, told OBG.

Having amended the 1998 Takeover Code in August 2013 the DCI is preparing a list of reserved sectors in 2014. Meanwhile, the government has significantly raised its budgetary allocations for the NDB, with budgets of PGK80m ($32.5m) and PGK85m ($34.5m) in 2013 and 2014, respectively, up from PGK30m ($12.1m) in 2012.

This was used to support some PGK100m ($40.65m) in loans in 2013 following the roll-out of a subsidised 6.5% interest lending rate in January 2013, down from an average of 20% in 2012, as well as the establishment of the NDB’s MFI subsidiary, the People’s Micro Bank, in March 2013. “The NDB is a key vehicle for implementing the government’s SME policy, both through our subsidised 6.5% annual interest loans and through our new microfinance subsidiary,” Liu of NDB told OBG.

Mobile Collateral

While not a formal part of the government’s SME policy, improving visibility on SMEs’ accounts will be key to supporting their growth. As such, the Personal Property Securities Act (PPS Act) passed by Parliament in December 2011 will significantly expand the ecosystem of credit information once it is enacted in 2014. “While the credit bureau has been appointed to manage the PPS registry, the legislation will only come into force once the system is in place later and the law is gazetted in 2014,” John Leahy, partner at legal firm Leahy Lewin Nutley Sullivan Lawyers, told OBG. The PNG PPS Register was formally established in 2013 and the Treasury has piloted a prototype register hosted on servers in the US. The Treasury has named the CDB as the registrar, with the new registry to be integrated into the CDB’s existing database. Once the registry is operational in mid-2014, secured creditors will be given half a year to register personal property security interests they held prior to the PPS Act to avoid losing priority over the security interest. By integrating the PPS Registry with the existing database of borrowers, authorities expect to significantly expand the information available and create a more comprehensive picture for creditors.

While the new system will allow banks and non-bank lenders to take mobile property as collateral for lending, their risk appetite will vary. While banks will likely focus on larger items like machinery and vehicles, non-bank institutions may accept more. “Non-bank financial institutions are likely to accept more forms of mobile collateral than commercial banks, which will likely remain more conservative,” Leahy told OBG. The 2011 act provides for a wide range of eligible personal properties, including consumer goods, business equipment, crops and livestock, as well as intangible collateral like deposit accounts, intellectual property, licences, stocks and bonds. This will be particularly relevant for SMEs, which are often forced to lock up most of their capital in physical assets with little room for leverage.

Breaking down barriers to accessing funding for SMEs and individuals will be key to driving business development and job creation in PNG. While the financial inclusion policy aims to bring more people into PNG’s formal financial sector, authorities’ attempts to build the infrastructure necessary to support lending growth will be crucial to non-mineral growth in coming years. Although the process will be gradual, developing the ecosystem of credit information and support through risk-sharing instruments is an important step. The final SME policy expected by the end of 2014 should provide a comprehensive framework for SME development, integrating piecemeal initiatives launched in recent years.