Much of the conversation around the progress in Pakistan’s startup ecosystem is naturally dominated by the astronomical growth in funding witnessed over the past couple of years. And for good reason too. But one extremely important driver is often ignored or not realised well enough: the policy shift.

A series of policy initiatives mainly since 2019 — particularly spearheaded by the State Bank and the Securities and Exchange Commission of Pakistan (SECP) — have helped create an enabling environment for startups, if not the broader technology sector. E-commerce framework, amendments to the foreign exchange manual, and now Digital Banking Regulations — just take your pick.

These measures have already produced a few tangible results, such as the funding raised and jobs created by electronic money institutions (EMI), which have announced investments in excess of $100 million (with the inclusion of Careem’s $50m). This is just the beginning and much is yet to come. And that’s the point I want to emphasise today at the risk of sounding like a critic who nitpicks faults just for the sake of it.

For the longest time, conventional wisdom — at least in drawing room conversations — dictates how Pakistan’s problem lies not in making laws but in implementing them. While the former may not necessarily be true, the latter certainly is. Industry people have long complained about how there are on-paper frameworks for most matters as yet have no actual follow-through.

It’s good to have progressive regulators at last who are actively following developments in other markets, but let’s not get carried away with paper frameworks and give breathing space to startups to figure out things

Again, there are countless examples but nothing probably signifies the point more than the SECP notifying the Regulatory Framework for Special Purpose Acquisition Companies (SPAC). For context, SPACs are basically listed investment vehicles created for the sole purpose of making investments in other entities by merging with them. Swvl, the Egyptian transport startup operating in Pakistan, went public on Nasdaq the same way.

In fact, this was all the craze in the investment space during 2021 with 613 SPAC listings that raised a total of $145 billion — an increase of 91 per cent from the amount raised in 2020. It barely lasted as returns were disappointing and the median listing size halved.

However, the SECP wanted in on the gravy train and quickly came up with a framework. Never mind the fact that they still haven’t figured out how to increase the number of regular listings. Even ignoring the general lack of liquidity on the bourse or the documentation concerns that come along with being a public company, we have an upper lock that limits the potential upside for investors. So no opening day pops here. Sure, the investment bankers share the blame for the lacklustre offerings too but regulation leaves much to be desired.

Earlier, the Growth and Enterprise Market Board was introduced to give (generally fast-growing) small and medium enterprises a convenient avenue for raising capital. A few listings have already taken place and more are in the pipeline. Yet the investors seem to have scant interest based on the volumes so far.

And that’s the point; unless you focus on fixing the very structural issues, any SPAC regulation or number of boards wouldn’t change that. The market needs more liquidity which can only come on the back of new investors, who need to see a clear return potential and can conveniently make trades. Some progress has been made on the latter, most recently the Sahulat account. But all these efforts have to be complemented by aggressive marketing that goes beyond one seminar a year.

The SBP too has been particularly proactive in promoting fintechs and online payments. Lots of licensing regimes have been introduced in addition to the micropayment gateway Raast. But again at the risk of sounding a bore, what’s the uptake so far? Payment system operators /payment service providers are a good example, as even seven years later, the two entities who actually have numbers to show for are the National Institutional Facilitation Technologies and 1LINK — which have been in business for over two decades.

My personal favourite was the central bank digital currency quip let out by the SBP leadership. Sure they just claimed to be studying it, which is admirable. But it looks a lot like this: regulators read articles in foreign publications or journals, get impressed, feel the need for similar frameworks in Pakistan and introduce it here. Instead of letting the innovators do their job first and then figuring out the modalities, the policymakers beat them to it and create a formal structure first.

Might sound like criticism for the sake of it but this approach has in the past brought functioning companies to practically a halt. Take Keenu, which offered digital wallets and partnered with a bank that held the actual deposits. The fintech had built a decent merchant network to create use cases — even though transactions were few — but after the EMI regulations, it basically went from one stage of approval to another and still awaits commercial license.

It’s good to have progressive regulators at last who are actively following developments in other markets. But let’s not get carried away with paper frameworks and give breathing space to startups to figure out things.

Published in Dawn, The Business and Finance Weekly, May 2nd, 2022

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