Financial inclusion is very dependent on the enabling environment that regulators create. In Pakistan, there are three main regulators: the State Bank of Pakistan, the Securities and Exchange Commission of Pakistan (SECP) and the Pakistan Telecom Authority.

Regulations by these institutions acting in concert or independently determine the ease of doing business. By and large, Pakistan is blessed with very proactive regulators as they all have financial inclusion as a priority.

Recently the SECP created a regulatory sandbox and approved six solutions in the first cohort. The regulatory sandbox provides companies with the ability to test new solution sets for regulations which currently do not exist. After the trial period the SECP will determine if there is a genuine need in the market for the proposed solution, and if so will look to create the required regulations and seek approval from the parliament if a change in the current law is required.

The first solution that the SECP approved was a Sharia-compliant digital insurance company (Takaful) for personal lines (individual not companies). This covers all types of insurance other than natural life. Traditional general insurance companies have not done a very good job as far as insurance products like travel, home content and telephone theft are concerned.

After the trial period the Commission will determine if there is a genuine need in the market for the proposed solution and if so, will look to create the required regulations and seek approval from the parliament

The market perception is also that when it comes to claims, they are notoriously slow. Regionally, these products have been successfully provided to the masses but in Pakistan, they have yet to take off. This is because the insurance companies have yet to use the customer lens and are using the old model of trying to get the customers to buy what they produce.

Imagine a customer journey where a customer receives an SMS and if interested, phones the call centre. The agent explains the service in a language the customer is comfortable with. The customer confirms their acceptance of the proposed cover via an SMS and the cover is provided immediately with a 30-day free look.

The real change is on the claims side. The sandbox Takaful will be settling claims online as well. If the claims are settled within 20 minutes the perception of the general public towards insurance companies will change.

The second solution approval was for a digital insurance broker.

Unlike the Takaful, the brokerage sandbox approval is for personal lines. The insurance broker, like the digital insurance company, will acquire customers digitally on behalf of insurances companies. Based on prior agreements with insurance underwriters, claims will be paid in real-time through a mobile wallet or a bank account. The digital broker is expected to assist traditional underwriters to become digital.

The third solution approved was for equity crowdfunding. Our current laws make this a criminal offence. However, under the sandbox environment, the SECP is experimenting to assess market demand. After the six-month trial period, the SECP is expected to go to the Parliament to get this law changed.

Equity crowdfunding is very popular in both developed as well as emerging markets. It allows a start-up to raise its funding from investors in small denominations as opposed to from venture capital (VC) or private equity firms. Pakistani startups need this medium of funding as the VC channel is not deep enough. The caveat is that emerging markets may not have investors with enough experience of start-up funding, which is a high-risk-high-reward equation.

Hence eligible investors will have to be prequalified and this investment opportunity will not be rightly available for everyone.

The fourth solution approved is also necessary but has its downsides. The peer-to-peer debt funding solution allows borrowers to bypass banks and go directly to individual lenders. The solution is a platform where pre-lenders scored (without liability) by the platform are introduced to lenders. This program was initially immensely successful in the United States and China. However, in both countries due to an inadequate regulatory environment abuses took place. As a consequence, regulators in both countries are revisiting their regulations. In China, the largest peer-to-peer lender Ant Financial Services is now obliged to retain some of the risks of default as opposed to just being an introductory platform.

The fifth and sixth solution deal with investments. From a financial inclusion lens, the penetration of investment products such as mutual funds is very limited. The general public has a material lack of awareness and until recently the process of investing for individuals was very convoluted. The approvals are for a robo-advisory and a centralised online platform for mutual funds.

The writer is a tech entrepreneur

Published in Dawn, The Business and Finance Weekly, December 14th, 2020

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