In 2015, Tameer Bank, a leading microfinance and the creator of Easypaisa, started getting feedback from its bottom-of-the-pyramid customer base that the 12 months equal monthly instalment loan was not enough. There was a demand for a short-term, small-ticket consumption loan with a fast turnaround.

The credit underwriting criteria that Tameer Bank was using required extensive fieldwork to determine the customers’ free cash flow and hence their debt payment ability. The potential customers were looking for an instant decision with no paperwork and were willing to provide access to the data on their phones.

Or in Tameer Bank’s case, as Telenor Bank was on its cap table, GSM data could also be available. This product required alternative data for underwriting as proxies for income estimation. There was also the issue of regulation.

The State Bank of Pakistan (SBP) regulations for microfinance banks required that loans could only be extended for productive loans instead of consumption loans. Although nano loans were becoming a global product, Tameer Bank decided to pass on this opportunity at that time.

Unlicensed lending should be made a criminal offence, and those apps offering it should be removed with the owners put in jail

In 2016 Telenor purchased the remaining 49 per cent of Tameer Bank, renaming it Telenor Bank. In 2018, Ant Financial Services, a global fintech giant and a subsidiary of the famous Ali Baba group, valued Telenor Bank at $420 million and purchased 45pc of the bank.

Nano loans were the rage in China, and Ant encouraged Telenor Bank to fill this customer demand. Following their cue, Mobilink Microfinance Bank (owned by Veon and Jazz ) also introduced a similar service. The Unique Selling Product of both these entities was the GSM data from their telco partners and the financial data they had from the mobile wallets they had opened.

Financial data from wallets or bank accounts are the leading input for building predictive algorithms. The State Bank regulates Telenor Bank and Mobilink Bank, and both these entities convinced the SBP that this was a market need. Both entities working within the regulatory framework successfully created a predictive algorithm which allowed them to build scale. Currently, these two micro-finance banks have about 3.5m active loan customers, thus making them the largest lenders in the industry.

One of the global criticism about nano loans is the effective interest rate. Nano loans typically have a contractual tenor of 60 days and are usually repaid in 30 days. The lending rate charged by these banks was 5pc per week, and the interest rate metre was stopped after eight weeks.

The question arises why the interest rate was 5pc per week. Annualised, this would be an effective interest rate of 260pc. Was this not gouging the customer? We must peel the onion to understand nano loan pricing.

Firstly, 5pc should not be annualised as the interest rate charged stops after eight weeks. No interest is charged after that. Secondly, the tenor of the loan is usually one month.

However, despite this explanation, the 5pc per month charge is excessive, providing an abnormal return to the banks. Acknowledging the need for this product while recognising the excessive pricing, the SBP issued draft regulations limiting the interest rate to a maximum of 3pc per month.

In any case, the real issue with nano loans pricing and collection methodology is not by entities regulated by SBP or the Securities & Exchange Commission (SECP). The problem lies with unregulated entities.

In 2010, above-the-board companies started entering Pakistan and approached either approached the SECP for a non-banking financial institution license or sought out existing license holders to partner with.

Unfortunately, fraudulent entities published their apps on Google Play Store or Apple Store, enticing unsuspecting customers with instant loans while accessing only customer phone data. Given the very low level of active loan customers and the ease with which a loan could be obtained, there was high demand despite the exorbitant interest rate.

These unofficial lenders resort to strong-arm collection tactics and blackmailing techniques, leading to a borrower in Multan committing suicide under pressure.

Nano loans are a legitimate need in Pakistan, especially because of our low financial inclusion and the banking sector’s convoluted income assessment and paperwork requirements.

The regulators should allow the market to set interest rates but ensure that customers are not being exploited. Unlicensed lending should be made a criminal offence and immediate action taken by removing the apps from the market places as well as putting these criminals in jail.

The writer is the Chairman of the Pakistan Fintech Network

Published in Dawn, The Business and Finance Weekly, August 7th, 2023