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Financial inclusion through digitisation

Updated September 07, 2015

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THE two sectors that have arguably witnessed the most technological advancement in the country — as measured by the rate of growth in innovative products as well as their users — are telecommunications and financial services.

And over the past five or so years, the two have joined hands and helped bring millions of economically disadvantaged people into formal banking channels.

Financial inclusion is one area where South Asian governments, their central banks and foreign donors have been intensely focusing on lately. It is one of six strategic objectives outlined by the State Bank of Pakistan (SBP) in its Vision 2020 strategy released mid-August. And just a few months earlier, it had issued a detailed ‘National Financial Inclusion Strategy’ (NFIS) document.

Nonetheless, the country lags far behind its regional peers in this area. The NFIS points out that only 10.3pc of Pakistani adults have an account at a formal financial institution, against the South Asian average of 33pc. It adds that 56pc of adults use neither formal nor informal financial products. Mobile money, one of the fastest growing financial services, is still being used by only 11pc of men and 3pc of women.

In analysing the grim scenario, the central bank cited the “lack of capacity of both financial institutions and clients as a constraint to greater financial inclusion” as a major reason.

“Most financial institutions have focused on the upper end of the business and retail markets and have not developed the skills, techniques and products required to serve other market segments profitably. While microfinance banks have developed this knowledge for microfinance clients, there is a large ‘missing middle’ which is currently not being served,” the SBP noted in the NFIS.

But despite that seemingly dismal picture, no one is denying the rapid pace of growth of modern payments systems over the past five or so years, which has in turn made it available for millions of people to conduct at least basic financial transactions through formal modes.

The data bears this trend out. The value of branchless banking transactions conducted last year crossed the Rs1tr-mark and reached Rs1.35tr. Similarly, the number of transactions conducted through this medium swelled to around 278.4m.

But Monis Rahman, chairman and CEO of Naseeb Networks Inc. — which owns the online job portal Rozee.pk — noted some gaps that are hampering further growth in digital banking.

“While incumbent players such as banks and telcos have launched branchless [banking] initiatives, they are largely walled gardens and rely heavily on physical agent networks which charge transaction fees at entry and exit points. As such, they do not truly take advantage of digitisation, which will happen when [mobile] wallets are truly agnostic of banks/telcos and the money can be reused digitally in the ecosystem for making purchases.”

Room for growth: Financial industry executives choose to view the relatively grim statistics in the context of the huge much room for growth available to banks and other formal institutions — a ‘glass half full’ analogy, if you will.

But they are also under no illusion that it would take the combined efforts of all stakeholders to tackle a challenge of this magnitude. The SBP is targeting 50pc of the adult population to use formal financial services by 2020 and that at least 25pc of the female population has formal accounts (up from the current 2.9pc).

Faiq Sadiq, head of payment services at Habib Bank Ltd, stressed that digital is the way to go forward if these targets have to be achieved.

“With a population our size, until and unless we go digital, in non-traditional ways, [increasing financial inclusion won’t be possible]. [The services have to be] efficient, but also cost-effective, and for everyone, be they students, young professionals, farmers, the business community, or the affluent. Our job is to create financial highways that the people are able to use at a reasonable cost.”

Shezad Arif, head of retail clients at Standard Chartered Pakistan, referred to the country’s young demographics.

“As the next generation, which normally studies from 15 to 25 years, grows and starts working in five years and starts earning money, they will interact with [banks] digitally. This generation is [not likely] to come to the branch and drink coffee with the branch manager,” he said.

He added that the “the perception that people here are not digitally savvy [is not true]. Our domestic helpers are more digitally savvy than us [in a way]. They are the ones who are using the Omnis and the Easypaisas of the world to move money to their families; you and I would open a bank account. So the parallel infrastructure for payments is getting bigger and bigger everyday”.

Shahzad Shahid — CEO of TPS Pakistan, the company responsible for the technology powering the 1-LINK network (which interconnects the networks of around three dozen commercial and microfinance banks in the country) — said it was a ‘big eye opener’ for everyone that only 10-13pc of the country’s adult population had bank accounts. He compared that with 81pc in Sri Lanka, 31pc in Bangladesh and 53pc in India.

“We have to make banking something that is convenient and within reach of a common man, and charge it so that anybody can use it. If people continue to put small amounts of money under their pillows, they will never [be integrated] in the real economy,” he told this writer.

When asked to compare the current status of financial inclusion and literacy in Pakistan with other South Asian and Middle Eastern countries, Shahzad said it would be unfair to compare Pakistan with the Middle East, in particular.

“Naturally, the Middle East is far more advanced and far more cash-rich. So you can’t really compare our level of financial services or digitisation with theirs. But the big difference is that Pakistan is far more innovative today, as evidenced by the kind of things we have done, like Easypaisa, 1-LINK and IBFT etc.”

Suggestions: HBL’s Sadiq proposed that “the government can announce today that no government employee will receive their salary in cash. Saudi Arabia did [a similar thing] with its wage protection system.” The system, introduced in Saudi Arabia in 2013, made it mandatory for private firms to gradually open bank accounts for their staff and deposit their salaries directly in them.

And there are some indications that the government is willing to move in that direction. One of the targets in the SBP’s NFIS is that the government will “shift all government payments, including [those] to farmers and pensions, to digital platforms by end-2017”. It also expects large private firms (including agri-businesses) to route a majority of their corporate payments through digital means by 2020.

And the government is already using ATM cards to make monthly payments to around 94pc of eligible beneficiaries under the Benazir Income Support Programme.

“Another good thing is that the SBP has come up with regulations for payment system providers and payment service operators. This is encouraging non-banking, non-telco [firms] to set up their services, with the SBP’s guidance and regulations and banks’ support. In the next three years, I think that these initiatives things will really help masses across the board,” said TPS’s Shahzad.

Sadiq added that people, particularly the affluent, can also play a role in increasing financial inclusion and literacy.

“We pay our own domestic helpers every month in cash. Instead of paying them in cash, we can give them plastic. How will they trust that the money is there? We have to build up their faith that the plastic does indeed have the funds and that they can go to an ATM and withdraw the money.”

Published in Dawn, Economic & Business, September 7th, 2015

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