In an attempt to increase financial inclusion in the country and raise dismal ratios that represent this, GoP and SBP have developed a National Financial Inclusion Strategy (NFIS) in 2015.
The strategy entails a comprehensive range of policies and targets to increase financial inclusion, and the present gov’t has also prioritized the NFIS.
The finance ministry reports that as of 2015, only 16% of the adult male population in the country had a bank account while only 11% of adult women had a bank account. As part of its 100 day agenda the gov’t has set out various targets that it aims to achieve by 2023.
Enhance usage of digital payments:
The development and growth of FinTech has disrupted conventional banking channels in the global banking industry. Technological advancements have paved the way for digital financial services and enhanced customer experience.
In Pakistan the industry is still on the development stage and the gov’t aims to accelerate the growth of fintech. Currently e-banking channels contribute 8% to total transactions as per MoF. The aim of the gov’t is to achieve 65mn active digital transaction counts.
Policies enlisted under the NFIS include digitization of gov’t departments, expanding digital access points to enable ease of access to financial services, and operationalization of Asaan Mobile Account (AMA) Scheme to improve access of digital transaction accounts and drive usage.
Enhance Deposit Base:
The deposit to GDP ratio is currently around 40% which the gov’t aims to increase to 55%. Steps required to achieve this include increase in banking branch network to rural and semi-urban areas, promotion of digital banking solutions for inaccessible areas, and development of specialized products such as Islamic banking products for religious individuals.
Promotion of Small and Medium Enterprises:
SMEs constitute 90% of business enterprises in Pakistan and contribute about 30% to GDP, as per MoF. The sector is of paramount importance to the economy as it plays a pivotal role for job creation. The gov’t has a focused effort towards developing this sector and providing various incentives for its growth and promotion. The MoF however has highlighted that SMEs constitute only 7% of private sector credit.
The target of the gov’t is to extend SME finance to 17% of private sector credit. The gov’t wants banks to take steps towards developing frameworks aimed at helping the growth of SMEs and increasing the share of SME credit to 17% of total private sector credit. BAFL was the first bank in Pakistan that developed an SME Toolkit (in partnership with IFC) to help development and growth of SMEs. The bank has developed an online portal (free of charge) that offers various resources to help the growth of SMEs. Steps that need to be taken to help promote SME sector as identified by MoF include establishment of an e-registry, strengthening of SME Bank Limited and First Women Bank Ltd by privatizing them, disposal of SME loan cases by banking courts, refinance facilities for tourism/IT sectors, development of a national SME policy, reorganization and empowerment of SMEDA, and various tax incentives such as reduction in corporate tax for small companies.
Increase Agricultural Finance:
The GoP recognizes the importance of increasing agricultural finance as agriculture is the very foundation upon which the economy of the country stands on. Despite significant growth witnessed over the last few years in agribusiness, the agriculture sector still suffers from issues of sustainability and lack of economic independence. The agribusiness as of Jun’18 as per SBP data contributes PKR 662bn (Jun’17: PKR 592bn, up 11% YoY) to total banking sector gross loans – a mere 8%. As per MoF, factors such as low quality seeds/fertilizers, conventional cropping patterns, lack of risk coverage risk mechanism and conventional delivery channels for access to means of financing, have resulted in economic vulnerability of the farming community. The gov’t recommends various steps to increase agricultural finance such as automation and adoption of electronic land record management system by banks for agricultural finance, Kissan Digital Portal for agricultural financing, subsidies for agricultural inputs to small farmers, national crop insurance scheme, and promotion of Electronic Warehouse Receipt Financing.
Promotion of financial inclusion through low cost housing finance:
Shortage of housing in the country is one of the poignant issues facing the population and has received ample attention from the incumbent gov’t. As per MoF, demand for new housing stands at ~700,000 houses a year and about half of it is supplied.
Housing deficit currently stand at 10mn units as per MoF. The PTI gov’t has also initiated a “Naya Pakistan Housing Scheme” which aims to build 5mn new affordable houses. The gov’t envisions the success of this plan through promotion of low cost housing finance. Measures under consideration to promote this include increasing conduciveness of legal and regulatory environment, development of Housing Finance Companies (HFCs), and up-scaling of housing microfinance.
Promotion of financial inclusion through Islamic finance:
Considering that a sizeable population tends to remain averse from conventional banking products owing to religious reasons, the gov’t aims to increase financial inclusion through further development of Islamic finance. Currently there are 5 complete Islamic banks while 16 conventional banks have Islamic banking branches. The gov’t aims to increase awareness about Islamic finance through introduction in curriculum and social media platforms. Moreover the gov’t also targets to increase efficiency in liquidity management through regular issuance of domestic Sukuk bonds. As per the NFIS document, Islamic banking contributes 13.6% to total assets and 14.7% to total deposit. The gov’t aims to increase the share of Islamic banking assets and deposits to 25%.
A rosy picture – Implementation frameworks need to be rigorous:
It is welcoming that the gov’t realizes that financial inclusion in today’s day and age is of paramount importance for economic growth. The plan undoubtedly presents a grandiose picture but successful implementation of the steps remains questionable.
The implementation framework mentioned in the NFIS includes the creation of a Transformation Office at the PM’s office to supervise, coordinate and report the progress. Moreover we also highlight that the growth of mobile banking by telecom companies (e.g. JazzCash, EasyPaisa, Zong PayMax) can be a potential source of disruption to conventional banking systems. The growth and penetration of FinTech into the masses of the Pakistani population is still on the initial stages of the growth curve, and we can expect conventional commercial banks to elevate their focus on financial inclusion and introduce innovative banking products, going forward.
HBL (Konnect) and UBL (Omni) have already recognized this and developed specialized mobile banking products to enhance customer experience. In addition to this, financial inclusion is of utmost importance for bolstering remittances as well which is a key target of the incumbent gov’t. Increase in financial inclusion can also resolve issues of low savings and investments through effective resource mobilization.
Forexample through embedding technology into National Savings Scheme (NSS) architecture will enhance transparency, increase ease of access for savers, and reduce intermediation costs.
Faizan Kamran Khan
Arif Habib Limited