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 situation nation. It is a lower-middle-income economy with a population of 11.8 million (2021 estimates) and a per capita gross national income of $2,730 in 2022. The mineral sector (mining, petroleum, and natural gas) contributed 28% of the gross domestic product (GDP), while agriculture, forestry, and fisheries contributed another 18% in 2022. MSMEs account for about 25% of GDP (in the formal economy) and 24% of the labor force. Despite its natural resources, PNG remains politically and socially fragile, with high crime rates, ethnic violence, and one of the world's highest rates of gender-based violence (GBV). An estimated 48% of children born in PNG are stunted or chronically malnourished (double the rate of countries with a comparable GDP per capita), while most of the workforce has completed a maximum of grade ten education. The United Nations Development Programme's Human Development Index ranks PNG 156th out of 191 economies and indicates significant fragilities. PNG is also prone to disasters caused by natural hazards, and since 2016, it has experienced droughts, earthquakes, and volcanic eruptions.

2.Financial inclusion and national development. Improving access to finance can be instrumental in lowering poverty and fragility while supporting national development. A significant correlation exists between higher financial inclusion and lower poverty and income inequality. Microfinance has growing importance as financial services enable lower-income groups to undertake productive activities. Improving access to financial services for households and MSMEs in PNG will depend largely on strengthening the capacity of borrowers and potential lenders.

3.Developing banking sector. The banking sector in PNG includes four commercial banks, four licensed microfinance banks, 16 savings and loan societies (SLSs), and several unregulated semiformal and informal microfinance institutions (MFIs). Competition between commercial banks is weak, limiting services for the financially underserved and unbanked, including women and women-owned or women-led MSMEs. Lack of competition also contributes to low financial intermediation and reliance on informal finance. Microfinance banks that target the underserved and unbanked provide limited financial services of varying quality. Given the weak competition, less than half of the working-age population has an account at a formal financial institution, with access lower among women. With low access to finance, the sector contributed only 4.0% of GDP in 2022 (footnote 3). A low ratio of domestic credit to private sector (% of GDP) in PNG, estimated at 15.5% in 2022 (among the lowest globally), confirms low levels of financial intermediation. Increased access to finance for equipment and working capital (debtors and inventories) and seasonal financing in the agriculture sector are needed to expand MSMEs. In addition to funding, access to electronic banking can enable transactions without physically exchanging cashan important solution for addressing geographical barriers and reaching remote populations across the country. Another significant benefit that better access to banking can provide is the record of generations of customer transactions. These records can support basic (cash flow) accounting to improve credit applications and management.

4.Gender disparities in financial inclusion. Women in PNG face disproportionate barriers to participating in the formal economy, accessing financial services, and engaging in decision-making roles. These challenges are exacerbated by high rates of GBV and social norms that encourage women to participate in paid and unpaid care work in the informal economy. Only 14% of women in PNG are engaged in wage-earning or salaried jobs, versus 33% of men. There are high levels of GBV in PNG (68% of women have experienced physical or sexual violence from their partners in their lifetime). The gender gap in financial inclusion is higher in PNG than in the rest of the region. The difference in formal financial inclusion between men and women is 29 percentage points; the next highest is Fiji, with a difference of 16 percentage points. In a survey conducted by the Pacific Financial Inclusion Programme, as many as 70% of women respondents borrowed, but only 7% borrowed from formal financial institutions. About 24% borrowed from neighbors, 26% from close relatives, and 36% from moneylenders. This indicates that women depend on credit from informal lending sources. Research by Bank of Papua New Guinea (BPNG) shows that less than 25% of MSMEs surveyed are owned or led by women. While the challenges for women and women entrepreneurs to access financial services are similar to other contexts, there are specific issues for women in PNG, including the limited financial access points, particularly in remote and rural areas, which means that women would have to spend considerable time away from home and at high costs to reach these access points.

5.Limited financial literacy and microfinance institution capacity. Poor financial literacy constrains people and businesses in PNG. At the same time, and despite ongoing capacity improvements, MFIs in PNG experience (i) weak capacity for MSME and agribusiness financing; (ii) low capacity for social performance management, gender sensitivity, and client protection; (iii) inadequate information systems for data collection; and (iv) gaps in governance and human resource management. Risk aversion in commercial banks and limited financial management and business planning capacity among MSMEs are key barriers to their financial inclusion. PNG developed policies, strategies, and institutions for financial inclusion. Despite these efforts, over two-thirds of PNG's population still lack access to formal financial services, with access lowest in rural areas and among women. With the third National Financial Inclusion Strategy, 20232027, in place, the Centre for Excellence in Financial Inclusion (CEFI) targets the inclusion of 2 million unbanked population by 2026, of which 50% will be women. Women face disproportionate barriers due to lower levels of formal education, limited mobility, and limited exposure compared to men due to cultural barriers. Rural dwellers have limited access due to distances from service providers. Improving financial literacy, particularly among women and women-owned and managed MSMEs, can increase their ability to access finance. Parallel support is also needed to support MFIs in evaluating risk and extending financial inclusion to support growth.

6.Limited use of digital financial services. PNG's mountainous topography and the remoteness of its population contribute to infrastructure limitations and high costs of providing financial services, particularly where banking services rely on physical presence. Women and the poor are constrained by the cost, time, and safety issues of traveling to access financial services. DFS can substantially reduce the cost and barriers to accessing financial services by remote communities, poor populations, and women. Despite increasing investments in telecommunications, impacts on the finance sector are nascent. Some regulated financial institutions have started using DFS and mobile money to improve access to financial services. However, smaller financial institutions are constrained by limited capacity to expand DFS.

7.The regulatory environment restricts microfinance. The microfinance regulatory environment constrains the growth of MFIs. The government has reformed the regulatory framework for SLS, which can help expand saving, credit, and payment services, and is exploring the potential use of digital assets and related service providers to expand access to finance. The BPNG issued banking licenses to SLSs that commenced operating as microfinance banks; however, the licenses impose a regulatory framework similar to those used for commercial banks. The regulatory framework constrains the ability of MFIs to grow, reach the underserved and unbanked, build a capital base, and generate competition with commercial banks. MFIs in PNG do not pose a significant risk to its financial stability, so regulations similar to commercial banks should be reconsidered to empower these institutions. Tailored regulation, aligned to the level of risk, can support their growth and protect the financial system's stability.

8.Lack of collateral to access financing. Formally registered micro and small businesses in PNG typically have limited collateral and 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 loan collateral 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-based land titles system which reduces its usability as collateral. Women are culturally disadvantaged as they are seldom involved in decision-making on land use, including its use as collateral. In the event of insolvency, the recovery rate is 24.9%, while the recovery cost is 23.0%this adds to the reluctance to lend without acceptable collateral. Lending to individuals and MSMEs is considered risky and costly due to due diligence requirements. A risk share facility supporting microfinance banks was trialed under the Microfinance Expansion Project. Building on this, the government anticipates launching a credit guarantee scheme to reduce collateral requirements and improve financial access. The credit guarantee scheme will be an important tool for supporting gender equality and women's empowerment, and economic recovery.

Financial inclusion of the population is enhanced, enabling progress toward a stronger and more sustainable economy

Access to financial services and the entrepreneurial capability of households and MSMEs improved

Financial capabilities and capacities of households, MSMEs, and PFIs improved

Use of digital financial services increased

Regulatory capacity for microfinance strengthened

Capacity development of the government-established Credit Guarantee Corporation supported