Sound financial policies and bold reforms: Kamit






Sound financial policies and bold reforms in the financial sector were major factors that kept the Papua New Guinea economy together despite the onslaught of the global financial crisis, said Wilson Kamit, governor of the Bank of Papua New Guinea.
Speaking at the opening of ANZ’s new head office in Harbour City, Port Moresby, Kamit said the reforms created the foundation for financial stability which has not only insulated PNG when the global markets crashed but also drove unprecedented economic growth in the country.
“The financial sector has seen major transformation in asset size since 2000,” Kamit said.
“Total assets of the financial system grew from under K4 billion to over K20 billion as at the end of March 2009, with the banking system maintaining 65.2 percent, savings and loans societies 4.1 percent, licensed financial institutions 3.2 percent, and life insurance companies 1.1 percent.
“Consistent with the rapid increase in asset size, return on assets and equity of the banking sector increased significantly following the reforms. Banks in PNG remain one of the most profitable in the region.
“The financial sector reforms assisted significantly in preventing the domestic banking system from the adverse effects of the global financial crisis,” the central bank governor added.
According to Kamit, the reforms gave full responsibility to the central bank for licensing and supervising authorised deposit taking institutions, superannuation funds, fund managers, life insurance companies and life insurance brokers, giving it a wider scope in its role as financial regulator. 
As such, the reforms strengthened the central bank’s information gathering and investigative powers, enabling it to help instill good governance, transparency and accountability of institutions under its watch.
Economy buoyant
but risks linger
As the world’s major financial markets pick their way out of the difficult economic times, the issues they have had to deal with inorder to recover were hardly faced by economies in the Pacific, including the PNG economy.
For PNG, it managed to circumvent the crisis through a number of factors, mainly in relation to a prudently supervised financial sector.
Lending by commercial banks being virtually funded domestically by deposits from the public meant they were cocooned from the domino effect of bank collapses overseas while a supervisory framework which emphasised on the maintenance of capital adequacy, low level of non performing loans, good corporate governance and management kept the financial system in check. 
A stable interest rate environment and sound fiscal management by government, including a debt retirement programme also lent confidence to the PNG economy and helped in the improvement of PNG’s sovereign risk rating from BB to BB+.
But, Kamit warns, there are still risks the country should keep in mind. “Despite the global financial crisis, the PNG economy has performed relatively well in the last five years on the back of high international commodity prices, and prudent management of fiscal and monetary policies.
“The economy grew at an average rate of five to six percent in real GDP terms between 2004 and 2008, leading to an improvement in balance of payments position and record international reserves adequate for 9-11 months of import cover.”
However, there are challenges PNG still has to face:
• A significant decline in commodity prices can have an adverse impact on the economy through a fall in producer incomes, increase fiscal deficit, lower investments and increase public borrowing. Decline in incomes can lead to an increase in non performing loans in those sectors and undermine soundness of the financial system;
• Financial institutions can introduce risk in their operations through imprudent management practices. These include credit, operations, and market risks. Credit Risk is the threat of default by borrowers and transactional counterparties as well as the loss of value of assets due to deterioration in credit quality. Operational risk is the threat of loss resulting from inadequate or failed internal processes, people and systems or from external events, including legal risk, while market risk is the threat of loss due to movement in prices on the holding of interest bearing securities, equities, foreign exchange, commodities and derivative instruments.
The Central Bank must ensure it maintains supervision standards that will ensure a continuing sound financial system. There is no room for complacency or special dispensation for participants in the financial system.”
Opportunities through
new technologies
But risks aside, Kamit said the financial sector reforms have also provided opportunities for it to introduce new financial products.
“The new area of banking that has been successful in several developing countries is electronic or mobile banking. Electronic banking products have enabled banks to capture the un-banked population, provide financial literacy and significantly reduce the cost of banking.
“Mobile phone banking and branchless banks operating through agents have become a norm in many countries to bring banking services to the rural areas,” Kamit said.
“The rugged terrain, remoteness of many communities and the fragmented characteristics of the PNG economy suggest that mobile money or electronic banking is the way forward to provide financial services to the mass in the rural areas.”
There are also opportunities for bank expansion, as increase in business activities would require commercial bank’s presence in various regions of PNG.
However, Kamit pointed out that innovation would only succeed if infrastructure were in place and law and order issues resolved, especially concerning the safety of bank staff.
“The law and order problems have caused the banks to reduce the size of their representations throughout PNG. Over the years, banks had to close down in provincial centres. The closure of branches in Popondetta twice in the last few years is a topical illustration,” he said.
“The cases of kidnapping and threatening staff and their families is a problem that must stop. Bank staff must be allowed to contribute to the development of our nation without threat or intimidation whilst carrying out their duties.”