UNCDF: Bridging Financial Inclusion Gaps in Papua New Guinea's Informal Sector

As a follow up to my previous article, in Papua New Guinea, financial exclusion is a significant barrier to economic empowerment, with around 15 billion Kina ($3.8 billion) remaining unbanked. Approximately 80% of PNG’s population lives in rural areas and primarily relies on agriculture and micro-enterprises. However, most of these people remain disconnected from formal financial systems, limiting their ability to save, invest, and grow. As a non-credit-rated, hybrid development finance organization, UNCDF is uniquely positioned within the United Nations system to address these gaps by deploying targeted financial instruments and partnerships to support underserved communities.

UNCDF's Role in Financial Inclusion: A Unique Mandate

As the only non-credit rated, hybrid development-finance organization within the UN system, the United Nations Capital Development Fund (UNCDF) has a unique mandate to target the most underserved populations in the least developed countries. Established by the General Assembly with a capital mandate, UNCDF aims to drive finance to underserved markets that traditional capital providers may overlook. In PNG, this means focusing on bringing financial services to the rural and informal sectors, which make up the majority of the country's economic base yet remain disconnected from the formal financial landscape.

UNCDF operates as a critical bridge, aligning the goals of sustainable development with the realities of the informal economy in PNG. This approach is aligned with the organization’s overarching mission: “Leaving no one behind.” Here is how UNCDF is working to transform financial inclusion in PNG’s informal sector through initiatives that cater to the specific challenges this sector faces.

Addressing Barriers: Flexible Financial Solutions

1. Tiered KYC and Flexible Banking Policies

One of the most significant obstacles for informal sector participants is the stringent Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. UNCDF, in collaboration with PNG’s regulatory bodies, is advocating for policy reforms that implement tiered KYC regulations. By lowering identification barriers for low-risk, low-income clients, UNCDF aims to create pathways for informal sector workers to gradually join the formal financial sector. This initiative is coupled with UNCDF’s advocacy for innovative digital identification solutions, like biometric IDs, that can work in remote areas with limited infrastructure.

2. Digital Financial Solutions for Remote Areas

PNG’s challenging geography limits access to financial services in rural areas. To counteract this, UNCDF is partnering with mobile network operators and financial service providers to roll out digital financial solutions tailored to rural communities. Through mobile wallets, digital savings products, and mobile money platforms, UNCDF is leveraging technology to create low-cost, scalable financial services that transcend the geographical limitations of traditional banking infrastructure.

Building Financial Literacy and Trust

3. Financial Education Initiatives

Financial literacy remains a critical barrier, with only 37% of adults in PNG possessing a bank account and basic knowledge of financial services. UNCDF is working on grassroots-level financial literacy programs to improve understanding of budgeting, savings, and credit management. By partnering with local institutions and using community-led workshops, UNCDF is bringing financial education directly to underserved populations, empowering individuals to make informed financial decisions and improve their economic resilience. This hands-on approach, which often includes training community leaders as financial literacy ambassadors, ensures sustainability and community engagement.

4. Strengthening Trust in Financial Institutions

Trust in formal financial institutions has historically been low, and many communities prefer informal systems. To change this, UNCDF is focused on rebuilding relationships and transparency between financial institutions and local communities. In collaboration with local partners, UNCDF is working to create financial products that cater to the unique needs of rural dwellers, such as micro-savings and micro-loans with flexible terms. The goal is to create financial products that provide real value and utility to the community, addressing the issues that have led to mistrust in the past.

Catalysing Growth through Public-Private Partnerships (PPPs)

5. Mobilizing Public and Private Capital

UNCDF recognizes that to overcome infrastructure gaps, a collaborative effort is needed. Public-Private Partnerships (PPPs) are essential to UNCDF’s strategy in PNG, where both the public and private sectors have roles to play in developing the country’s financial landscape. For example, UNCDF is working with local banks, mobile network operators, and microfinance institutions to co-create financial products that serve the informal sector. By aligning donor support with private sector expertise, UNCDF aims to accelerate the creation of financial infrastructure in PNG.

6. Supporting the Growth of Micro and Small Enterprises (MSMEs)

Micro, Small, and Medium Enterprises (MSMEs) are the backbone of PNG’s informal economy, and yet they face significant financing challenges. UNCDF is helping MSMEs gain access to credit by working with financial institutions to develop risk-sharing mechanisms, such as partial credit guarantees, that make it less risky for banks to lend to small businesses. In addition, UNCDF is supporting business development services that provide entrepreneurs with the tools they need to build financially viable businesses, including training in areas like financial management and market access.

Strengthening Resilience through Innovative Insurance Models

7. Microinsurance for the Informal Sector

Recognizing the vulnerability of informal workers to shocks like natural disasters, UNCDF is pioneering microinsurance solutions in PNG. Microinsurance products are designed to provide a financial safety net for informal sector workers, helping them manage risks associated with their livelihoods, such as climate change-induced disasters. This initiative is particularly relevant in PNG, where rural populations are highly susceptible to natural risks. Through these products, UNCDF aims to foster resilience in the face of economic uncertainty.

8. Building Capacity among Financial Institutions

UNCDF’s mandate also involves building capacity within financial institutions to serve low-income and rural populations. UNCDF works with banks and microfinance institutions to develop tailored training programs on sustainable finance practices. By building institutional knowledge, UNCDF aims to ensure that financial institutions are equipped to sustainably serve rural and underserved markets in the long term.

Monitoring Impact and Ensuring Sustainability

9. Data-Driven Approach to Financial Inclusion

UNCDF uses a data-driven approach to assess the effectiveness of its interventions. By continuously collecting and analysing data on financial inclusion metrics in PNG, UNCDF can adapt its strategies to meet changing needs on the ground. This approach not only enhances accountability but also allows UNCDF to replicate successful models in other regions, amplifying its impact.

10. Creating a Sustainable Ecosystem through a market systems Development approach

The goal of UNCDF’s work in PNG is not just immediate financial inclusion but the creation of a sustainable financial ecosystem. By building partnerships, advancing policy reforms, and developing financial infrastructure, UNCDF is laying the foundation for an inclusive financial system that can support PNG’s economic growth for years to come. This ecosystem approach, involving multiple stakeholders from government to private sector actors, ensures that financial inclusion efforts are embedded within the country’s broader economic development agenda.

Promoting Sustainable Finance and Green Economy Opportunities

As climate change increasingly impacts PNG, there is an urgent need for financial solutions that support sustainable practices, especially within rural and agricultural sectors.

UNCDF is pioneering efforts to integrate sustainable finance into the development agenda by supporting green and blue financing initiatives tailored to PNG’s unique environment. These initiatives provide financing options for eco-friendly projects, such as sustainable farming and climate-resilient infrastructure. By offering loans, guarantees and grants for green projects, UNCDF encourages rural communities to engage in practices that contribute to both economic resilience and environmental protection.

UNCDF’s Commitment to Inclusive Finance in PNG and Beyond

UNCDF’s work in PNG reflects its unique mandate to reach the furthest behind, utilizing its role as a non-credit rated, hybrid development-finance institution to drive capital to underserved markets. With a focus on innovation, inclusion, and sustainability, UNCDF’s initiatives in PNG’s informal sector demonstrate the potential for creating a robust financial ecosystem that empowers individuals and strengthens communities. By aligning its efforts with local realities and leveraging strategic partnerships, UNCDF is making strides in transforming financial inclusion from a vision to a reality in PNG.

With the generous support from European Union in Papua New Guinea , UNCDF is not only addressing the immediate challenges faced by the informal and Agriculture sectors but is also setting an example for how financial inclusion initiatives can be scaled across other regions facing similar challenges. The commitment to inclusive, resilient, and sustainable development lies at the heart of UNCDF’s mission, and its work in PNG exemplifies the transformative power of finance in achieving broader development goals. Through UNCDF’s efforts, financial inclusion in PNG is no longer just an ideal; it is a tangible, achievable objective with far-reaching implications for individuals, communities, and the nation as a whole.