Savings is a Crucial Weapon in the Fight Against Poverty

October 12, 2010

Over thirty five leaders from the government, private sector, non-profits, and the donor community met yesterday to discuss how to address the challenges of offering appropriate savings products to the low income and rural people of Papua New Guinea.

The event was an information exchange, co-hosted by the Pacific Financial Inclusion Programme (PFIP), and the Bank of Papua New Guinea (BPNG), designed to look at issues of importance from the perspective of many different stakeholders, with the goal of forming partnerships to find solutions.

Acting BPNG Governor, Benny Popoitai officially opened the event by reaffirming BPNG’s dedication to championing financial inclusion in PNG. He discussed how new technologies like m-money, the ability to make financial transactions over the mobile phone, can greatly decrease the cost of offering savings products in rural areas.

David McLachlin-Karr, Resident Coordinator for the UN System highlighted the importance of financial inclusion in helping to reach the Millennium Development Goals. He explained how having a large proportion of the population based in agricultural meant that income is seasonal, and that the ability to save was essential to provide them with financial security. Many of the services people of PNG need to improve their qualities of life, and the future prospects for their children, like education and healthcare, can cost large sums of money and therefore necessitate savings. People need to be taught how to save, and provided with access to services that allow them to do so. In this way, financial inclusion is fundamental to many of the MDGs.

It is now widely understood that it is not sufficient to offer a service like savings, even if it is well designed. In Papua New Guinea, financial literacy is very low and must be taught along with the provision of financial services. The ADBrecently released an evaluation of a financial literacy programme in four different areas of PNG, which showed that the training did increase the number of people who saved, and the amount of money each one of them saved on average. In short, the training helped create a culture of savings. Currently PFIP is preparing a survey to measure the level of financial literacy in PNG, which is an important step to developing a targeted curriculum for the country.

The presentation highlighted the importance of savings. Explaining that the poorer people are, the more time they have to spend managing the little amounts of money they have to meet their daily needs. They therefore have a high demand for flexible savings products. Of all the financial products, including credit and insurance, savings is the most demanded around the world, reinforcing the adage, “save all the time and only borrow when you have to”. This means that policy should focus on facilitating savings products first. The debate should not be about how high lending rates are for borrowers, it should highlight how low deposit rates are for savers.

Another constraint for savings that was highlighted was excess liquidity in the financial system. “The taxes on profits from the LNG project have the potential to inject even more liquidity into the economic system of PNG, putting upward pressure on inflation and a downward pressure on deposit rates unless they are responsibly managed”, explained Mike McCaffrey of PFIP. This is because when the government deposits large amounts of money like this in commercial banks, the banks then do not have any incentive to go out and collect deposits from individuals. In essence, they already have all the money they need for investing and lending given to them by the government, so there is no reason to design savings products for low income people, and those people end up not getting access to these services.

The PFIP team has facilitated seven different information exchanges in six different countries around the Pacific. The information exchanges begin with a short presentation on a topic of interest followed by some informal discussion on this topic as well as the promotion of financial inclusion in general with interested counterparts.

PFIP is funded by the Australian Agency for International Development (AusAID), UN Capital Development Fund (UNCDF), European Union, and the United Nations Development Programme Pacific Centre.