CANBERRA — A 2018 review by the Bank of Papua New Guinea and International Finance Corporation into financial services found challenges with equal access to financial products, especially for poorer families and women.
The report highlighted barriers including the lack of transparency of information on rates, fees, terms and conditions, as well as gaps in financial consumer protection that were pushing at-risk groups to unregulated lenders.
“Currently, only about 37 percent of people in Papua New Guinea have an account with a formal financial institution,” John Vivian, IFC’s resident representative for PNG, told Devex.
The numbers are even lower for poorer families, especially women and those living in rural areas, the report found. In response to the review, BPNG has released a draft for new financial consumer protection regulations to establish a framework for fair and equitable treatment of all consumers of financial products and services. Consultations on the draft regulations began in February.
“[To instill trust], you need to have the right systems in place so that people have the protection they need if they’re taking out a loan or some other financial product.”— John Vivian, IFC’s resident representative for PNG
The review and implementation of recommendations is a collaboration between IFC and BPNG, with funding support from the governments of Australian and New Zealand, and aims to help the government of PNG deliver on its ambitions to have more people being able to access financial services and products.
Insights from the review
The issue of trust in financial service providers was a key insight from the review, compounded by challenges of linguistic diversity and geographic spread within PNG.
“To do that [instill trust], you need to have the right systems in place so that people have the protection they need if they’re taking out a loan or some other financial product,” Vivian said. Building trust in the regulated systems is core to delivering better financial outcomes in PNG, he added.
Highlighting how important it is for financial institutions to provide people with all the information they need in a form that they understand so people can make informed choices, Vivian explained that the ultimate aim is to build usage, trust and competition in the formal financial sector, which will help PNG achieve its goals on financial inclusion.
Understanding where mistrust occurs is important to overcoming barriers, according to IFC Financial Sector Specialist Philippa Roberts. Lack of transparency around rates, fees, terms, and conditions are the major areas of concern, she says.
“There were many instances where people weren’t aware of the charges for their loans or the full extent of the fees, or even unaware of changes in those fees and rates,” Roberts told Devex. “This made it impossible for people make informed decisions regarding the loans they were taking, which given the significant levels of over-indebtedness in PNG is extremely concerning.”
Roberts said it was common for people seeking financial support to take the first deal in PNG. And because of this, unregulated lenders with high-interest rates were “thriving.”
“The lenders include people and unregulated ‘finance companies’ as well as relatives and wantoks [clan members],” Roberts said. “There isn’t a culture of ‘shopping around’ for financial products. People feel that credit is so hard to get they should just take whatever they are offered.”
Responding to the review
According to Roberts, BPNG were taking the review and its recommendations seriously in order to deliver major changes to financial access in PNG. The new regulations proposed aim to make it easier for customers to compare and understand products — and shift the power back to the consumers to encourage banks to provide more competitive products.
But the integration of financial consumer protection is a shared responsibility involving government, the private sector, industry, financial service providers, and NGOs. The consultation process — currently on the road in PNG — aims to include as many partners as possible to make the recommendations of the report as well as the new regulations a reality.
“BPNG are embarking on a major consultation with people from the public, business and thought leaders, and financial institutions licensed and supervised by BPNG in respect of financial products and services provided to consumers for either personal or business purposes,” Roberts said. “It’s never been done before, it is a key step in meeting the objectives enshrined in the government’s recently launched Financial Sector Development Strategy and the National Financial Inclusion Policy.”
The economic impacts
The importance of equal and wide access to regulated financial institutions was “a simple matter of economics,” according to Vivian.
“It is more than just individuals with bank accounts and access to credit,” he said. “Financial services generate income, decrease social-economic disparities, create financial assets, promote area development and provide new work opportunities across all sectors and sections of the economy. Financial inclusion has [a] multiplier effect on the economy as a whole through higher savings pooled.”
Through equality in financial service offerings, a country’s economic development can be accelerated through an inclusive growth process. By increasing the money that is being transacted within national systems, overall transaction costs can be reduced.
In the absence of efficient payments through regulated financial institutions, Vivian said the risk was that people would continue turning to the unregulated financial sector to obtain the funds they need.
Applying the lessons from PNG
While many issues highlighted in the review are specific to PNG, including challenges of educating on financial access to a linguistically diverse population, Roberts said the lessons of financial consumer protection should be considered widely.
Since the global financial crisis and the Indian microfinance crisis of 2010, safeguards and frameworks have become vital not only to protect consumers but also to protect the stability of the financial sector. This can also be applied in the context of technological innovation and the entry of new market players. That’s why it’s important for countries such as PNG to bring itself into line with best international practices.
“Any of the future innovations could be more complex and a risk for people with low levels of literacy, so it’s good to see moves to have the right measures in place to protect the consumers now and into the future,” Roberts said.