The rapid evolution of mobile technology across Papua New Guinea (PNG) is proving to be a key driver for banks as they step up their efforts to seek out growth in rural areas. Banks’ moves to shift their focus from urban centres to rural areas sits well with the government’s financial inclusion policies, although lenders are likely to face a number of challenges as they look to expand in what remains a predominantly cash-based economy.
The banking sector has struggled to weather a series of crises over the past three decades. By 1996, commercial lenders found themselves compelled to reduce their combined number of branches, which dropped from 485 to 195 and, since then, the number of banks operating in the country has dwindled from seven to four.
Findings from the Asian Development Bank (ADB) suggest around 85% of PNG’s population remained unbanked in 2012, while the Bank of PNG (BPNG) estimated in the same year that just 22% of the PGK900m ($417m) thought to be in rural circulation was held by commercial banks.
The latest IMF Financial Access Survey of 2009 found there were just 1.71 branches and 0.47 ATMs per 1000 sq km in PNG, while the number of bank accounts stood at around 1.6m amongst a rapidly expanding population of 7.2m.
BSP remains PNG’s market leader, holding about 1.2m bank accounts in 2013, up from 550,000 in 2011. Australia and New Zealand Banking Group (ANZ) and Westpac Banking Corporation, meanwhile, place second and third, respectively, with a combined total of 250,000 accounts, although both have traditionally targeted the high-revenue corporate and more affluent retail segments. Malaysia’s Maybank (Malayan Banking) was granted a licence in 1994 and remains the sector’s smallest player.
Since merging with PNG Banking Corporation (PNGBC) in 2002, BSP has faced little competition in the retail market, despite the central bank favouring the introduction of a new entrant. Currently, more than 80% of BSP’s accounts are retail based, and the bank is in a strong position to lead the advance into rural markets. BSP’s rural banking strategy includes plans to open 75 branches in remote areas and see a 10-20% growth in number of accounts.
The drive is being spearheaded through the bank’s subsidiary, BSP Rural, over the course of the year. The financial institution currently operates 270 ATMs and aims to open around 35 scaled-down rural branches per year. Westpac operates 16 branches and over 30 ATMs which are mostly located in urban centres, while ANZ has 66 ATMs and is adding to its 14 outlets at a rate of about one per year.
However, despite BSP’s plans to accelerate into rural areas, some experts question whether serving the mass market will prove profitable. In a survey carried out by International Finance Corporation (IFC) and UNDP’s Pacific Financial Inclusion Programme (PFIP) in 2008, almost three quarters of PNG respondents put the weekly amount they could afford to save at under PGK100 ($46).
In the 2012 budget, BPNG extended tax incentives for banks opening rural branches through to 2017. However, lenders are still seeking out low-cost channels in a bid to achieve the economies of scale they need to break even. “Rural branches will unlikely ever be profitable in PNG,” Clyne told OBG. “It is a social service BSP is providing as part of our ‘Financial Inclusion’ initiatives. A rural branch needs approximately 2000 customers to break even in terms of direct costs involved in installation and operation.”
He continued, “BSP has over 1m retail accounts in PNG, of which roughly 98% are transactional banking services only - customers are purely cash in, cash out service focused - partly because the formal economy is so small. We estimate some 40% of clients who conduct transactions through our branches would be better served through alternative channels, such as rural branches, mobile banking or by using EFTPoS (electronic funds transfer at point of sale).”
A drive to push into rural areas last year helped boost customer numbers for PNG’s banks, with ANZ and Westpac both almost doubling their accounts tally. Each of the two banks opened around 55,000 new basic accounts during 2012.
BSP launched its flat-fee basic Kundu account in 2011 on the back of PNG’s mobile revolution, following in the footsteps of mobile telecommunications provider Digicel which set up its EasiPAY (Easipawa) service in 2009 and PNG Post, which operates a Salim Moni Kwik (“Send Money Kwik”, SMK) facility. Around 275,000 Kundu accounts were opened in 2012, helping to earn BSP the Connected World Forum Award for the world’s “Best Bank-led Mobile Money Programme”. The award marked a first for both the bank and PNG.
While PNG’s formally banked economy remains small, international recognition is likely to galvanise activity within the financial services sector. Forthcoming revenues from the liquefied natural gas project, coupled with rising formal employment, which is estimated to be growing at around 7%, should boost demand and help strengthen the banking sector’s expansion efforts.