THE country’s current financial system has undergone consolidation and rationalisation over time to a point where it is not serving the development needs of Papua New Guinea.
It now requires an urgent regulatory and financial sector reform to improve performance and service delivery.
Regulatory environment is now at the stage where it requires urgent reform.
The laws governing the oversight and supervision of the financial system are now considerably out-of-date.
The Bank of Papua New Guinea has been overloaded with roles and functions over time that it is not effectively performing its core policy mandate and operational issues are now undermining the effective performance of the Central Bank.
Efficiency and effectiveness of the financial sector has been overwhelmed by short-term profit motivation, rather than effective service delivery to meet the economic and social development priorities of PNG. Commercial banks and financial institutions are more concerned about cost recovery, rather than investing and better managing commercial risks to improve their operational and financial performance.
The following are some of the operational issues which support the need for further reform.
The high fees, charges imposed from accounts and financial transactions made by customers, is a major contributor to the profits of banks and financial institutions.
Dormant account fees, deposit and withdrawal fees, card fees, card replacement fees, pin replacement fees, standing order fees, investigation fees, remittance fees, receipt fees, printing fees, account management fees, system fees and the list is endless.
These fees are not supposed to underpin and drive the profits of the institutions, as they potentially constitute theft from the deposits in customer accounts.
Bank lending in PNG defies economic and financial theory and logic. Lending is heavily focused on short-term benefits and security requirements, with very high interest rates on loans.
These lead to a lack of innovation and long-term investment and loss of prudent risk management.
The high loan application fees and fixed interest charges rather than variable based on declining loan balance, are symptoms of these problems. The high fees and interest rates reduce the volume of loan portfolios of banks and financial institutions and keep interest rates on loans very high relative to similar financial systems in the region.
These reinforce the need for more high fees and charges, which is the situation PNG is facing at present. The following are urgent financial system reforms that are required in PNG:
lReform the BPNG and the regulatory environment;
lIntroduce virtual banking to reduce operating and investment cost, and increase competition in the financial system;
- Introduce biometric Identification card system for customers to access their accounts and perform financial transactions;
- Abolish bank fees and charges. Replace fees with deductions from earnings to encourage banks and financial institutions to be more innovative in lending and risk management, to expand their long-term loan portfolios; and,
- Abolish fixed interest charges on loans and replace them with variable charges based on outstanding loan balances.