The road to financial inclusion

Published September 22, 2014
‘If financial exclusion is to be addressed successfully, the conventional banking model has to be put aside. A distribution system which deals with low-value, high-volume 
transactions must be created’.
‘If financial exclusion is to be addressed successfully, the conventional banking model has to be put aside. A distribution system which deals with low-value, high-volume transactions must be created’.

IMAGINE opening a bank account in under a minute at a retail outlet with no paper work. Imagine an account which has no opening or minimum balance requirement. Imagine an account which can be used for payments at kiryana stores, taxi cabs, buses, online purchases and is connected to the existing payment system.

This is financial inclusion, and we need not imagine it for long because much of it is already a reality.

By the end of this year, the branchless banking industry will have 50,000 retail agents, where it will be possible to open a basic mobile account through a real-time, online biometric verification from Nadra. The account form will be automatically populated from Nadras database, and the thumb print will serve as the signature.

The federal and provincial governments have already started using branchless banking as opposed to cheques or cash payments. BISP payments, student stipends, IDP compensation and EOBI payments have all been digitised. In 2013, the industry made 7.9bn government-to-person payments. A phenomenal achievement, but this is only the tip of the iceberg

In developing countries, more than 2.5bn adults, or approximately 72pc of the adult population, are unbanked. They do not have access to a basic bank account, credit, savings, life and health insurance. The unbanked have the same needs as the banked population, however, the products’ design and delivery varies significantly. By default, the unbanked turn to informal financial services which are often costly, non-transparent and risky.

Populations are without financial services principally because the cost of service is too high, the products offered do not suit their needs, and the commercial bank distribution system and timing does not suit their requirements.

From the supplier’s perspective, the perception is that low income equates with high risk for credit products and low profitability from a deposit angle. Lastly, a commercial bank’s distribution is largely aligned for the rural population and their products for middle-income customers.

Banks typically ignore the long tail customers as usually 20pc of their customers generate 80pc of their bottom line. Hence, if financial exclusion is to be addressed successfully, the conventional banking model has to be put aside. A distribution system which deals with low-value, high-volume transactions must be created. This opportunity is best harnessed through a distribution system made possible by the telecoms and their customer base.

Four factors are essential to make this happen. A regulatory regime which views financial inclusion as its key mandate; an existing distribution system which has pervasive presence across the country; players who have a dual responsibility of profitability as well as social impact; and lastly, customer awareness and protection.

In Pakistan, major progress has been made in the first two requirements; progress has started in the third, and much needs to be done in the fourth requirement.

Our regulatory framework was ranked in the top three in the world by the Economist Intelligence Unit. A prime example of a successful regulatory adaptation is the opening of a basic mobile bank account. The opening of a traditional bank account for an unbanked individual is an onerous process. The Know Your Customer (KYC) and anti-money laundering (AML) stipulations force banks to impose requirements that are difficult for an unbanked individual to meet. For branchless banking, the requirements are risk-based. Low transaction volumes have translated into low KYC and AML requirements. To date, the industry has opened 3.4m mobile accounts.

The second requirement is a pervasive distribution system. Commercial banks only have 12,700 branches and 5,000 ATMs, mostly in urban areas. The total number of bank accounts, after eliminating multiple accounts, is estimated to be around 15m. Compare this with a network of 100,000 retail agents selling airtime and a customer base of 80m cell phone users that the telecoms have. The success of financial inclusion depends on tapping synergies between banking and phone densities.

The third requirement is that of creating products which are suitable for the needs of the unbanked. The product or service needs to be convenient, reliable and accessible. The prime driver of financial inclusion is a banking account. If the bulk of the unbanked can open a bank account with ease, then other financial products like credit, remittances and payment of premiums for health and life insurance will follow.

The main hurdle left is the largest one: customer awareness and customer protection. This will come with time, as more people get comfortable using the services being offered via financial inclusion efforts. And that is when we will see growth not just in the number of parties using these services, but also in the volumes of money being transacted.

Lastly, further institutional support is required. The State Bank has played its part in creating an enabling environment, and a new World Bank initiative is poised to further boost the efforts made by individual players thus far. In time, Pakistan can become an international role model in financial inclusion.

The writer is the founder and CEO of Tameer Micro Finance Bank, and the Chairman of the Pakistan Microfinance Network.

Published in Dawn, Economic & Business, September 22nd, 2014

Opinion

Editorial

‘Source of terror’
Updated 29 Mar, 2024

‘Source of terror’

It is clear that going after militant groups inside Afghanistan unilaterally presents its own set of difficulties.
Chipping in
29 Mar, 2024

Chipping in

FEDERAL infrastructure development schemes are located in the provinces. Most such projects — for instance,...
Toxic emitters
29 Mar, 2024

Toxic emitters

IT is concerning to note that dozens of industries have been violating environmental laws in and around Islamabad....
Judiciary’s SOS
Updated 28 Mar, 2024

Judiciary’s SOS

The ball is now in CJP Isa’s court, and he will feel pressure to take action.
Data protection
28 Mar, 2024

Data protection

WHAT do we want? Data protection laws. When do we want them? Immediately. Without delay, if we are to prevent ...
Selling humans
28 Mar, 2024

Selling humans

HUMAN traders feed off economic distress; they peddle promises of a better life to the impoverished who, mired in...