Financial Crime World

PNG Banking Sector: Stable but Facing Challenges

Port Moresby, Papua New Guinea - December 2010

The Papua New Guinea (PNG) banking sector has made significant progress since the end of 2005, with assets growing from K9.5 billion to over K15 billion. Despite its strengths, the sector faces several challenges.

Strong Indicators

The PNG banking system is characterized by strong indicators, including:

  • High asset growth
  • Strong capital levels
  • Profitability
  • Significant liquidity

These indicators demonstrate the sector’s resilience and stability. However, the sector’s reliance on domestic deposits makes it vulnerable to changes in economic conditions.

Challenges Ahead

Despite its strengths, the sector faces several challenges, including:

  • Sterilizing Excess Liquidity: The Bank of Papua New Guinea (BPNG) has strained profitability due to a stockpile of central bank bills and a policy rate kept at 7%.
  • Property Market Risks: Strong growth in the property market increases banks’ exposure to market risks.
  • Loan Concentration: Loan concentration in the commercial and financial sector could represent vulnerability for the system.

Stress Tests

Stress tests conducted by BPNG showed that the system faces little impact from credit risk shocks in the near term. Even if Non-Performing Loans (NPLs) were to double, triple, or quintuple, the Capital Adequacy Ratio (CAR) would remain above the recommended 12% level.

Recommendations

To ensure continued stability and sustainability, banks should:

  • Monitor Loan Portfolios: Continuously monitor loan portfolios, particularly in the commercial and financial sectors.
  • Maintain Policy Rate: BPNG should maintain its policy rate at 7% to manage inflationary pressures.
  • Support Small and Medium-Sized Enterprises: The government should continue to support the banking sector through initiatives such as increasing access to finance for small and medium-sized enterprises.

Main Highlights

  • The PNG banking sector has grown significantly since 2005, with assets reaching over K15 billion.
  • The sector is characterized by strong indicators, including high asset growth, strong capital levels, profitability, and significant liquidity.
  • NPLs remain low at around 1.5% of total loans, and provisioning is high.
  • The sector’s reliance on domestic deposits makes it vulnerable to changes in economic conditions.
  • Stress tests showed that the system faces little impact from credit risk shocks in the near term.
  • Loan concentration in the commercial and financial sector could represent vulnerability for the system.