Mudassar Aqil has been the CEO Telenor Micro-finance Bank & Easypaisa, since 2019. He has over 24 years of banking experience in the US and Pakistan. Mudassar also serves as a Director on the Boards of Pakistan Microfinance Network (PMN) and Pakistan Fintech Network. Before joining Telenor Microfinance Bank, he led FINCA Microfinance Bank as CEO for 8 years. Mudassar holds an MBA from Salisbury University, USA. Below are selected excerpts from BR Research’s recent interview with him on the state of microfinance and branchless banking as well as prospects for upcoming digital banks.

BR Research: Based on your association with the local microfinance sector for about a decade now, what are your views on the ‘growth’ and ‘inclusivity’ of this ecosystem, which covers, as per latest PMN data, 139 districts with 4,000+ branches through three dozen+ microfinance providers (MFPs)?

Mudassar Aqil: The microfinance sector in Pakistan has evolved over the last three decades. Today, it is a mature industry that is now providing a multitude of services to millions of low-income households, micro and small businesses and farmers that were previously unbanked. Importantly, if we look at the numbers, the sector has grown from 40,000 borrowers and a handful of microfinance institutions in 1996 to 8.5 million active borrowers today.

Despite the positive progress made by the microfinance sector overall, Pakistan’s access to credit remains one of the lowest in the world. According to Global Findex report, only 4 percent of the country’s population has access to formal credit. Similarly, for a country with population of 225 million, the total number of bank borrowers remains around 14 million. This is a very low number. However, it is interesting to note that out of the 14 million borrowers in Pakistan; around 8.5 million borrowers are in the microfinance sector. It signals that the contribution of microfinance players is crucial when it comes to increasing the pace of financial inclusion in the country.

Nonetheless, the overall pace of growth of microfinance industry is still slow. According to PMN’s estimate, the total market size of borrowers is around 40 million, yet only 8.5 million borrowers are served. Therefore, from a perspective of progress against opportunity, we still have a long way to go. I believe that this progress can be sped up if reliance on brick-and-mortar model is augmented with technology to increase outreach to serve the underserved and unserved segments.

BRR: The operating environment has remained more challenging this year for businesses due to demand slowdown, high input costs, power outages, and more recently, the devastating floods. How has this crisis-mix affected the micro-credit customers of Telenor Microfinance Bank (TMB)?

MA: In my opinion, the operating environment in the country has been challenging for a quite a few years. The Covid-19 pandemic was quite challenging for many segments of the economy. Most recently, the devastating floods in the country, a menacing current account deficit and global commodity prices-related issues have gripped the country, resulting in high inflation, devaluation of PKR and high interest rates. This has resulted in overall slowdown of the economy, resulting in strained spending ability of individuals and reduced profit margins of businesses.

This crisis has also impacted the microfinance industry. Apart from business growth, repayment capacity has been hampered due to pressure on personal disposable income. At TMB, our business is also not immune to these challenges; however, we learnt from our previous experiences and changed our lending business focus over the last three years to cash-flow-rich micro and small enterprises (MSEs), keeping the primary focus on equal monthly installment (EMI) loans.

We are particularly focused on enterprises that have the ability to absorb these kinds of economic shocks due to good cash flows, high inventory turnover and less dependence on power supply. As a result, our loan portfolio continues to perform very well and well within our risk appetite with good margins.

BRR: Following reports of fraud at TMB around 2019, how has the leadership responded to the reputational damage in the market? In addition, what steps have been taken to improve internal control and governance standards?

MA: As the saying goes, never let a crisis go to waste. In 2019, TMB uncovered incidents of fraud and credit irregularities in its microfinance lending business. We used this crisis as an opportunity to restructure our lending business and cleanse our lending portfolio. We are extremely fortunate to have supportive shareholders in the form of Telenor and Ant group who completely endorsed this exercise and provided the capital to the Bank to get back on a positive trajectory with a robust forward-looking strategy.

We are very proud to note that the steps we took to tackle the crisis and resettle our business on a solid foundation are unprecedented in Pakistan’s banking sector’s history. We undertook a number of measures. We conducted an extensive exercise to verify the identities and repayment capacity of close to half a million borrowers. We discontinued new bank lending for a period of 16 months, during which the entire risk and control framework was centralized and revamped. The entire portfolio with irregularities was cleansed and loan-loss provisions were provided. We shifted lending focus to higher quality MSE EMI loans and digital nano loans using payment data from our Easypaisa platform.

Moreover, our lending business has been transformed from a legacy brick-and-mortar model to a Digital-First model with a paperless, cashless, branchless process, with Easypaisa being the primary delivery channel. As a result, today our entire deposit and lending business, except gold-backed loans, does not require our customers to visit any branch. All our loans are disbursed and collected through Easypaisa wallets. It has been a remarkable journey of reinventing our lending business and coming out of the crisis as a stronger, leaner, digital-first bank.

BRR: TMB has had a strong legacy in the country’s microfinance sector. However, latest statistics from the PMN show that the bank does not feature among top-five MFPs for micro credit, either in terms of active borrowers or gross loan portfolio (GLP). (Until 2019, it featured in the top-five list for those indicators). What kind of challenges does TMB face in re-gaining market share and how are you responding to them?

MA: As I mentioned earlier, we have completely transformed our lending business over the last three years, pursuing a new strategy which is more focused on quality over quantity. During this exercise, fresh lending was halted for a period of 16 months, which resulted in decline of our outstanding loan portfolio. Therefore, it would not be appropriate to compare TMB’s GLP and active borrowers with the other players in the industry. TMB is following a new strategy, as a digital-first bank. We are focusing on serving the urban and peri-urban MSEs with good cash flows through EMI loans on a digital-first principle. I believe we will be market leader in these segments very soon.

Similarly, another part of our lending business strategy is digital nano lending, where we are leveraging payment data of 11 million monthly active Easypaisa user-bases and offering them smaller amount digital loans, which help individuals with quick and convenient access to credit. I am pleased to inform that we are performing well in scaling our lending business, and have a growing and healthy portfolio.

BRR: We understand that Easypaisa has applied for a Digital Banking license. In your view, what are the prospects for Digital-only banks in Pakistan?

MA: Telenor Bank/Easy-paisa is among the pioneers of digital financial services in Pakistan. We have vast experience as a leader in digital payments with a platform business model that enables others to build an ecosystem in partnership with us. Additionally, with the digitalization of our lending business, we believe that we are uniquely qualified to be an ideal candidate for a digital banking license. The introduction of DRB (Digital Retail Bank) licenses is a very positive and progressive step by the State Bank of Pakistan. We foresee bright prospects for the growth of digital banks in Pakistan.

As you know, Pakistan has one of lowest access to credit and savings in the world. The current banking distribution models have not been able to meet the demand of financial services in the country. Further, Pakistan currently has the right environment which is akin to a “perfect storm” for the adoption of digital financial services. Overall, 65 percent of Pakistan’s population is between the ages of 15 and 40, and is also tech savvy. There is a supportive regularity environment, including digital KYC, Raast, among others. Besides, the broadband and smartphone penetration is continuously increasing. Another important aspect is the post-pandemic change in consumer behavior, as we are witnessing a rapid increase in digitization.

All these factors give us a lot of confidence that digital banks will flourish in Pakistan. Likewise, digital banks have the potential to completely transform how financial services can be built and distributed digitally.

BRR: What prompted the Easypaisa leadership to apply for the digital banking license, considering that it already has a significant footprint in the Branchless Banking (BB) segment?

MA: TMB is the pioneer of introducing Branchless Banking in Pakistan and possesses a vast experience in digital payments and lending business. We are running a state-of-the-art digital platform and serving 11 million users monthly in Pakistan. Our lending business is already digital-first, as it operates entirely on digital railroads through best-in-class technology solutions, including leveraging data science and analytics. We are, in fact, the first bank in the industry to launch an in-house payment data-based Credit Score that is available to our users transparently.

While continuing to transform the industry, we have digitized our productive lending business as our productive loans are now being disbursed digitally via mobile wallets. Moreover, we have transformed our branch banking distribution and have now moved away from a “brick-and-mortar” model to a digital-first model. We have successfully transformed 75 percent of our branch network and are on track towards complete digital transformation within the year 2023.

We are the only bank to have scaled back on our physical bank branches and moved the entire volume of customers and transactions to digital channels. All our branch products and distribution processes have been merged with our Easypaisa channel. So, in essence, we are already a digital bank and conversion to DRB is a natural transition for TMB, since it will allow us to run a digital banking business more efficiently.

BRR: Considering the mixed evidence from the BB segment so far, one wonders if digital banks will have a better shot at user engagement. As per latest SBP data, just 49 percent of mobile-wallet users in this segment were ‘active’ in Apr-Jun 2022. (Previously, SBP has defined ‘active’ accounts as those accounts that were opened in the last 180 days or accounts that performed at least one transaction in the last 180 days). Why user-engagement is so low on BB platform and what kind of steps service providers like Easypaisa can take to improve usage of this platform?

MA: I believe the main problem which makes majority of registered mobile wallets in Pakistan to become inactive is the deep tentacles of our cash economy. Digital wallets can only become the primary mode of payment when people can have the confidence that digital wallet payments will be accepted in all their daily use cases. In this regard, it is critical that all retail outlets in Pakistan are mandated to accept digital payments. I believe that Raast by SBP should be adopted as a base-level standard for all merchants for retail payments.

Secondly, as we continue to open mobile wallets for first-time users, their biggest need remains to convert physical cash into digital cash by depositing that money into their mobile wallet. To facilitate roughly 100 million user market, Pakistan needs around half a million agents that can perform these transactions for the users around the clock. However, the number of unique monthly active agents is just a little over 120,000 now. Lastly, the government needs to provide some meaningful incentives to both users and merchants to adopt digital payments such as reduced GST and other similar measures. Unless digital payments do not become cheaper than cash, it would not be possible for them to become the primary mode of transaction.

Despite challenges, we feel user engagement on our platform is high. We have 11 million 30-day active users that we serve on monthly basis and 56 percent of them use more than one financial service on our platform and 10+ transactions a month. I believe the key to success is to have engaging products and use-cases where customers’ daily life becomes easier.

BRR: What kind of products, services and lending models does Easypaisa leadership hope to roll out if they are awarded a Digital Banking license?

MA: Easypaisa is perfectly placed to leverage a digital banking license. It will allow us to offer financial services in the ambit of payments, loans, savings and insurance for the long tail of currently under-served and unserved individuals and MSMEs. We aspire that everything that we do must meet three key principles: frictionless onboarding, real-time fulfillment, and customer-centric user experience. Banking in the future will be embedded into the daily life use-cases of people. We aim to follow the same philosophy by broadly looking at our business from three lenses: the payment lens, the lending lens, and our platform business lens.

We aim to bring end-to-end digital experience for our users where all financial services are accessible 24/7 to them. For individual users, focus will be to lead with our expertise in digital payments and everyday use-cases and put a special focus on neglected segments like women and freelancers. We aim to make basic financial services, i.e., payments, loans, savings, insurance accessible to every Pakistani through a completely digital and frictionless process. We also plan to employ our expertise in data science to assign users a credit score that will gamify the user experience to encourage customers to transact more and increase their credit score for cheaper and flexible credit.

For MSEs, the focus would be on retail sector digital payments along with lending to urban enterprises. For retailers, TMB will leverage its vast experience in payments and agent cash management to enable a small retailer to accept cashless payments, besides offering them access to credit. TMB will deploy a ‘touch + tech’ strategy to facilitate thin-file borrowers by serving them at their doorstep through a digitally-powered salesforce.

TMB also plans to offer, a full suite of personal digital nano loans and Embedded Finance products. On the payment side, we will be partnering with various industry players, including financial institutions and other local and global platforms, offering daily use-cases and services over a single platform. To sum it up, we are already a digital-first bank and, if granted a digital bank license, we envisage even more innovation through our digital banking platform.

BRR: In the end, one crucial area where Digital Banking can potentially have an impact is in reducing the gender divide. However, the track-record of digital financial service providers, including in the BB segment, is not too impressive. For instance, within the 88.5 million BB accounts as of June 30, 2022, just over a quarter of accountholders were females, despite the promise of this segment’s ‘digital’ nature. In this context, what kind of barriers exist that need to be removed?

MA: Pakistan’s female population remains largely excluded from the formal economy. On the digital wallets side, the numbers are slightly better than overall bank account ownership with females having 28 percent of BB accounts – but we have a long way to go in reducing this gap.

One big operational barrier for women to own a digital bank account is to have their own mobile phone or to have a registered SIM in their name. As per industry data, only 33 percent women in Pakistan have access to mobile phones. To improve this ratio, access to mobile phones need to be improved because it is still a shared device in a lot of households. Secondly, requirement of SIM to be in the name of women should not be mandatory to open a digital account.

Moreover, I believe that industry collaboration is also key in promoting financial inclusion for women and enhancing the availability of financial services to low-income women across the country. Even with the digital railroads in place, there needs to be a mechanism where we may be able to design a model for women to be financially included, even if they don’t have a SIM in their name.

I feel that with SBP’s initiatives like digital onboarding and Asaan Mobile Account, we can now digitally onboard women from the comfort of their homes and facilitate them to get instant access to digital finance. Similarly, with the introduction of RAAST, we can facilitate free fund flow in their mobile wallets. Moreover, a significant push is further required from the government to take this initiative up as a national cause to make sure that women have equal access to financial opportunities.