Last week, Pakistan became part of the World Bank's (WB) 25-nation "Universal Financial Access Initiative". This is supposed to help the State Bank of Pakistan (SBP) in strategic and technical areas for implementation of its National Financial Inclusion Strategy (NFIS). At the launch event, high-profile visitors from WB and UN appreciated governments drive to bring in more folks inside the financial tent.
SBP governor said at the event that financial access had improved from 12 percent in 2008 to 23 percent in 2015. But this amelioration has to be credited to branchless banking (BB), where telecoms have outplayed commercial banks in making a business case out of financial exclusion. Official data show that nearly 11 million mobile accounts (m-wallets) had been opened as of June 2015. This number is expected to have grown further in the seven months since.
According to the WB Global Findex database, only 13 percent of Pakistani adults had a formal bank account as of 2014. Even this paltry access ratio is gender-skewed, for less than 5 percent of females had bank accounts. There is an urban bias, too, as less than one-third of bank accounts were in rural areas. Only 3 percent of adults saved with banks; only 2 percent borrowed from them.
The regulator has admirably promoted microfinance and BB services through flexible regulations and regular stakeholder interactions. Kudos! Yet, at the same time, conventional banking, which forms the core of the SBPs bank-regulation domain, could have done better.
There are 100 million Pakistani adults who currently don't have access to formal and regulated financial services, as per the World Bank. By ignoring that, the banking sector - except for a very few banks that have ventured into BB - is missing out on commercial opportunities.
The NFIS, which was launched in May, last year, is targeting 50 percent of adults having formal bank accounts and at least 25 percent of females with bank accounts, by 2020. Considering the retarded pace of private banks in expanding retail banking accounts, these figures may be hard to achieve.
Of course, if you add in the growing base of m-wallet users, the targets don't seem so implausible because BB will remain a growth sector for a few more years. However, one needs to understand that an m-wallet is not the be-all and end-all of financial inclusion. Its much more than that. And NFIS compilers were right to include some "service" or "usage" targets, too.
For instance, formal savers would be 10 percent of adult population by 2020, compared to 4 percent in 2015. Moreover, SME finance would be at least 15 percent of total private sector credit in 2020, as opposed to just 7 percent in 2015. Arguably, these targets are not aiming for the sky. But the intent to double most of financial access indicators in five years time is significant.
To achieve these service/usage targets, commercial banks will need to do better than they have until now. Telcos were innovative when they used mobile phones and small grocers to reach the un-banked. Banks are not known for innovative behaviour. One is reminded of Paul Volcker, the Fed Chairman under Ronald Reagan, who grumbled at the height of financial crisis that the only important financial innovation he could think of in the past two decades was the ATM. So one wonders, really, how far off is account-opening from a bank's core business? One understands that stakeholders have to reduce cash dependence in a cash-heavy economy, and BB services can be really helpful in that regard. But the next step, where folks need meaningful access to savings and credit products, requires the financial muscle and expertise of the banking sector.
Bankers probably don't have much interest in scraping the bottom of the pyramid. The government wouldn't like to force them to do so and the banks won't be innovative. That's going to be a big challenge for NFIS heading forward.
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