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Papua New Guinea: Improving Financial Access and Entrepreneurship Development Project

Sovereign (Public) Project | 53097-001 Status: Proposed

The proposed Improving Financial Access and Entrepreneurship Development Project will support government efforts to develop the finance sector through improving access to financial services and building entrepreneurship capacities of households and micro, small, and medium-sized enterprises (MSMEs, including a focus on strengthening MSMEs in the health sector. Government has recognized that the poor availability and limited use by households and MSMEs of appropriate financial services and products are key constraints on socioeconomic development, especially for low-income men and women and those living in the country's many scattered, remote, and hard-to-reach regions. This challenge is reflected in PNG's Financial Sector Development Strategy for 2018-2030 which aims to expand the finance sector's contribution to PNG's social and economic development.

Project Details

Project Officer
Singh, Shiu Raj Pacific Department Request for information
Country
  • Papua New Guinea
Sector
  • Finance
 
Project Name Improving Financial Access and Entrepreneurship Development Project
Project Number 53097-001
Country Papua New Guinea
Project Status Proposed
Project Type / Modality of Assistance Loan
Source of Funding / Amount
Loan: Improving Access to Finance Project
concessional ordinary capital resources lending / Asian Development Fund US$ 15.00 million
Ordinary capital resources US$ 15.00 million
Strategic Agendas Inclusive economic growth
Drivers of Change Gender Equity and Mainstreaming
Governance and capacity development
Knowledge solutions
Partnerships
Private sector development
Sector / Subsector

Finance / Banking systems and nonbank financial institutions - Finance sector development - Inclusive finance - Small and medium enterprise finance and leasing

Gender Equity and Mainstreaming Effective gender mainstreaming
Description

The proposed Improving Financial Access and Entrepreneurship Development Project will support government efforts to develop the finance sector through improving access to financial services and building entrepreneurship capacities of households and micro, small, and medium-sized enterprises (MSMEs, including a focus on strengthening MSMEs in the health sector. Government has recognized that the poor availability and limited use by households and MSMEs of appropriate financial services and products are key constraints on socioeconomic development, especially for low-income men and women and those living in the country's many scattered, remote, and hard-to-reach regions. This challenge is reflected in PNG's Financial Sector Development Strategy for 2018-2030 which aims to expand the finance sector's contribution to PNG's social and economic development. The proposed Improving Financial Access and Entrepreneurship Development Project will support government efforts to develop the finance sector through improving access to financial services and building entrepreneurship capacities of households and micro, small, and medium-sized enterprises (MSMEs, including a focus on strengthening MSMEs in the health sector. Government has recognized that the poor availability and limited use by households and MSMEs of appropriate financial services and products are key constraints on socioeconomic development, especially for low-income men and women and those living in the country's many scattered, remote, and hard-to-reach regions. This challenge is reflected in PNG's Financial Sector Development Strategy for 2018-2030 which aims to expand the finance sector's contribution to PNG's social and economic development.

The proposed project will build on ADB's ongoing work to increase and broaden financial inclusion and microfinance activity in PNG which initially began through the successful Microfinance and Employment Project, and the yet to be validated Microfinance Expansion Project (MEP). Lessons from the MEP have been incorporated into the project proposal along with recommendations from a thematic evaluation of ADB's support for SMEs during 2005-2017. As a result, the project will strengthen the environment and capacity of lenders and borrowers to facilitate financial inclusion and entrepreneurship.

Project Rationale and Linkage to Country/Regional Strategy

1. Government request and continuing ADB efforts. The Government of Papua New Guinea (PNG) has requested that the Asian Development Bank (ADB) continue its support for finance sector development through a project to improve financial access and entrepreneurship capabilities of households and micro, small, and medium-sized enterprises (MSMEs). The proposed project will build on ADB's work to increase and broaden financial inclusion and microfinance activity in PNG through the successful Microfinance and Employment Project and the recently completed but yet to be validated Microfinance Expansion Project (MEP).

2. Alignment with government strategies. The government's request reflects its recognition that the poor availability and limited use by households and MSMEs of appropriate financial services and products are key constraints on socioeconomic development, especially for low-income men and women and those living in the country's many scattered, remote, and hard-to-reach regions. This challenge is also reflected in PNG's SME Policy, 2016 and the National Financial Inclusion Policy, 2019, which are both aligned with its Vision 2050 and in the National Financial Inclusion Strategy for 2016-2020. The Financial Sector Development Strategy for 2018-2030 aims to expand the finance sector's contribution to PNG's social and economic development.

3. Alignment with ADB strategies. ADB's country partnership strategy for 2016-2020 sustains ADB's commitment to make finance services more inclusive for both men and women in PNG through ongoing engagement and policy dialogue with the government on microfinance and support for initiatives to expand availability and use. The project, which is included in ADB's 2020-2022 country operations business plan for PNG, is consistent with the strategic priorities and targets for private sector development of the Pacific Approach 2016-2020. It also aligns with Operational Priorities 1, 2, and 6 of ADB's Strategy 2030 to address the region's remaining poverty and reduce inequalities, accelerate progress toward achieving gender equality, and strengthen governance and institutional capacity.

4. Financial inclusion needs heightened as growth slows. PNG's need for a more inclusive and accessible finance sector, along with the grassroots entrepreneurship that this can bring about, is growing as the economy weakens. Annual average growth is projected to slow from 5.5% in the 2009-2018 period to 4.8% in 2019 and average only 2.6% during 2020-2022. Falling commodity prices, drought in 2015-2016, an earthquake in 2018, and other shocks have exposed vulnerabilities in public finances and macroeconomic management. Government revenues have stagnated, state-owned enterprises are showing losses, and the ratio of public debt to gross domestic product (GDP) has risen with growing deficits. Foreign exchange shortages have reduced investment and growth in the non-resource and informal sectors, which account for more than 85% of employment. The COVID-19 pandemic is expected to exacerbate these economic woes and this is where more borrowing by households and MSMEs, including health sector MSMEs, could bolster job creation and income generation through entrepreneurship development and support delivery of health services.

5. Very low financial access. PNG is a fragile and conflicted affected state with less than half of all PNG's working age people and even fewer working age women have an account at a formal financial institution. This reflects and is likely a factor in the underdevelopment of financial intermediation and the small size of the finance sector. Even including insurance activity, it accounted for only 2.3% of GDP in 2018. PNG's ratio of private sector credit to GDP, estimated at 19% in 2018, is among the lowest in the world. Women hold only 30% of deposit accounts, 25% of loan accounts, and 19% of mobile financial service accounts. They own only 24.8% of the MSMEs and are three times more likely than men to work in the informal sector.

6. Direct causes and effects. Competition between the country's four commercial banks is weak. This and other systemic issues, such as use of early stage digital platforms to extend their reach, weigh on the levels of financial intermediation and services and leaves underserved and unbanked individuals and MSMEs to rely on expensive informal financing. Of the country's 49,500 SMEs, only 5.4% had obtained bank loans, according to 2016 SME Policy. The risk aversion of commercial banks is deepened by the lack of both, ready information on prospective customers and standardized identification. Processing small loans of uncertain quality to MSMEs and individuals adds costs for extra risk management and due diligence. For their part, many MSMEs are unable to prepare bankable proposals. Along with households and individuals (particularly women), they are also largely without what currently qualifies as collateral. Banks' product choices for this market are sparse; awareness of such products, along with financial literacy in the population overall, is low.

7. Addressing root causes. More than 20 savings and loan societies (SLSs), five licensed microfinance institutions (MFIs), and unregulated MFIs in the financial sector offer potential for expanding coverage of basic financial services to the currently underserved and unbanked. First, however, a start must be made on addressing root causes. These include the financial illiteracy in households and among women, and the poor financial management and business planning skills of both male- and female-owned MSMEs. MFI and SLS capacity deficits in business and product management combined with poor credit risk assessment and narrow categories for acceptable collateral present particular obstacles. Expanding the minimal use of digital financial services (DFS) to promote products and customer knowledge is critical in PNG due to its difficult terrain and challenging demographics. Relatively few of its people reside in or near cities; maintaining a physical banking presence in the small, often hard-to-reach communities in which most of the rest are scattered is generally uneconomic. With increasing investments in communications mobile phone coverage is expected to improve from 60% reported in 2019. Gaps in PNG's legal and regulatory frameworks will be filled to better support microfinance.

8. Steps under way. ADB is already helping deal with some of these obstacles. A digital system to overcome the reliable customer identification issues that frequently limit access to financial services and credit is being piloted under regional technical assistance (TA). A risk-sharing facility for MFIs was tested under the MEP to help boost their lending and services. Based on lessons learned from this trial, the Bank of Papua New Guinea (BPNG) may establish a credit guarantee corporation as part of a program to speed up SME sector growth.

9. Lessons learned. Other lessons from the MEP have been incorporated in the project concept along with recommendations from a thematic evaluation of ADB's support for SMEs during 2005-2017. As a result, the project will aim to (i) select only those participating financial institutions (PFIs) committed to servicing SMEs; (ii) develop the capacity of PFIs and SMEs, including the SMEs owned by women; (iii) ensure that the design's performance indicators and the collection of data on targeted groups are good; and (iv) conduct regular monitoring to detect any needs for mid-course adjustments.

Impact A full suite of quality financial services provided to all at affordable prices and in a convenient manner (Medium-Term Development Plan III for 2018 2022)
Outcome Access to financial services and entrepreneurial capacity for households and micro, small, and medium enterprises improved
Outputs

Financial capabilities and capacities of households, micro, small, and medium-sized enterprises, and participating financial institutions improved

Use of digital financial services increased

Legal and regulatory environment for microfinance strengthened

Geographical Location Nation-wide
Safeguard Categories
Environment C
Involuntary Resettlement C
Indigenous Peoples C
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design
During Project Implementation
Responsible ADB Officer Singh, Shiu Raj
Responsible ADB Department Pacific Department
Responsible ADB Division Pacific Liaison and Coordination Office in Sydney, Australia
Executing Agencies
Bank of Papua New Guinea
Douglas St., P. O. Box 121
Port Moresby
Papua New Guinea
Department of Finance
Vulupindi Haus, P.O. Box 710
Waigani, Papua New Guinea
Timetable
Concept Clearance 13 May 2020
Fact Finding 20 Jul 2020 to 24 Jul 2020
MRM 24 Nov 2020
Approval -
Last Review Mission -
Last PDS Update 13 May 2020

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