The growth of Micro and Small to Medium Enterprises (MSME) plays a critical role in transforming any developing economy. Countries in the category of emerging economies in the APEC region that has a focus on promoting the MSMEs such as Indonesia, Malaysia, Peru, the Philippines, Thailand and Viet Nam have formulated policy frameworks, created institutions, created market spaces and provided stimulus package to promote the growth of MSME that contributes to transforming their economies.
Papua New Guinea has a dual economy comprising of a formal, corporate-based sector which makes up 20% of the economy and a largely based informal sector where subsistence farming makes up bulk of the economy. A growing informal industry which is making inroads into the informal sector if the handicraft and artefacts market.
PNG currently has less than 50,000 SMEs and if they are further categorised, over 50 percent of them could be classified as micro with a profit base not over PGK200,000.
Since 2016 after the launching of the National SME Policy framework and the SME Master Plan 2016-2030 with a promise of a stimulus package to promote the growth of SMEs, little has been done to implement this policy. An increase in the number of SME’s with a monthly supplement of success stories of SMEs would have indicated the success of the government’s drive to promote MSMEs.
The stagnation in the growth of MSMEs in PNG over the last 5 – 10 years is because commercial banks are 80% reluctant on lending credits to MSMEs due to lack of collateral and track records. There are many Papua New Guineans with good ideas willing to start up business but commercial banks are reluctant to issue loans because there is no form of guarantee to cover part of the default risk or their financial track record.
Establishment of a Financial Institution such as a Credit Guarantee Scheme or Corporation in PNG can be in the right direction to promote fruition of ideas into growth of MSMEs. The National SME Policy and Master Plan 2016 – 2030 aims to create a credit guarantee corporation similar to the Malaysia’s model of CGC which is has successfully promoted the growth of MSME by supporting more than 900,000 MSME’s with credit guarantees.
What PNG needs to propel the growth of its SME sector is to establish a Credit Guarantee Scheme. The CGS should provide credit guarantee to MSMEs that lacks collateral and track records with any commercial banks as security to secure loans for start-ups or further expansion of business. The CGS should also provide credit ratings to commercial banks for MSMEs.
The CGCS would provide credit ratings to commercial banks for the MSMEs probability of default in one year should be 10%. CGS should employ a risk base charging criteria with 70-80 percent of the risk covered by CGC on a 3 – 8 years financing tenure similar to the Malaysian model.
To ensure that MSMEs have Credit Guarantee and favourable credit ratings the CGC should partner with commercial banks and recommends or choose commercial banks for MSMEs to obtain credits or loans to start of expand their MSMEs.