EFFORTS are underway for making banks and financial institutions more inclusive, but the kind of financial inclusion that can make a significant impact on the economy requires a more serious and meaningful approach.

Recently, the State Bank developed, with the World Bank’s assistance, a broad National Financial Inclusion Strategy (NFIS). Central bankers say it will go a long way in improving people’s access to savings, credit, remittances and insurance services.

The NFIS will help in setting up a national platform for all stakeholders for consultation and implementation of the required reforms and initiatives for financial inclusion.

One key indicator that paints a pathetic picture of the current status of financial inclusion is that in a country of more than 180m, the number of bank account holders is around 36m, and the total number of all borrowers is just over 6m.

Some government measures like targeted cash handouts to the poor through Nadra-customised smart cards and the involvement of microfinance and Islamic banks in agriculture credit scheme have improved financial inclusion

When these two numbers are further broken down, the results become more discouraging in terms of access of people in rural areas to banking services, the gender mix of depositors and borrowers, and the concentration of bank financing in a few selected sectors. For example, whereas over 10pc citizens own at least one bank account, only 3pc of the nation’s women are among them.

International focus on financial inclusion had gathered momentum at the turn of the century, and bankers recall that back in 2003, a comprehensive initiative was launched with the help of the DFID to rapidly achieve financial inclusion.

That, however, produced limited results. “Now, the World Bank-supported NFIS is being pursued more vigorously,” says a commercial banker privy to the happenings in this area. In a separate move, a below $100m World Bank loan for the Sindh government has just been approved, with the condition that it would be used to improve the working conditions of small farmers. “So, financial inclusion as an undercurrent theme is alive, and taking banking services to rural people is being prioritised as a practical step,” says an official of Sindh Bank.

Basically, financial inclusion has a lot to do with the size and growth of the undocumented economy. “The reason why key indicators of financial inclusion in Pakistan look worse than elsewhere in the region is that the parallel economy is huge [more than one-third of the formal economy, by an ADB estimate], and it is growing by leaps and bounds,” says a former deputy governor of SBP.

According to World Bank data for 2012, Pakistan lagged behind India, Sri Lanka, Nepal and Bangladesh in most financial inclusion indicators, like people’s access to bank credit, the percentage of population using bank accounts to save money, and the percentage of female population having access to banking services etc.

However, sustained growth in branchless banking over the last few years, and investment by banks to expand their branch networks hold promise for deepening of financial inclusion. Bankers say innovations like money transfers through hundreds of thousands of retail outlets with cooperation from cellular companies should broaden access of the rural population and womenfolk to banking services.

Citing the current example of providing a lump sum amount of Rs40,000 per family to about 25,0000 families from amongst the IDPs of North Waziristan, government officials say online government-to-people transfer has become well-established. This had begun in 2010 with money transfers under the Benazir Income Support Fund through Nadra-customised smart cards. By the end of 2013, the number of beneficiaries of all kinds of government-to-people money transfers had reached 4.5m. Bankers say the wealth of data Nadra is accumulating through such activities can, at a later stage, help banks reach out to micro-borrowers with confidence.

The mid-1990s banking sector reforms, including the privatisation of banks, made the industry somewhat efficient. And the introduction of information technology in the first half of last decade, along with better regulatory framework and innovations created more depth in the financial market.

Some government measures like targeted cash handouts to the poor, as well as some central bank steps like framing of comprehensive yet simplified rules for branchless banking and the involvement of microfinance and Islamic banks in agriculture credit disbursement scheme have also improved financial inclusion.

“We could have deepened financial inclusion more speedily,” says a central banker. “But one roadblock was banks’ over-prudent approach towards access to credit in the wake of the 2008-09 international financial crisis. Some banks were so nervous that they literally stopped making new loans.”

Bankers say real progress towards financial inclusion can be made only if policymakers focus on the issue, the broadest indicator of which is the number of taxpayers. “With the number of taxpayers being 2m or so, how can banks go at full speed for financial inclusion,” wonders the head of treasury of a large local bank.

“Agriculture employs over 40pc of our workforce, but its contribution to tax revenue is 1pc. This and other such anomalies have to be corrected to encourage banks to boost financial inclusion.”

Published in Dawn, Economic & Business, July 14th, 2014