Reforms that will expand the use of moveable property, such as vehicles and crops, as collateral could transform the way small businesses and lenders operate in Papua New Guinea.

Port Moresby, Papua New Guinea — In Papua New Guinea, it is hard for a small business to get a loan. Lenders often require land or buildings as collateral. Only large, established firms can readily get financing. As a result, the aspirations and potential of many would-be entrepreneurs and productive businesses are not realized. Their contributions to economic growth and national development are constrained.

Secured transactions reform offers a way to address this problem and help tilt Papua New Guinea’s economy towards greater diversity and innovation. The ongoing reforms are establishing clear and enforceable regulations and procedures that make it easier and safer for lenders to provide loans that use non-land assets as collateral. This is expected to make a broader range of financing products available to a broader base of borrowers.

The reforms are also helping create a way for smaller firms, such as wholesalers and supply stores, to provide credit to customers secured against the goods they sell, or the products the use of those goods will help generate; for example, an advance on fertilizer secured against the value of future crops.

Leveraging assets to grow

This means that more small companies can start-up and grow. They can leverage the value of their moveable assets and invest more funds in building their business. In recent years, eight Pacific island countries have established secured transaction systems in collaboration with the Pacific Private Sector Development Initiative (PSDI), a program financed and led by the Asian Development Bank and the governments of Australia and New Zealand.

The results have been impressive: more than 37,000 loans have now been granted in these countries using moveable property as collateral. In Solomon Islands, a loan that used to take up to four weeks to be approved can now be completed in one day, a typical speed in countries where the reform is well established.

"We can do all the registration processes literally in five minutes. That’s mind boggling when you compare it to the old system."

Ben Chapman

In Papua New Guinea, where small businesses employ a majority of the workforce and make a significant contribution to gross domestic product, it has been possible to secure credit against moveable assets. But the inconvenience, time required, and insecurity inherent in the process made it unappealing to lenders.

A loan secured against a vehicle, for instance, involved submitting paper forms in person to register a security interest over the vehicle, paying a processing fee at a different location, and then waiting three-to-four weeks to receive a confirmation letter, which in turn had to be filed at the courthouse. Checking whether the vehicle had already been pledged elsewhere involved a manual search of courthouse records, which could not be guaranteed as complete.

Increasing convenience and reducing risk

Under Papua New Guinea’s new secured transactions system, an online registry that went live in May 2016 is dramatically reducing the time, cost, and risk associated with registering security interests over moveable assets. Lenders can now search the registry and quickly verify whether there are existing claims on an asset being pledged. Streamlined and strengthened repossession laws are making transactions safer and more commercially viable for lenders. In the event of a default, collateral can be recouped without dealing with lawyers or the courts.

Under the new Personal Property Security Act, which established PNG’s secured transactions system, finance institutions need to register all security interests in non-land assets used to secure existing loans by November 2016.

For major lenders, with tens of thousands of loans on their books, getting ready for the registry was a major concern.

"The only challenge regarding the new registry was how would we get all our security uploaded and listed within the 180-day timeline," said George Barratt, Head of Lending Support and Operations with Bank South Pacific, one of Papua New Guinea’s six major lenders. "The thought of individually loading all entries once the registry was live would have meant a lot of long days and nights."

Recognizing this challenge, PSDI worked with Papua New Guinea’s major lenders on a way to pre-load data to the registry. The online interface developed allows lenders to create hundreds or even thousands of registry filings at once by collating loan data in a single spreadsheet. By the time the registry went live, it had close to 200,000 individual entries.

The registry also includes a data review-and-approval function and a user account verification and identification function to help the registrar, the Investment Promotion Authority, manage the data efficiently.

The banks said the benefits of the new system easily warranted the effort of compiling and transferring their loan data. And for some, gathering the information had its own rewards.

"For Kina, there were knock-on benefits from this process," said Ben Chapman, National Operations Manager with Kina Bank, another of Papua New Guinea’s six major lenders. "It was quite time consuming, but we’ve now created a large database of all our lending customers’ key information. In hindsight, it’s good to do something like that because you’re doing housekeeping at the same time."

A better lending system

The financial institutions say the benefits of the new system will be immediate.

"The best thing is that we’re in 100% control," said Mr. Chapman. "We don’t have to go to a solicitor; we don’t have to go to a government department. We can do all the registration processes, literally in five minutes. That’s mind boggling when you compare it to the old system."

"The other big advantage is the search mechanism," he said. "If we have prospective customers, we can search to see if particular securities are solely theirs."

The banks also agree the new system will encourage creation of new loan products.

"The concept has been used in other countries with a lot of success, and that’s what we’re really looking forward to in Papua New Guinea," said Mr. Chapman. "It’s a relatively simple system and process, but the security behind it is very efficient. It’s just a matter now for the banks and finance companies to come up with innovative products."

Luke Dunstan is a Communications Specialist with the Pacific Private Sector Development Initiative based in Sydney. Learn more about ADB’s work in Papua New Guinea and follow PSDI on Twitter at @ADB_Sydney_PSDI.