Marape backs credit scheme

On Nov 27, 2018, the National Executive Council approved the establishment of the Credit Guarantee Corporation Ltd to address the lack of access to credit and capital for micro-small and medium enterprises in the country. The Bank of PNG (BPNG) carried out the preparatory work and incorporated it under the Companies Act 1997 on Jan 5. It is a joint venture between the Bank of PNG and Kumul Consolidated Holdings (KCH). It was launched last Tuesday. It will support the Government policy to develop and grow the MSME sector to create new employment, achieve sustainable economic growth and fair and equitable distribution of wealth through majority citizen ownership of business activities.
Below are extracts from what the key speakers said:

Prime Minister James Marape
While we have had various guarantee schemes in the country, the establishment of the CGC as an independent legal entity with a sole purpose of providing guarantees and focusing on helping the MSMEs (micro, small
and medium enterprises) grow and develop is very promising and is in line with Government’s focus on growing the MSME sector.
I encourage all the licenced financial institutions to collaborate with the CGC to ensure the credit risk is shared by the CGC and the participating financial institutions, so that the institutions can be encouraged to make credit available to MSMEs.
In the Credit Guarantee Corporation, the Government is committed to investing K50 million at the first instance.
If it doesn’t come from Treasury, (acting) governor (Benny Popoitai can) take it from the dividend you will paying Treasury.
It’s a guaranteed partnership.
The dividend you will pay us can be held back.
Apart from providing guarantees to financial institutions, I envisage the CGC to do wholesale financing to financial institutions, especially the smaller ones, to expand their microcredit loan portfolios.
To also provide short term liquidity support to financial institutions affected by natural disasters, health pandemics and runs on customer deposits as a first line of defence.

Bank of PNG board chairman David Toua
The Central Bank’s mandate, consistent with the Central Banking Act, is to develop financial policies that will bring about stability in the prices of general goods and services, a predictable interest rate structure, and a stable exchange rate that adjusts to the swings in commodity price cycles that restores it natural equilibrium.
“During the Covid-19 pandemic, the Central Bank reacted by easing monetary policy to ensure commercial banks and second-tier financial institutions had the liquidity necessary to fund transactions demand for money and for business that might need additional capital to sustain their business.
These measures included a
reduction of the Kina Facility Rate, the cash reserve requirement and opening the discount window for second tier financial institutions for liquidity requirements.
The other supporting policy measures included the commercial banks deferred principal
and interest payments on loans for three months and the members of superannuation funds who were unemployed for
three months could drawdown some of their member contributions.
Since 2013, the Central Bank, in association with the financial institutions and our development partners, have undertaken massive financial inclusion drives in the country.
We hope to continue that trend with access to finance for our MSMEs.
Credit guarantee schemes are now common and are established by governments to mitigate third party credit risk on financial institutions to encourage lending to private sector, especially the MSMEs, which are limited in accessing funds to expand their businesses.
Studies have shown that MSMEs’ lack of accessibility to bank credit is attributed to:

• UNSTRUCTURED nature of business due to lack of capital, capacity and financial education;
• IMPROPER corporate structures due to their lack of knowledge of proper enterprise structures for risk mitigation and controls;
• INADEQUATE collaterals acceptable to the banks due to lower liquidity, surplus savings and lack of deep asset base;
• LOW productivity due to low literacy levels; and,
• POOR market accessibility due to their remote locations.

“For these attributes, governments have focused on capacity building, development of proper structures, improve financial education and develop supply chain modules to address issues relating to market accessibility.”

Bank of PNG acting governor Benny Papoitai
The establishment of the CGC and the guarantee facility is one of the key outputs of the SME Accelerator Programme established by the Bank of Papua New Guinea.
The CGC is to ensure that credit risk is shared by the CGC and the participating financial institutions so that the institutions can be encouraged to make credit available to especially the MSMEs.
Markets failures and imperfections such as information asymmetries, inadequacy or lack of recognised collateral, high transaction costs for small-scale lending, and perceptions of high risk, all of which lead to lack of access to credit for MSMEs.
Despite adequate liquidity in PNG, financial institutions are often reluctant to lend to SMEs and when they do the high interest rates charges becomes a barrier for SMEs.
For long-term sustainable financing and assistance to MSMEs, the Government has realised it had to intervene in the market through a credit schemes to provide third party credit risk mitigation to lenders to increase access to credit for MSMEs.
The main objective of the CGC is to ensure that our MSMEs can obtain financing for viable business investments and in particular to assist MSMEs that are otherwise creditworthy but do not have adequate collateral to obtain a loan at a reasonable interest rate.
I am, therefore, hopeful that the provision of collateral and the reduction of risks to our financial institutions through guaranteed payment in case of default will lead to reduction in interest rate by our financial institutions.