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Financial inclusion: Bringing light to the black economy

Waiting for the bankBUSA JEREMIAH WENOGO

FINANCIAL inclusion is the process by which people who are said to be “unbanked”, that is, not part of the formal financial system, are brought in through policy reforms that make such accessibility possible.

In Papua New Guinea one does not have to go far in order to appreciate the magnitude and complexity of the issue when the reality is that majority of the population is based in the informal economy, and cannot get formal sector jobs.

The majority of these “unbanked” are subsistence farmers or micro-enterprises in the agriculture or artisan industries.

These enterprises cover petty trading to large scale businesses that escape government scrutiny in the form of income tax and other requirements.

The need for urgent intervention to increase financial inclusion is reflected in the fact that a high level of financial exclusion is directly related to a high level of poverty.

When people cannot save money, plan or budget, the likelihood of falling into poverty is very high. In PNG the problem is one that concerns the bulk of the population where it has been reported that we have one of the worst rates of financial inclusion in the Asia Pacific Region.

It is estimated that only 15-20% of the population is “financially included”.

Ensuring that a critical mass of PNG’s population is financially included will not be a small feat. The problem becomes even more complex when one considers that PNG has a high level of financial illiteracy.

More concerning is the reality that those Papua New Guineans who are expected to make prudent financial decisions concerning their personal financial welfare very rarely budget or plan for the future. Many end up being victims of loan sharks and scams.

Such a population - with its conspicuous spending, unrealistic expectation and nomadic behaviour – may promote the collapse of the economy. Nevertheless, it is surprising that time and again our people have been able to weather the storm and come out intact.

Looking into the future, as the economy becomes more monetised, the social network that ties each of us into a web of family relations will increasingly come under immense pressure.

This brings me to discuss the efforts of the Bank of BPNG (BPNG) and other key partners in driving reforms and activities such as the annual Financial Inclusion Expo.

At its inception in 2012, the Expo in Lae was attended by well over 8,000 people and 34 financial institutions. For a first time event, the figures are indicative of the commitment, determination and willingness of people to be partners of the nation building process.

As the Expo continues it looks certain these numbers will swell. Already the 2013 Expo in Port Moresby has recorded about 15,000 participants with an increasing number of new accounts being opened.

It is expected that the numbers will double in 2014 as BPNG plans to host a couple of Expos and savings campaigns in different provinces.

In addition, government efforts to enhance our ability to access finance, such as the introduction of the Private Property Security Act, will allow more people to come out of their hideouts to seek new opportunities.

For too long our people have been left out in the cold not benefiting much from past mineral and commodity booms.

In these “lost years” the informal economy has been “mother” - rearing, clothing and feeding the majority of our people.

The development in PNG cannot be inclusive if the informal economy is not brought into the forefront of development discussion. This has been well articulated by BPNG Governor Loi Bakani who, at the official closing of the Kokopo Expo, stated that financial inclusion is all about “reaching out to the unbanked 80-85%, the majority of whom are based in the informal economy”.

And so we have taken on this mammoth but noble and important task of bringing people into the formal financial system. It is also a bold decision to undertake a journey that will take us deep into the heart of the “black economy”.

Financial Inclusion in PNG - the story so far….

Even in major towns and cities like Port Moresby and Lae many people don’t have access to bank accounts. For those that do, the account is either dormant or closed due to lack of money in the account or lack of knowledge and understanding of how best to use it.

For the providers, such as banks,  he high cost of doing business compounded by the rise in law and order problems is forcing them to limit their services to places where they are able to conduct business without too much risk.

This makes it difficult for the majority of people in the rural areas to access these services. Deteriorating infrastructure and law and order issues have also increased operational costs.

Government initiatives such as the District Treasury Rollout Program need to be strengthened with more focus on how government can encourage private sector partners, in this case financial institutions, to invest in rural districts.

Financial inclusion through the National Informal Economy Policy 2011-2015 needs to be given prominence and the informal economy needs to be captured in the review of the 2011-2015 and future Medium Term Development Plans.

Budgetary appropriations at the national, provincial, district and LLG level also need to be made to allow the informal economy to continue its role as a “safety net” for the majority of our illiterate population both in rural and urban areas.

Financial literacy is the key to financial inclusion

Papua New Guineans are intelligent people but we are often plagued with an inability to utilise our full potential to make a difference, the result of certain obstacles most of which are beyond our control.

These include culture and traditions, upbringing, failure of the bureaucratic machinery to deliver, and structural issues and reforms that have not allowed an entrepreneurial spirit to be unleashed in PNG.

Lack of financial literacy has hampered people’s ability to be empowered to improve their welfare. Financial literacy is a key component of improving the level of financial inclusion in PNG.

One of the major reasons why we have a low level of financial inclusion is because most people in the informal economy are illiterate. For those who are able to read and write, information is not readily available to them.

Nevertheless, the government through BPNG and with assistance from some key government and private sector agencies is looking at exploring strategies to address this problem. These strategies are captured in the National Strategy on Financial Inclusion & Financial Literacy 2014-2015.

As part of this strategy it is envisage that BPNG in collaboration with the National Department of Education will introduce financial literacy into the education curriculum.

Developing a savings culture has to be done at a very early age so that we have a generation of Papua New Guineans who are competent to make better choices and decisions about how best to manage their lives financially.

Instill confidence in the people to improve financial inclusion

Historically, the establishment of the Papua New Guinea Banking Corporation (PNGBC) was a major catalyst for financial inclusion. However, its demise brought with it the closure of many bank branches across the country and loss of confidence by the people in PNG’s financial system. 

Since then ordinary Papua New Guineans have complained about the unfavourable policies and requirements of most of the commercial banks.

There is a huge challenge now for the government and BPNG to educate our people about the pros and cons or the benefits and costs of the financial products and services that are offered on the market in order for people to regain their trust and confidence.

Without instilling that confidence, the majority of ordinary Papua New Guineans will remain skeptics of the idea of financial inclusion creating an obstacle to this means of increasing access to financial services.

Public private partnerships are crucial to improving financial inclusion

Although the numbers produced so far by the three expos are impressive, we have to remind ourselves that, for financial inclusion to become a mainstream agenda in PNG, will require both the government and the service providers – whether banks or micro-finance institutions - to work in partnership.

It is encouraging to note that many innovations such as SMS Phone Banking,the  Electronic Wallet concept, Instore Banking and others in the pipeline, have come about because of great ingenuity by service providers to get around the many problems that hamper effective service delivery.

If financial inclusion is critical to attaining the many aspirations of the government, then it needs to be given appropriate support.

For a start, the government needs to take stock of the National Strategy on Financial Inclusion & Financial Literacy 2014-2015 and its aim to bring to the banks one million unbanked people by 2015.

The author is an economist and a senior project officer with the Consultative Implementation & Monitoring Council who specialises in issues concerning the informal economy in PNG


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Michael Dom

Thank you Busa and Baka, I think I can appreciate your approach to the need for financial inclusion, through improved banking policies.

Essentially you argue for a three-pronged approach: (1) BPNG policy intervention, and therefore by default improved Government policy on commercial banking; (2) rationalized, realistic and flexible commercial bank policy and board decisions regarding re-investment and facilitation for more participation of rural communities and (3) community support (also including district and police services), financial education and contribution to security for banking services.

That's a very big plate of food.

Most people, including myself, would have to agree with your calls for reduced bank charges etcetera.But I suppose we have to find the realistic mode through which commercial banks may be able to serve local communities and the 'grassroots' banking needs.

I would assume that major profit margins earned by the commercial banks in recent years, from returns on their investments in resource and infrastructure development, may be tied in to other business development objectives. What those re-investments are I don't know.

The local commercial bank branches may also be answerable to their global corporate bosses about such decisions. Again, I don't know much about that.

Busa Jeremiah Wenogo

Michael, thanks for your comment.

I think it is fair to say that commercial banks need to be fair in PNG given that there is so much liquidity in the banking system at present.

The banks are flush with so much cash that they should use some of that as leverage to adjust some of their policies to allow more people in PNG to have access to the formal banking system.

The huge after tax profits being declared by some of these banks on a consistent basis does provide the government leeway to negotiate with banks to address some of the problems associated with maintenance fees and others.

In certain areas where its really not necessary to charge fees the bank should strive to ensure that no fees are charged or fees are reduced.

With regard to spreading banking services to those less viable areas especially in rural areas of PNG, I think the banks have to be commended for coming up with innovate ideas to get the services right down to the people.

The government for its part did and is still trying to address this issue through the District Treasury Roll-out program where the government builds treasury offices in districts with spaces that can be leased out to interested banks to provide their services.

I believe the BSP rural banking idea came about as a result of this program.

Nevertheless, lack of electricity and the poor state of the transport infrastructure has discouraged banks to venture into these areas.

In a place like top town in Lae, I believe it is able to sustain its own operations given the high level of economic activity in Lae.

However, say in a place like Kaintiba in Gulf, the lack of economic activity made worse by poor road or infrastructure or lack of it may not create that economies of scale that is required to successfully run a banking businesses.

Apart from service providers and the government it is important that there is community support so that services operate without much hiccups.

The government and the private sector partners can do their best but at the end of the day it boils down to community ownership.

If that is not there it has a bearing on whether a bank should operate or not and if does operate at what cost it is willing to operate in.

It is also important to note that reforming the payment system like what BPNG is doing to get rid of cheque payment is a positive step to reducing time and money that is involved in facilitating a transaction.

However, PNG is not yet a fully pledge cashless economy where every transaction is facilitated through electronic means. In most districts and even in towns people prefer to make payments in cash. This is also a major challenge.

How can the government readily facilitate the conversion of electronic cash into actual cash. This will require a holistic approach where the government has to invest in infrastructure in terms of communication, electricity, transport, ATMs to be protected/supported by an effective and efficient law and order regime.

The reality is that Papua New Guineans don't have savings culture and rarely do you find people saving for future expected and unexpected events such as school fees, deaths and marriages.

Their lack of understanding and knowledge needs to be addressed through financial literacy training. Of course this training will not be free but can be facilitated through partnership between development partners, government and CSOs or NGOs already on the ground.

For instance, the Asian Development Bank with counterpart funding from the government is supporting a Micro-finance Expansion Project to roll-out literacy training to interested communities or groups.

Once again this all depends on the willingness of the community. For the school kids, it is really the responsibility of of a responsible government to invest in such initiatives for the sake of our children.

I agree with you that services such as banking don't come for free and in fact, in my blog, I gave a comparative analysis of the level of financial inclusion in PNG during PNGBC's heyday and today's banking environment where BSP is the single most dominant bank on the market.

I also stated that given that BSP is commercially owned by private citizen's through the board, it is actually the prerogative of this board to determine whether they should embrace such a policy to allow more people to have savings account.

Nevertheless, it is also the role of BPNG to ensure that the board composition of large commercial banks in PNG does not create a conflict of interest situation so as to marginalised the majority of Papua New Guineans.

Board composition should be as diverse as possible to ensure that there is a level playing field when it comes to the decision making process concerning the operations of the bank.

To conclude, the biggest challenge is that most of our people have the assets but have not formally register these assets so that its values can be determined.

That is the reason why most commercial banks in PNG have develop stringent guidelines to ensure that their funds are secured when they are lent out. This is also one of the main reasons why the cost involved in facilitating a loan for instance is quite deer.

By formally registering these assets and attaching values to them will bring confidence to the banks and reduce its cost. In saying this, there is also a need for the these banks to seriously consider the fees that they impose on their products and services.

Baka Bina

Michael, true but how do you explain the healthy profits that some banks make. If it is K10m fine but one bank last year made K254m.

Surely it can do without the K45m it generates in the 12 months as monthly maintenance fees for its 1m grass roots accounts.

You remove the K45m and still have a healthy profit of K209m. From that Lae Top town can still have its branch.
it would be amiss for me not to suggest that K3.75 should be the yearly charge as from the million accounts, the bank can still have 3.75m to operate branches nationwide or say to debit twice to get them 7.5m.

There is no justification to make a profit out of people who are forced to have accounts.

Michael Dom

Busa and Baka, I believe that your suggestion that commercial banks should withdraw their account maintenance fees and minimum account balance goes against core arguments in the article:(a) financial literacy, e.g. growing a savings culture and (b) instilling confidence to improve financial inclusion.

How can a commercial bank provide services to communities if the communities do not keep money in them? I may not be a banker or an economist, but I don't believe that money invested in Port Moresby banks covers the expenses of branches in Lae Top Town.

Also, instilling confidence in financial inclusion also needs to take into account; (a) lack of security in many rural locations, (b) accessibility and delivery of cash (the reason behind innovative phone banking etcetera) (c) identification of account holders (where most people may not even have birth certificates) (d) providing more customized accounts, with minimum charges requires some other major investments which allows the commercial bank to be confident of recovering its expenses, i.e. some kind of business or local resource development.

But please cure me if I am ignorant of how the banking systems work.

In the end somebody has to pay for the services businesses provide. Or do we think that a 'free education' model is available for us all to gain financial literacy and inclusion?

Busa Jeremiah Wenogo

Baka, that is very true indeed.

Recognising this I made a mentioned in my blog that when BNGBC was operating in PNG we had a high financial inclusion level due to their friendly policies.

Their exit led to a significant drop in the financial inclusion level in PNG.

The high cost of maintaining a simple savings account is one of the major deterrent in bridging this huge financial exclusion gap that is currently prevalent in PNG.

This is something BPNG needs to look into if it wants to promote financial inclusion in PNG. Once in my blog I stressed the importance for the government through BPNG to instil confidence back into our people so that they can once again be part of the formal financial sector.

The other important thing we need to realise is that unlike PNG Banking Corporation in the past, BSP is commercially owned by shareholders who are after profits and dividends.

So the decision to remove these fees has to come from the board. Most of them are Papua New Guineans and it is expected that as Papua New Guineans it would be a patriotic gesture if they make these decisions.

Unlike PNGBC BSP is not entirely owned by the government of PNG so there is that commercial aspects of business that we need to consider.

All in all,it is really the role of BPNG and ICCC to look into this matter and take appropriate measures to address them.

Otherwise, financial inclusion would only be playing into the hands of only few elites who control the financial institutions in PNG.

Baka Bina

Busa,you forgot two things.In the old days, money left in the bank grew.

Correct me if I am wrong on this as nowadays it cannot because of the account maintenance fee of K3.75 or so per month (that varies between banks). This fee is automatically deducted and nobody is safe with any amount less than K3,000.

Who makes the money to maintain such an account of 3,000 kina? If a person opened an account with K50. and did no activity on it in a year, he'd have no money in it.

Then there is the minimum balance of K20. For a grassroots, that K20 is something that he must have access to without closing the account.

For financial inclusion, start by simply removing these two constrictions.

It pains me to see banks announcing a profit based on minusing K3.75 for each account and, if the calculation is right, if you have a million accounts that's 3.75 million a month without the bank doing any maintenance on the account. That is 45 million by the year's end.

Some banks have more that a million in low income earning and salaried accounts so their profit margins are very healthy. Therefore it pays for the banks to compulsorily impose maintenance fees.

Michael Dom

An informative article, thank you Busa.

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