Re-positioning Non-bank Service Strategy in Papua New Guinea

ERe-positioning non-bank servicestrategy in Papua New Guinea

David Kavanamur99-2

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Labour and Management in Development Journal, Volume 3, Number 6 2© Asia Pacific Press 2003

Repositioning non-bank service strategy in Papua New Guinea David Kavanamur

Abbreviations

ADB Asian Development BankAusAID Australian Agency for International DevelopmentBMFS Bougainville Microfinance SchemeBPNG Bank of Papua New GuineaBRI Bank Rakyat IndonesiaBSP Bank South PacificCGS Credit Guarantee SchemeCIC Coffee Industry CorporationCID Commercial Investment DivisionDAL Department of Agriculture and LivestockENBSLS East New Britain Savings and Loans SocietyEPU Economic Policy UnitFORD Foundation for Rural Development

© Asia Pacific Press 2003

This work is copyright. Apart from those uses which may be permitted under the CopyrightAct 1968 as amended, no part may be reproduced by any process without written permissionfrom the publisher.

ISSN 1443–6698

David Kavanamur is a PhD candidate (Management), School of Marketing & InternationalBusiness, University of Western Sydney, Blacktown campus, [email protected].

Acknowledgment

An expanded version of this article was presented at the ‘Development Research Symposium:South Pacific Futures’ on 23 July 2002, organised by The Foundation for DevelopmentCooperation, Women’s College, University of Queensland, Brisbane. The author would liketo thank Dr Michael Hess and an independent reviewer for critical and insightful commentson an earlier draft.



HLGS Housing Loan Guarantee SchemeHLISS Housing Loan Interest Subsidy SchemeIBBM Institute of Banking and ManagementIMC Implementation Monitoring CommitteeKAM key account managementMFI microfinance institutionsMOA memorandum of agreementNEC National Executive CouncilNIS National Investors SchemePFI participating financial institutionPNG Papua New GuineaPNGBC Papua New Guinea Banking CorporationRDB Rural Development BankSACS Smallholder Agriculture Credit SchemeSAG Stand Alone GuaranteeSBDC Small Business Development CorporationSBGF Small Business Guarantee FacilitySLS Savings and Loan SocietyTPNG Territory of Papua New GuineaUNDP United Nations Development ProgrammeWHWCCS Western Highlands Womens’ Council Credit Scheme



The provision of financial services for ruraldevelopment, or more specifically povertyalleviation, has evolved under variousbanners from ‘subsidised credit’ in the 1970s,‘microcredit’ in the 1980s, and to‘microfinance’ in the late 1990s. Thisevolution reflects the transition of worldeconomies towards more market-basedprinciples of economic management. It alsoexemplifies the realisation that the poor donot just need credits but also broaderfinancial services, including savings andinsurance products. The microfinanceparadigm captures the changing perceptionthat the poor are indeed bankable and canafford to pay market interest rates, aconception contrary to earlier positions.Microfinance institutions (MFIs) are nowgenerally accepted as a major tool in the fightagainst poverty in developing countries aswell as in poor urban segments of developedcountries such as in Europe and the UnitedStates (Hussain, Maskooki and Gunasekaran2001).

Examples such as those of the GrameenBank of Bangladesh, BancoSol in Bolivia andthe unit desa (village post) system of the BankRakyat Indonesia (BRI) are seen as providinglessons for poverty alleviation generally.

Attempts have been made to replicatethese experiences in the Pacific. Grameenprototypes have been attempted in Fiji,Papua New Guinea (PNG) and WesternSamoa. Best practice lessons from theseinnovative schemes have also been graftedonto development banks, credit unions andrevolving funds in the region. While somepositive lessons have been learnt in thePacific from such experimentation, theoverall result is such that there are wide

‘expectation gaps’. Amongst the problemsidentified by expert commentators are thefindings of McGuire (1997) that Pacific MFIs’outreach depth remained shallow and thatnone of the programs were operating on asustainable basis both operationally andfinancially.

Increasingly, the question being asked isthe one posed by Cornford (2000): given thepeculiarities of the Pacific environment, isit appropriate to use one of the ‘off-the-shelf’models in the Pacific or is there a need for areassessment of client needs and subsequentinnovation of products and services throughmarket segmentation and environmentalanalysis? Cornford’s answer to the abovequestion is certainly in favour of the needto differentiate products and service throughcareful environmental and market analysisas well as through innovation. She arguesthat, because the poor are certainly not ahomogenous group, the challenge is todevelop innovative financial servicemechanisms which are sustainable. Theinnovation aspect must meet the particularneeds of the client group while thesustainability aspect refers to theachievement of repayment at rates and overperiods which make the MFI financiallyviable. It seems most likely that this can beachieved through the emergence of a widerange of microfinance organisations andstrategies with a diverse set of soundpractices based on a process of learning andinnovation rather than through theapplication of a unitary and linear set of bestpractices (Dunford 2000).

This need for a differentiated approachalso applies to the aims of MFIs.Commentators have concluded that “it is



extremely difficult for MFIs to achievefinancial self-sufficiency” even in idealcircumstances (McGuire and Conroy 2000).In other words, the goal of financial self-sufficiency for MFIs that has hitherto beenidealised in the international MFI modelmay be overly simplistic. Even wellmanaged programs such as Grameen are stilldependent on donor support. This findingis consistent with the underlying rationalefor financial market intervention that firstprompted directed credit in the 1970s, onethat stems from the intertwiningrelationship between market failure andstate failure (Kavanamur 2000). Marketfailure results from excessive transactioncosts in dealing with poor people and smallbusiness generally, while state failure in theprovision of physical infrastructure and localamenities in developing countriesexacerbates these transaction costs.Moreover, imperfect or asymmetricinformation leads to market failure infinance. So the target market of MFIs, thepoor, makes financial self-sufficiency anonsensical aim. If this market had theresources to achieve financial sustainability,the people in it would not be poor andwould not require this service of MFIs.

This article considers the experience ofthe application of microfinance in PNG. Itlooks at a selection of institutions involvedin microfinancing activities at various levelsand in various ways. Non-microfinanceschemes such as the Smallholder AgricultureCredit Scheme and the PNG GovernmentCredit Guarantee Scheme are also includedin this process for comparative purposes vis-à-vis managerial experiences. It then drawslessons about the difficulties they havefaced. The institutions chosen include MFIs

quite similar to the Grameen-styleorganisation as well as state-ownedorganisations and a private sector savingssociety which have used microfinancetechniques to improve their lendingpractices.

An overview of the landscape

A brief overview of the performance of someof the key non-bank institutions in PNG forwhich data are available will help paint abroader picture of the landscape. Some ofthese financial programs do not necessarilyfall into the category of MFIs, but theirexperiences are instructive because theyshow up the successes and failures whileoperating under PNG business conditions.Papua New Guinea has one developmentbank, 1000 credit unions, 334 Grameenprototypes and 500 revolving funds servingan average rural population of five millionpeople (McGuire 1997). Those looked at hereare Liklik Dinau Abitore Trust, WesternHighlands Women’s Council Credit Scheme(WHWCCS), FORD Inc Microfinance, theRural Development Bank’s (RDB)Smallholder Agriculture Credit Scheme(SACS), the East New Britain Savings andLoans Scheme (ENBSLS), the Small BusinessDevelopment Corporation’s (SBDC) SmallBusiness Guarantee Facility (SBGF), and thePNG Government’s Credit GuaranteeSchemes (CGS). The following organisationsrepresent both state and private sector effortsaimed at stimulating the productive sectorsof the PNG economy through the use ofloans. The lessons drawn from thisexperience show just how difficult a taskthey face in achieving a financiallysustainable basis for their operations.



Liklik Dinau

Liklik Dinau is the best known replica of theGrameen Bank experience in Papua NewGuinea. Liklik Dinau emerged from thepartnership of seven parties includinggovernment departments, the Papua NewGuinea Banking Corporation (PNGBC), theUnited Nations Development Programme(UNDP), the National Council of Women,and the Foundation for Law, Order andJustice. Liklik Dinau offers a standard one-year loan and both voluntary andcompulsory savings accounts whichattracted a five per cent interest rate in 1999.Its target population is a minimum 50,000disadvantaged women in rural EasternHighlands. The scheme lends to both groupsand individuals through three branches and71 centres with a loan recovery rate of 96 percent. Loans are disbursed on a successionbasis from K300, K750 and K800. Thescheme’s outreach totalled 1,120 borrowersby September 1998—four years after it itsinitiation—with a successful savingsportfolio of around K113,000. Groupmembers receive training as a prerequisite

for taking out loans and social collateral isrelied upon for loan recovery, namely groupliability and peer pressure. The performanceof Liklik Dinau has been extensivelydocumented elsewhere (see Fleisher 1996;Hickson et al. 1998 cited in Conroy 2000;Lacson and Zacarias 1996; AusAID 1999).

Although Liklik Dinau offers a promisingmodel for Papua New Guinea, itsperformance had lagged behindexpectations by the end of 2001. At the timeof the author’s visit to Goroka in May 2002,Liklik’s operational funds had dried up andin its operations were being mothballed asfurther donor funds were being sought.Symptomatic of imprudent management,running costs had been covered by clients’savings, which apparently had not beenadequately quarantined (Newsom, personalinterview, 15 October 2002). Donors becameimpatient with the scheme’s outreachprogress as well as the slow progresstowards the achievement of both operationaland financial sustainability. By December1999, the total number of members was only2,704 but the number of outstanding loans

Table 1 Key performance indicators of Liklik Dinau/Abitore Trust, 31 December 1999

OutreachNo. of total members 2,704No. of outstanding loans 1,495No. of depositors 2,704Av. Loan size (K) 487Av. deposit size (K) 176

SustainabilityPortfolio at risk >50%Operational sufficiency <30%Staff productivity 135 borrowers per field officer

Source: Ennenbach, J.C., 2000. PNG Microfinance and Employment Project: summary. The institutionallandscape of microfinance in Papua New Guinea, international best practice and institutional capacity,Bankakademie Micro Banking Competence Center, Frankfurt:39.



was 1,495 (Table 1). This translated to anoverall portfolio at risk of more than 50 percent.

A number of evaluative studies hadearlier correctly pointed out potentialoperational difficulties. First, a UNDPreview in 1998 (Hickson et al. 1998, cited inConroy 2000) pointed out that, although thesavings performance of Liklik Dinau was anoutstanding aspect of the scheme at 55 percent (K75,000) of the outstanding loanportfolio, there was no separate account forsavings held at a commercial bank andtherefore an absence of any reserve savingsto meet contingencies. Second, an AusAIDreview in February 1999 cautioned thatLiklik Dinau’s continued operation was atstake because of a looming liquidity crisis.The scheme had earlier on been bailed outby AusAID and the Government of PapuaNew Guinea. After the 1999 review the twoparties had injected a further A$1.2 millionover a 3-year period up to 2002 (Conroy2000). This support was premised on thescheme meeting a set of stated performancetargets, with a twice-yearly reportingschedule. The AusAID review of 1999reasoned that, for Liklik Dinau to achieve adegree of sustainability and self-sufficiency,donor support would have to be continuedbeyond three years.

Clearly, although the repayment rate hadimproved within a year from inception,about half of all current borrowers in 1998were in arrears, portfolio at risk wascalculated at around 60 per cent, theprogram dropout rate was more than 40 percent, and repeat loans were insignificant(Hickson et al. 1998, cited in Conroy 2000).A restricted range of economic activities for

which loans were being made was cited asa source of weakness. Third, Bablis’ (2000)performance evaluation of Liklik Dinau,based on a questionnaire survey (12 per centof 734 women in the Goroka area), foundthat although 66.3 per cent of therespondents favoured the 20 per cent interestrate on the repayment of loans, theremaining 33.7 per cent thought otherwise.This was seen by Bablis as indicating thatalmost one-third of the clients could chooseto become wilful defaulters for one reasonor another. Bablis (2000) also found that therewas an equal division between clients whofavoured weekly repayments and thosefavouring a more flexible repayment pace.This latter group supported a ‘non-GrameenBank pace’ that, according to theinternational model, would makesustainability impossible.

A possible explanation for theobservation made by Hickson et al. (1998)that half of the borrowers were in arrears in1998 is offered by Bablis (2000:56) who foundthat 84.9 per cent of his respondents did nothave a clue of the meaning of ‘profit’. Thismeant that most of the Liklik Dinauborrowers operated income-generatingactivities with little appreciation of the profitmotivation assumed in an economic way ofthinking. Perhaps they were generallyhappy to be seen to be doing something inthe name of bisnis with inherent underlyingsocial/political implications related to localrealities rather than to any assumption aboutthe business cycle. This echoes the findingsof Epstein (2000), who describes a youngwoman seller at the Gordon open market inPort Moresby who would normally payK280 to air freight her father-in law’s



broccoli and cabbages from Mt. Hagen toPort Moresby and sell them for only K240.Although the transaction was a loss-makingventure she obviously enjoyed the time shespent at the market.

In sum, although Liklik Dinau hasempowered the majority of less fortunatewomen in the program and has underscoredthe high savings propensity of rural womenin Goroka and generally in Papua NewGuinea (see Fernando 1990, 1991), itsexpected goals of mass outreach,sustainability and self-sufficiency have beenoverly sanguine. McGuire and Conroy(2000) conclude that a long period is requiredfor MFIs to achieve financial self-sufficiencyand some degree of ongoing subsidisationfrom donors and governments will continueto be required. From the repaymentexperiences of Liklik Dinau it appears likelythat factors other than time may be requiredwhere attitudes to finance are based on non-economic ways of thinking.

Western Highlands Womens’ Council CreditScheme

The Western Highlands Women’s CouncilCredit Scheme (WHWCCS) initiallyemerged from a partnership between theGovernment of Papua New Guinea, theSouth Pacific Forum’s Women’s Bureauthrough the Asia Pacific DevelopmentCentre in 1982 and the National Council ofWomen. Of the many provinces thatbenefited from this scheme in the early yearsof credit schemes or microfinance in PapuaNew Guinea, Western Highlands stood outwith its exceptional performance by 1995(UNDP 1998). By the late 1990s, additionalpartners had come on board and others hadleft. New partners included the New

Zealand Government, the Department ofReligion, Home and Youth Affairs, the RuralDevelopment Bank and eventually theWorld Bank, which contributed K2 millionto the K945,300 already in circulation.

In the Western Highlands Province, as wasthe case in other provinces, the RDB was usedas a conduit to disburse a further grant ofK490,000 from the Wingti/Chan governmentin 1994 as part of an overall country lendingportfolio of K1.2 million. The maximumamount lent to women borrowers under theRDB’s Women and Youth Scheme was K2,000at 8 per cent, payable over two years. Kopel(2002) undertook an evaluation of this schemeand established from the Provincial Councilof Women’s records that 80 per cent of theRDB loans had been repaid with interest.Lending under this scheme was mainlythrough the extensive network of women’sassociations throughout the province. Inresponse to the perceived success of thisscheme, the Western Highlands ProvincialGovernment undertook to provide furtherfunding with an initial K1 million in 1999 andan additional K500,000 in 2000 (Kopel 2002).

Loans are disbursed from the ProvincialWomen’s Council to associations. By 2000,there were 139 of these associations, of which109 had received funding (Kopel 2002). Theassociations then passed on the funds to7,140 groups in the six districts of theprovince—Hagen Central, Anglimp/SouthWaghi, Minj, Banj, Dei and Baiyer. Thenumber of individuals in these groupsranged from 79 to 3,249 women. The totalnumber of beneficiaries of the scheme was7,140 women in 2000.

In terms of performance, it is clear thatthe scheme has achieved some social and



political success. It has, for instance, sociallyempowered the women to be independentand become self-motivated (Kopel 2002).Financial sustainability is less clear.Repayment can take up to two years becauseof the flexible repayment pace, unlike in theGrameen model followed by Liklik Dinauwhich requires weekly repayments. Fromthe K1 million seed funding, K685,773.89(68.6 per cent) was repaid within two yearsof disbursement (2000–01). By June 2001,31.4 per cent of funds remained outstandingand by March 2002 the balance of loanablefunds stood at K98,788.09 (10 per cent of seedmoney). As in revolving funds, repaidmoney was reinstated and disbursed to newassociations as well as for repeat loans. Thelow levels of loanable funds attracted afurther K500,000 from the province’s 2002annual budget. The interest rate (8 per cent)has been far below market rates which havebeen well above 20 per cent since 1999.

Moreover, repayment has been hamperedby the existence of a splinter women’s groupwithin the province that has established arival Women’s Council. The group isaffiliated to opponents of the governor of theprovince, who committed the seed capital.Within this opposition group there are 36associations which owe loans amounting toK231,926. This problem is typical of schemesthat are perceived to have underlyingpolitical motivations. Furthermore, whilerecord keeping may have been up-to-dateat the RDB and Women’s Council offices, thiswas found to be wanting at the associationand group levels due to the high rate ofilliteracy. It is obvious that customisedmanagement training is required for loanrecipients and at association and groupmanagement levels.

Foundation for Rural Development Inc.

The Foundation for Rural Development(FORD) Inc is a registered local non-government organisation founded in 1997and based in Mt Hagen, Western HighlandsProvince. Although FORD is a registeredtraining provider and partner of the SBDC,it has also entered the area of microfinance.FORD’s vision is to empower people throughits three development programs focusing oncommunity development, microenterprisedevelopment and rehabilitation programsfor youth (The Foundation for RuralDevelopment, information leaflet). Itsdevelopment activities are supported by itsInformation and Media Unit. FORD’s majordonors have been Protestant churches inGermany, AusAID’s CommunityDevelopment Scheme and the GlobalEnvironment Facility Small Grant Scheme.FORD is both a newer player in the MFIscene and has also adopted a differentstrategy. It targets workers who receiveregular income and guarantees repaymentof loans by deducting amounts directly fromloan recipients’ pay.

FORD commenced its microenterpriseprogram in 1999 with donated fundstotalling K300,000. Lending was primarilythrough community groups. In the period1999–2001, FORD lent to 45 groups atsubsidised interests ranging from 10–15 percent. Each group had to sponsor arepresentative to attend a short businesstraining course offered by FORD at a cost ofK300 per person. The idea was to fostercooperative projects that would benefit thecommunity at large. After a review of thefirst phase of operation (1999–2001),however, FORD found that the idea ofcooperative groups did not work.



During the first phase, FORD realisedthat loan repayments were not forthcomingas expected and that, even with the training,management skills remained rudimentary.FORD then went through an internalbrainstorming session involving all its 12staff plus staff seconded from thegovernment of the Western HighlandsProvince. This resulted in a revised strategyaimed at ensuring the sustainability of thescheme by directing its lending to a newtarget group of low-income earners. It ishoped that targeting low-income earnerswill enable these groups to act asdevelopment catalysts at the communitylevel (Pu, personal interview, 11 May 2002).FORD needs about K2 million from donorsto effect this second phase of the microfinancescheme. Successful repayment by low-income earners secured through directpayroll deductions would help build uploanable funds, which would then be on-lentto viable borrowers in the informal sector.

Prospective borrowers would bethoroughly screened on the basis of theiremployment record, project proposal both forindividual and group, bank accounts, andcharacter assessment via community leadersand employers. This screening process maytake 3–4 weeks, after which time the lenderand borrower will have to agree on howmuch should be deducted. Only after thefirst payroll deduction is actually made outto FORD will the loan be released. Lendingis strictly for entrepreneurial activities ratherthan for consumption.

At the time of the interview, FORD hadalready secured the necessary ‘deductioncode’ with the Department of Treasury,

enabling access to direct loan deduction bygovernment departments/agencies. Withinthree weeks of this, a total of K60,000 hadbeen on-lent to 20 borrowers at 30 per cent,a rate which was 10 per cent above marketrate. Because the service fee charged bypayroll offices for the deduction service isfive per cent, the actual percentage thataccrues to FORD is 25 per cent. FORD alsointends to charge a 3–5 per cent fee for thebusiness training and advisory services itprovides to borrowers. Previously theseservices were free.

In sum, FORD’s independence as anNGO has helped ensure the viability of itsmicroenterprise promotion program andtherefore its own institutional survival. Fromits review of the first phase of lending, FORDrealised that market rates had to be chargedand that an effective repayment system hadto be developed given the lack of a strongloan repayment culture based oncommercial trust and integrity. FORDrealised that the K300,000 it had disbursedearlier was being perceived as simply ahand-out and that the culture of borrowingand repaying had to be developed fromscratch. It realised also that, in anenvironment where villagers were used toreceiving direct government handouts forpolitical purposes, experimenting with largeamounts of money for mainly start-upoperations was a big mistake.

This approach is quite a contrast to theWHWCCS and Liklik Dinau operationswhich are dependent on government anddonor funds. FORD realised that itsoperational costs could not be effectivelycatered for if it lent directly to rural clients.



The trick then was to lend first to those withthe capacity to repay and then target ruralborrowers at a cautious pace once theoperational costs of the scheme was assured.

Smallholder Agriculture Credit Scheme

The RDB and its Smallholder AgriculturalCredit Scheme is not an MFI but borrowsconcepts and instruments from themicrofinance area to improve its service tosmall-scale farmers who make up a largepercentage of Papua New Guinea’s low-income poor. For this large state-ownedinstitution, the relevance of the microfinanceexperience is not only in sustainability butalso in the reduction of transaction costs. Thelink between the two is the role of networks,the mobilisation of social capital, andstrategic alliance management skills.

The RDB began operations in Papua NewGuinea in 1967 to service mainly small tomedium-scale agricultural projects andenterprises. Since its inception up until 1998the RDB was used as the main lendingconduit for rural development by bothdonors and the government, none of whomgave much thought to how it couldeventually move into financial self-sufficiency. Its failure in the last threedecades to extend coverage and achievefinancial sustainability has been the subjectof debate. Various evaluative reports havebeen critical of its operational structure,investment strategy, portfolio mix, debtmanagement, and mounting losses(Kannapiran 1995; United NationsDevelopment Programme 1998; Bank ofPapua New Guinea 1998).

A major criticism relates to excessiveoverhead costs that seem to have norelationship to the extent of outreach. For

instance, the RDB provided only 45,000loans in the 20-year period from 1967–87(United Nations Development Programme1998). Given that 90 per cent of Papua NewGuinea’s 3 million people were within theRDB’s target clientele during this period, thiswas seen as a poor performance.Throughout the 1980s and well into the1990s its administrative costs competed withloan disbursements in most years. Forinstance, in 1992 the RDB disbursed loansworth K13 million at overhead costs of K11million (Kannapiran 1995), or at over 75 percent overhead costs of total loandisbursement. In that year, a total of 1,900borrowers were served by 360 staff.

Excessive costs and a perception ofinefficient management have effectivelyside-lined the RDB from participating in anumber of new innovative financialschemes. Examples include theestablishment of a proposed agri-businesscredit scheme to be housed within theDepartment of Agriculture and Livestock(DAL) and a Microfinance CompetenceCentre housed at the Institute of Bankingand Business Management (IBBM) withsponsorship from the Government of PapuaNew Guinea, the BPNG and the ADBamounting to a total capitalisation of US$20million and aimed at promoting sustainableMFIs.

During the 1990s, the RDB instituted anumber of innovative schemes aimed atovercoming the transaction costs that haveplagued it. While many of these have failed,the lessons are crucial for the developmentof sustainable financial products. Althoughthe RDB reconfigured the operationalstrategy using network partners, it felt



constrained by interest rate caps imposed byits mandate of delivering loans at‘affordable’ rates. One such scheme thatoffers key lessons for a successful reform ofthe RDB is its Smallholder AgricultureCredit Scheme (SACS) which has beenoperational since 1997. The importance ofthe scheme lies in its attempt to root theprogram in the private sector with annualrecapitalisation expected from commoditybodies (Department of Agriculture andLivestock 1996). Alliance partners in thescheme include the Department ofAgriculture and Livestock (DAL) and eightcommodity industry bodies including thoseof the coffee, cocoa, oil palm, copra,livestock, food crops, spices and rubberindustries.

With initial funding of K10 millionprovided by the Government of Papua NewGuinea through DAL, the schemecommenced operation on a revolvingfinance basis in which the principal of theloan is reinstated for further on-lendingupon repayment and the RDB retains theinterest portion to cover its administrativecosts. The seed money given is only half ofa K20 million grant that was initially agreedto by the Government of Papua New Guineain National Executive Council (NEC)Decision No. 184/95 of 07 November 1995.The maximum loan for any one project isK10,000, and interest is charged at asubsidised rate of 5 per cent with a 3-yeargrace period (Rural Development Bank1998). The maximum loan term is 10 years.The loan to each commodity sector issecured by the general guarantee providedby the seed capital itself, as no collateral isrequired from the borrower. The success or

failure of the scheme therefore rests entirelyon the rate of default. A high rate of defaultwill see the seed capital eroded, leavingbehind few loanable funds.

Responsibilities were clearly allotted tothe partners: the RDB was responsible formanaging the funds, loan documentation,disbursement and collection of payments;the DAL had overall control of coordinatingand sourcing funding; and industry bodieswere tasked with appraising projects andproviding localised extension services toloan recipients. Each partner had acoordinator and was represented on thescheme’s Implementation MonitoringCommittee (IMC) responsible for impactevaluation and planning future schemes.The operations of the scheme are governedby tripartite memoranda of agreement(MOA) between DAL, RDB and respectiveindustry bodies. The MOAs outline theresponsibilities and obligations of thepartners involved, and several agreementshave been finalised (Department ofAgriculture and Livestock 1996). IndividualMOAs between DAL, RDB and concernedindustry bodies specifically called for thelatter group to inject an annual allocation toits revolving fund. At the time of the reviewit was clear, however, that this had not beenadhered to, with a tendency for theindustries to rely solely on the seed capital.In this way, the industries behaved similarlyto the participants in the MFIs discussedabove.

After five years of lending (1997–2001)the scheme was suspended in early 1999 forthe coffee, cocoa and livestock sectors. Thereinstatement of these schemes can onlyhappen once their respective cash positions



are restored to 50 per cent of the seed money.Since 1997, more than K12 million has beencommitted as loan approvals, of which K11million has been disbursed.

A total of 3,856 farmers in the countryhave benefited from the scheme (RuralDevelopment Bank 2002). The RDB hadincreased lending during the first two yearsand over 66 per cent of the total seed capitalof K10 million was committed. Due to anunhealthy cash flow position, however,lending declined during the three years upto December 2001. To date, the rate ofrepayment does not match the speed atwhich loans have been written out forprojects; total repayments in the five yearperiod amount to only K3.097 million. Thusthe overall position at end 2001 shows thatthe loan portfolio has K8.8 million, of whichK6.39 million is in active portfolio and K2.4million is categorised as bad doubtful loans(Rural Development Bank 2002). The RDBnotes that arrears continue to mount at analarming rate, thereby threatening the valueof the K6.39 million loan portfolio. The cashposition of the SACS is K6.140 million, ofwhich K3.791 million is currently investedin government treasury bills.

The RDB has requested the write-off of817 doubtful accounts valued at K2.4million, much of which is in cocoa, copra,livestock and food crops. Only coffee, oilpalm and spices have had few doubtfulaccounts. The relative success of coffee ispartly due to the efficient management ofthe Coffee Industry Corporation (CIC),while the success of the oil palm industry isdue to the well organised Oil Palm IndustryCorporation and the structure of theindustry, in which smallholder blocks

revolve around the mill operator which actsas the lead organisation. All threecommodities have benefited from relativelystable prices and have well developedextension services. As in all other industries,however, road dilapidation is a real threat.For example, parts of the HighlandsHighway are literally now impassable. Themore poorly performing industries sufferfrom many familiar structural factors, but asalient debilitating factor is the heavypoliticisation of their industry boards.Although this problem is notinsurmountable, the failure of governmentsto address it effectively renders the problemintractable in the short term.

In terms of the microfinance aims ofinnovative service and sustainability, theSACS has only achieved levels of repaymentto ensure its long-term viability where theindustry partner’s performance has beengood. This illustrates that there is a need forSACS partners to review the scheme’srepayment methodology.

Small Business Guarantee Facility

Another PNG government attempt to cometo terms with the need for small-scalefinance is the Small Business GuaranteeFacility (SBGF), which sought to cater for thefinancing needs of small business, a categoryof business that was widely seen as beingneglected by commercial banks.

The Small Business DevelopmentCorporation came into existence with theenactment of the SBDC Act (1990). The SBDCAct empowers SBDC to develop credit andbusiness advisory service schemes aimed atpromoting small business. The Act not onlyestablished SBDC as a statutory government



entity, but also provided the possibility of itbecoming a financial institution. Since itsinception, SBDC has presided over theconception and development of a numberof financial incentive schemes such as theworking capital (raw material) assistanceprogram, the small equipment leasingassistance program, venture capitalinvestment, small-scale credit funds, andmicrocredit facilities. The performance ofthose programs, however, did not meet thegoals that the Government of Papua NewGuinea had hoped to achieve through theSBDC.

There have been few evaluation studiesto gauge the performance of the variousfinancial schemes promulgated by theSBDC. The success of the SBDC lies mainlyin the business training courses it offersthrough its network of partners rather thanwith its credit management. An initialattempt to assess the impact of the SBDC’sloan guarantee facility found that few smallfirms had actually accessed funds from threetypes of bank guarantees available under theSBGF, namely the Clean Loan Guarantee,Collateral Short Guarantee, and the CreditRisk Guarantee (Kavanamur 1999).Accessibility of such funds was constrainedby the delivery network limitations of boththe SBDC and participating financialinstitutions (PFIs), imperfect informationwhich acted against firms that were notstreetwise, and the unwillingness of allmajor commercial banks operating at thattime to participate—only the Bank SouthPacific (BSP) and the ANZ Banking Groupwere initially enthusiastic. Despite theincreasing financial support given to theSBDC over the years, its performance waswell below par (Kaul 1998).

One attempt to address this was the SmallBusiness Guarantee Facility. This startedwith high expectations in 1996 with an initialcapitalisation of K1.6 million by theGovernment of Papua New Guinea. Loanguarantees ranged from 50–100 per cent ofprincipal loan and eligible loan amountsranged from K1,000–100,000. The SBDCinitially placed K500,000 each in termdeposits with two PFIs at below market ratesto act as guarantees for lending by thecommercial banks to targeted clients.1 It wasagreed by the partners that, to help reducedefault risk to the banks and ensure areduction in interest cost to borrowers downto 10 per cent,2 only 4 per cent would be paidon the SBDC guarantee deposits (Kaul1998:32). The first loan under the schemewas made in December 1996, and up toMarch 1998 K840,000 loans had beendisbursed resulting in K662,095 beingguaranteed under the scheme. BSP was themost active PFI with K546,900 worth of loansapproved for 65 per cent of the guaranteeportfolio.

Despite high expectations, the actualnumber of loans disbursed under thescheme was no more than 30 (Weseliyaki,personal interview, 02 May 2002). Indeed,by mid 1998, a total of only 18 clients hadtaken out loans worth some K87,000. Thescheme has been plagued by a high defaultrate as commercial banks have taken theeasy way out in cases of default by simplycalling upon the guarantee to redeem non-performing loans (Weseliyaki, personalinterview, 02 May 2002).

According to the SBDC, the banks oftendecided not to exhaust loan recoveryprocesses, opting instead to rely on the



SBDC’s 80 per cent guarantee of theoutstanding loan amount. Banks were alsodemanding excessive security from clients,reflecting their risk-averse nature eventhough their risks were negligible—riskswere fully covered by the 80 per cent SBDCguarantee, 20 per cent borrower equity, andthe banks’ first call on mortgage of the assetsof the borrower (Kaul 1998). The risk-aversenature of commercial banks vis-à-visguarantee schemes has also been observedby Wosae (2000) in his review of theGovernment of Papua New Guinea’s creditguarantee scheme administered through theDepartment of Treasury.

One of the many reasons for the low levelof lending under the SBGF over the past 12years is that banks were determined toreduce their lending transaction costs bygiving preference to loans above K10,000. Asa result, many firms requiring lesseramounts were turned away. SBDC alsodefaulted in fulfilling its extension servicedelivery to the clients as it was difficult andcostly to provide a one-to-one consultancyservice (Weseliyaki, personal interview, 02May 2002). SBDC’s limited service deliverynetwork was a major constraint in thisregard. Borrowers often misused loanallocations for purposes other than for whichthe loan was originally obtained. Typically,this was to meet family obligations. Thispoint demonstrates the potential‘fungibility’ of loans.

The temporary closure of the SBDC dueto a drastic cut in the 1999 budget did nothelp the cause of the organisation. In a panicmove to retrench staff, the guaranteedeposits placed with PFIs, which by nowincluded the PNGBC, were withdrawn and

used for retrenchment purposes. Both theBSP and ANZ had to withhold portions ofthe deposits as cover for outstanding loans.The announcement that SBDC would beabolished was seized upon by manyborrowers as a signal to cease repaymentaltogether (Longai, personal interview, 01May 2002), which made the work of the banksdifficult and heralded a break down in ‘trust’between the strategic alliance partners.

The situation at the SBDC had notimproved so that by 2002, donors wereadvising SBDC to shift its core businessaway from credit management, and insteadconcentrate on business training—an areain which it was generally perceived to besucceeding through its network partners. Inhis evaluation report, Kaul (1998) found anumber of weaknesses within SBDC. Salientamongst these is the point that there was alack of ‘responsibility’ over the years by staffin the conception, implementation andmonitoring processes of the organisation’svarious financial programs, particularlywith the raw material assistance and leasingschemes.

Kaul (1998) also found that the highdefault rates experienced under the SBGFwas due to the unworkable relationshipbetween the banks and SBDC because bankswere unwilling to commit resources towardsthe monitoring of loans and were lessprepared to share risk factors. Kaul’s viewwas that the SBGF should have been broughtin-house to give more control over loanmonitoring and advisory support to clients.Major weaknesses were evident in SBDC’sinstitutional capacity in terms of projectdesign, implementation and monitoringcapacity.



Moreover, although SBDC spoke ofbuilding network partnerships, it lacked therequisite strategic alliance managementskills and qualities. In-depth interviews bythe author with SBDC personnel reveal littlerelationship-building effort by the alliancepartners, particularly on the part of SBDCbecause the SBGF was critical to theachievement of its strategic intent. It wascounterproductive on the part of the SBDCnot to devote resources to relationshipbuilding, which should have been part andparcel of an overall strategy of processmanagement. Although SBDC haddeposited guarantee funds with PFIs asfinancial ‘hostages’, the token of trust seemsnot to have been reciprocated by the PFIs.Because organisational outcomes areinseparable from the processes, the outcomeof SBDC’s efforts should not be detachedfrom what was going on within.

PNG Government’s Credit Guarantee Scheme

The Government of Papua New Guineainstituted a number of financing facilities inthe 1970s and 1980s to help develop a cadreof entrepreneurs. Five schemes formed thebasis of this strategy: the Credit GuaranteeScheme (CGS, up to 80 per cent), the StandAlone Guarantee (SAG, up to 100 per cent),the Housing Loan Guarantee Scheme(HLGS), the Housing Loan Interest SubsidyScheme (HLISS) and the National InvestorsScheme (NIS).

At the outset, it must be noted that exceptfor the housing loans most of these schemesepitomise the Government of Papua NewGuinea’s incapacity to manage non-bankfinancial services. Because of high defaultrates, the schemes were no longeroperational by end 2001 and there are no

plans to revive them, except to salvage thescrap value of outstanding loans and to meetthe huge default obligations. The obligationsstood at K17.3 million on an original loanstock of K13,469,499, excluding externaldefault called-up guarantees of K18.5million as at 30 April 2000 (Wosae 2000).

A large portion (88 per cent) of the defaultobligation come under the stand-aloneguarantee scheme dealt with directly byNEC and is of less importance to this article.The outstanding loans under the CGS andNIS stood at about K4 million and K15million respectively at end 1999(Department of Treasury, personalinterviews, April–May 2002). PFIs of theschemes have also been frustrated by theslow progress in settling default guarantees.It is not the intention of this article toundertake a thorough review of theseschemes except to paint a broad picture ofthe management styles and organisationalculture of public sector organisations and theattitudes of banks and borrowers vis-à-visgovernment-supported credit schemes.From this, useful lessons could be gleanedfor the development of MFIs in Papua NewGuinea.

The performance of the various financialincentive schemes under the auspices of theDepartments of Treasury and Finance hasbeen affected by a number of factors. It hasproved difficult, owing to budgetconstraints, to redeem the mounting defaultclaims made by commercial banks on loansmade, under the schemes’ inducements, tooften unviable borrowers. A review of theschemes by Wosae (2000) found that the costof maintaining the default guarantees is veryhigh because interest accrues daily on



account of the fact that the banks have notfrozen interests on the loans. Default claimsalso carry penalty fees charged to theguarantor.

Within the Ministries of Treasury andFinance, shortcomings in terms of skilledhuman resources, management capacity andinformation systems have been seen asimpacting on the schemes. Treasury lacks adatabase capable of reliably storing andretrieving information necessary for timelydecisionmaking and loan tracking; oftenloan files go missing (Wosae 2000;Department of Finance 1996a, 1996b).Prudential management through carefulrecord-keeping, loan application evaluation,monitoring and liaison with stakeholders,and assiduous pursuit of clients forrepayment have been acutely absent duemainly to staff shortages; at the time ofinterviews management of the CGSeffectively rested with one junior staffmember within the Commercial InvestmentDivision (CID). Attempts to collectoutstanding loans by the Loans and RevenueDivision were merely symbolic as the aimwas to satisfy the Auditor-General’sreporting requirements.

Staff constraints led Treasury to adopt aminimalist approach by choosing to dependentirely on the goodwill of banks to monitorloans and provide business advice toborrowers. Moreover, the financial facilitieswere housed in three different divisions atdifferent times, first at the Economic PolicyUnit (EPU), then at the CID, and later, uponfailure of a scheme, at the Loans andRevenue Division. A typical case is the NIS,which ceased operations in 1989 but to dateremains to be foreclosed by the Loans andRevenue Division.

In terms of management culture, theMinistries of Treasury and Finance appearto have failed to nurture a management andprudential culture conducive to managinglending portfolios over time (Department ofFinance 1996a, 1996b). Interviews by theauthor revealed a lack of staff exchangesbetween the PFIs and Treasury to learn eachother’s culture as a way of generating acultural fit, meaningful communication andnetworking. The management of such softissues has been proven to be a vitalingredient in strategic alliance management,as it oils the relationship and developsmutual trust which can facilitate the promptresolution of conflicts (Yoshino and Rangan1995; Buttery and Buttery 1994).

In terms of process management, littleeffort has been put into relationship buildingprocesses and this has resulted in abreakdown in trust between the guarantor,banks and borrowers. Banks on their parthave been accused by Treasury of failing tofulfil their obligations under the MOUs tomonitor and supervise loans and for failingto report regularly on their status. They havealso been accused of taking the easy way outin cases of default by simply calling uponthe guaranteed values of bad loans insteadof first exhausting loan recovery measures.Borrowers on the other hand appear to havetaken advantage of the loans by choosing to‘wilfully default’ without guilt becausegovernment-supported loans are viewed as‘handouts’. The World Bank observedrecently that misappropriation and non-payment of obligations have become‘common and socially acceptable’ (WorldBank 1999:183).

Moreover, whenever Treasury called forloan recovery measures to be exhausted



prior to any guarantee payment, bankswould often delay the process resulting inadditional interest accruals with penalty feesadded on (Ermot, personal interview, 07/05/02). In this type of atmosphere,relationship building remains merelyacademic. The main losers in this game havebeen the tax payers.

East New Britain Savings & Loans Society

Savings and Loans Societies (SLSs) in PapuaNew Guinea have gone through a longperiod of learning. SLSs were initiated in1961 during the Australian colonialadministration of what was then known asthe Territory of Papua and New Guinea(TPNG). This was part of the Reserve Bankof Australia’s major effort to educate theindigenous people on money, savings,banking and credit (May 1998). This resultedin the enactment of a Savings and LoanSocieties Ordinance passed in the Territorylegislature. The early SLSs formed part of a‘pre-banking system’ aimed at nurturing asavings and credit culture hitherto non-existent in a traditional society based on‘subsistence-affluence’ (Fisk 1982) as well asaccelerating the monetisation of a pre-capitalist economy (Epstein 1968). As isevident from the foregoing discussion, over35 years later this task seems incomplete.The SLS movement reached its peak in the1960s and went into decline by 1975. By the1990s, however, reforms were institutedthrough the BPNG aimed at revitalising thisimportant financial instrument.

With support from the AustralianAssociation of Credit Unions and the BPNG,a number of resurrected SLSs have been setup primarily as savings institutions, but

with loans now secured against theborrower’s savings on a 1:1 basis. The mainfocus goes beyond the urban salariat as anumber of rural-based SLSs have beenestablished or revived. One of these is therelatively successful ENBSLS, which nowboasts of nearly 20,000 members and asavings portfolio of K10.4 million as at 4January 2002 (East New Britain Savings &Loan Society, personal interview, 05 April2002). Contrary to the perception that SLSsare mainly suitable for the urban salariat, theEast New Britain Savings and Loans Society(ENBSLS) has proven that rural incomeearners could also be drawn into the system.In September 1998, 65 per cent of itsmembership was self-employed and rural-based (Kavanamur and Turare 1999). Theexperience of Putim na Kisim operating inMorobe and parts of the Highlands and theBougainville Microfinance Scheme (BMFS),both of which have been assisted by theCredit Union Foundation Australia, alsoprove the point that rural people arebankable (Kopunye, Purumo and Newsom1999; Newsom 2002).

A closer look at the ENBSLS reveals anumber of pertinent lessons as well asconcerns. First, the success of the society canbe attributed to the fact that there is aconstant flow of deposits from the 35 percent of the membership who are salariedworkers. The society has ensured thatemployees of the provincial government,other government agencies and the privatesector are able to place direct depositsthrough payroll deductions into theirsavings accounts with the society. Furtheranalysis of the break-up of savings mayreveal that a good portion of savings is



actually attributable to this regular group ofsavers, thus ensuring that the society enjoysa degree of certainty in its investmentdecisions.

Second, without a closer strategic alliancewith BSP, the society would not have hadconvenient access to an efficient bankingservice. The society operates three bankingaccounts with the BSP/PNGBC bankinggroup—an operating account, a clearingaccount and a cash management account.BSP accepts deposits from the society’smembers anywhere in the country andperforms as the clearing-house within a 14-day period. Third, the society benefits frommodern accounting software recentlyimported from Australia at a cost of K400,000(Tololo, personal interview, May 2002).Fourth, the society’s overhead costs arealways kept in check and its number of staffis less than 10, including two professionalaccountants.

The successes of the ENBSLSnotwithstanding, the society has had tograpple with a number of management andenvironmental threats. First, there weremanagement concerns in the society becausedelinquent loans amounting to K4–5 millionhad attracted a BPNG audit on the loanportfolio at the end of 2001. Concerns aboutincreasing delinquent loans prompted theBPNG to appoint an administrator to thesociety for two weeks to makerecommendations on a restructure ofoperational procedures. There wereconcerns that the supervisory committeeand the manager had lagged behind infollowing up on delinquent loans, and viewswere expressed concerning the need for aprofessional manager with a background in

accounting and banking. There wereconcerns also that bank reconciliation hadlagged behind, but it was thought that thiswould be easily rectified with the newaccounting software.

The problem with delinquent loans stemsfrom the fact that over half the contributorsare not regular income earners, henceconstant repayments could not always beguaranteed. With the price of copra andcocoa depressed, coupled with highinflation, disposable income becameoverstretched for many rural dwellers. Afinal concern relates to rising theft cases thatled to the closure of two outstation posts, atPomio and Duke of York Island.

While the longer-term prospects of SLSsin Papua New Guinea seem secured becauseof their minimalist approach to banking andclose supervision by BPNG, concerns havebeen raised over the interest rate caps onlending placed by the BPNG (now at 6 percent per annum or 1 per cent per month onthe unpaid balance). Conroy (2000) suggeststhat there is a strong case for liberalisationof SLS interest rates.

Re-positioning lessons for financialintermediation

A number of key lessons can be gleanedfrom the foregoing discussion on the statusof non-bank financial provision in PapuaNew Guinea. The lessons are both positiveand negative. At the outset, a positive lessonis that the 35-year period of experimentationwith financial intermediation in Papua NewGuinea is now increasingly beingdocumented both in academic works andconsultancy reports. These are important



sources from which lessons could be derivedfor charting the course of MFIs both in PapuaNew Guinea and the Pacific. A number oflessons therefore abound.

First, from the foregoing review it isobvious that any over-institutionalisation ofan intermediary would ultimately incurunsustainable overhead costs that would beto the detriment of the scheme’s outreachand sustainability goals. This is clear fromthe experience of Liklik Dinau whereoperational funds would often soak uploanable funds as well as deposit funds ifthey were not adequately quarantined. Hightransaction costs in financial intermediationin Papua New Guinea, even where a leanstructure exists, invariably justifies acontinued role for donors. Transaction costswould continue to hinder the operation offinancial intermediaries in Papua NewGuinea for well known reasons that includelow population densities, lack of localamenities, collapsing physicalinfrastructures, difficult geographicalfactors, and so on.

Second, MFIs in Papua New Guineaought to work from the risk-averse principlethat assumes at the outset that at least 50 percent of borrowers are likely to default in anysituation given the embryonic credit culture.Following from this, only 50 per cent of seedcapital should be on-lent and the remainingportion should be invested in high-yielding,but risk-free investment instruments such astreasury bills, banks and finance institutions.If the capitalisation is large enough, interestincome should be used to meet overheadcosts; if not, government funding and donorfunds would continue to be required.Interest income also has the potential to

cushion the seed capital from the corrosiveeffect of inflation.

Third, the use of external network designof schemes has pointed up interestingfindings. In Papua New Guinea, the use ofnetworks does not assume the same set ofsocial capital factors evident elsewhere. Inparticular a PNG network strategy must becentred on the need to minimise the defaultrisk environment. Central to this strategy ofrisk reduction is the establishment of aCredit Risk Assessment Centre. The idea isto keep track of the credit histories ofborrowers and potential borrowers. Thisprompts borrowers to self-regulate to someextent, thus helping eliminate the growingculture of default. Currently, this is thepractice adopted by banks, but not practisedwithin society at large and therefore needsto be further explored. The provision ofextension services and the assiduoustracking of borrowers are also pertinent.

Fourth, the use of strategic partnershipsneeds to be more professional. Industrybodies would do well to adopt importantprinciples of portfolio management and keyaccount management (KAM), which arecentral to demand chain management andwidely used in relationship marketing andstrategic alliance management (Ojasalo 2001;Bensaou 1999; Proenca and Castro 1998). Akey point ventured here is the need to buildrelationships with clients and to treat eachof them as important. By focusing on andbuilding up a manageable set of clients oneat a time, a pull effect on would-beborrowers will be set in train based on theprinciple of trustworthiness. The type ofrelationship-building espoused here goesbeyond the rigid emphasis on number



crunching issues as it incorporates into thefinancial intermediation calculus themanagement of ‘soft issues’. This is clearlylacking in the management of government-backed credit schemes in Papua NewGuinea.

In addition to the positive lessonsreviewed here, there are also negativelessons that need to be pointed out. First,government-backed guarantee schemesmanaged in partnership with commercialbanks have largely failed. The poor state ofaffairs in the various guarantee schemesoffered by the PNG government and also theSBGF underscore this proposition. A lack ofrelationship-building has led to an absenceof trust and created animosity and apathybetween the guarantor and PFIs. Differencesin strategic and cultural fit due to a lack ofbonding ensured that there was never asustainable working relationship. In otherwords, the relationship was purelytransactional, with the banks often beingaccused of opportunistic behaviour andportraying the problem of ‘moral hazard’.Future attempts to revamp such schemesshould begin by erasing this negativeexperience from the partners’ institutionalmemories.

One can also safely infer from the negativeexperience with government-backedschemes that, although the intentions werenoble, the failure to redesign the schemesmay have inadvertently contributed to thedevelopment of the current culture ofdefault. The current practice wherebypoliticians are allowed to hand-out slushfunds freely in their electorates outside thenormal governmental apparatus does littleto eliminate this subculture. The use of

‘credit schemes’ in pronouncements duringthe 2002 election campaign is worryingbecause it has the potential to taint theactivities of the more genuine ones. Thecollapse of the RDB’s Oro Small BusinessCredit Scheme sponsored by politiciansshould act as a lesson for decision makerscontemplating similar arrangements.

A second negative lesson is derived fromthe continued failure of the RDB tosuccessfully re-invent itself in order toreduce its high overhead costs. To avoid this,the PNG government will need to changethe structure of ownership at the bank tominimise the level of political involvementthat has marred the bank’s operations overthe years.

Conclusion

The experience with financialintermediation in PNG has produced usefullessons for the re-positioning of existingschemes as well as for the design andmanagement of new ones. As Cornford(2000) points out, MFIs and non-bankinstitutions generally need to be modifiedto suit local conditions rather than merelyadopting ‘off-the-shelf’ models. A significantfactor in this might be the acknowledgmentof limitations of experience with manyeconomically active players operating in anon-market oriented way. One explanationfor the fact that the credit culture of PapuaNew Guinea has not matured is that muchof the lending is ‘security guarantee-based’rather than ‘collateral-based’; these wastedresources could be put to good use elsewheresuch as into a new deposit-taking RuralDevelopment Bank (Kavanamur 2002).Attempting to apply a lending system based



on security guarantee may be asking PNGentrepreneurs to learn to ‘walk’ before theycan ‘crawl’. Efforts should be geared towardshelping would-be borrowers to graduatethrough a spectrum of micro-small-medium-large loans. The ultimate aim, however, isnot to make MFIs become ends inthemselves, but to graduate clients throughthese schemes into more formal bankingservices once market and state failures areaddressed. It is imperative that government-backed loans and hand-outs through theslush fund cease operation under currentterms in order to stem the worryingdevelopment of a ‘default culture’ in thecountry’s financial system.

This article points out that becausetransaction costs and asymmetricinformation will always be concerns, thereis room for re-positioning savings and loanssocieties and revolving funds in order toextend outreach and achieve some degreeof operational and financial sustainability.It also raises hope for the successful re-positioning of the RDB and highlights theneed for financial intermediaries to adoptimportant management principles such asportfolio management, key accountmanagement and demand-chainmanagement. These are useful tools whichnow predominate in the fields ofrelationship marketing and strategic alliancemanagement. Finally, the article argues thatthe lack of a strong credit culture in PapuaNew Guinea is not insurmountable becauseit can be addressed over time through thedevelopment of a credit-record trackingagency and the reduction of cash hand-outsin society for political purposes.

Notes1 The guarantee fund deposited in PFIs

was later increased commensurate withthe number of disbursed loans anddefault claims.

2 Kaul (1998) doubts whether thesubsidised 10 per cent was actuallycharged by PFIs on the basis that theBank of PNG thinks otherwise.

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Documents

Re-positioning Non-bank Service Strategy in Papua New Guinea