Financial Crime World

PNG Banking Sector Strong, But Faces Challenges

The banking sector in Papua New Guinea has shown impressive performance indicators, with high asset growth, strong capital levels, and significant liquidity. However, despite these strengths, the sector faces challenges in serving certain segments of the population.

Market Dominance and Expansion

According to a recent report by the Bank of Papua New Guinea (BPNG), the country’s largest financial institution dominates the market, holding over half of total deposits. The bank has also expanded its operations into other Pacific countries, including Fiji, where it recently acquired significant operations.

Challenges in Serving Rural and Informal Populations

Despite its strong performance, the sector faces challenges in serving the informal, rural, and self-employed segments of the population, with limited reach to these areas.

Key Risks

  • Operational Risks: The report highlights material operational risks, including a high security and fraud risk in a country where violence and crime are significant.
  • Sterilizing Excess Liquidity: Sterilizing excess liquidity is straining BPNG’s profitability, with the central bank resisting increases to the stock of central bank bills and keeping the policy rate at 7 percent.

Stress Tests

Single-factor shocks focused on credit, market, and liquidity risks were conducted as part of the stress tests. The results showed that:

  • Credit Risk Shocks: High levels of capital and limited exposures to total lending indicate that the banking system faces little impact from credit risk shocks in the near term.
  • Market Risks: However, loan concentration in the commercial and financial sector could represent vulnerability for the system, with stress tests suggesting that a shock to asset quality in this sector could have a material impact.

Conclusion

While the banking sector faces challenges, the report suggests that it is well-positioned to withstand credit risk shocks in the near term. However, continued monitoring and attention to operational risks will be necessary to ensure the sector remains stable and resilient.