EDITORIAL: PwC Pakistan (A. F. Ferguson & Co.) has recently released a rather comprehensive, first-of-its kind publication titled “Banking Publication 2023: Navigating the Future of Opportunities and Challenges.”

The extensive document outlines valuable insights as the outcome of extensive research and analysis of banking industry’s financial performance and talks about key themes such as financial inclusion, digital banking, anti-financial crime, Environment, Social & Governance (ESG), among others.

The document feeds on insights and perspectives from industry leaders and senior professionals; it also benefits from a vast array of global and local PwC publications, surveys, and experiences across the banking sector.

It highlights how Pakistan’s Advances to Deposits Ratio (ADR) has been on a constant decline over the past 15 years as it was as high as 74 percent back in 2007 and dipped to 50 percent by the end of 2022. That too came after the central bank levied higher taxation in case of ADR staying under 50 percent beyond a cut-off date. For most part of the last decade, the ADR remained in the mid-40s.

Investments in government securities, on the other hand, have seen a massive growth. The Investments to Deposits Ratio (IDR) from 33 percent in 2007 stood at 77 percent by the end of 2022: almost a mirror image of the ADR trajectory over the timeline.

Low advances growth in times of high interest rates and low economic growth such as financial year 2022-23 is quite understandable, but the ADR stayed even lower when interest rates were in the single digits. The most damning piece of statistic is Pakistan’s overall lending to private sector, which is just 15 percent of GDP against India’s 55 percent and Bangladesh’s 39 percent.

The jury is out whether the banking sector in general is engaged in lazy banking, staying content with handsome risk-free returns on sovereign instruments, or if there has been a genuine lack of credit appetite from the private sector. Be that as it may, the state of affairs, at the least, indicates massive credit penetration potential in Pakistan.

The document also sheds light on priority sector lending, which is less than 8 percent of total loans, having almost halved from 2010.

Priority lending includes financing for SMEs and agriculture — both areas of massive neglect owing to a variety of reasons such as lack of credit appetite and absence of access to credible data required for credit scoring.

SME credit intervention in Pakistan at 4.2 percent is among the lowest in regional economies, with India’s and Bangladesh’s at 16 percent and 18 percent, respectively.

The situation, no matter how grim or challenging, must be seen as an opportunity by the policymakers and market players alike to find ways to access the neglected areas of SMEs and agriculture. With secured collateral-based lending at 98 percent of total lending, unsecured cash-flow based lending has a long way to go.

The report underscores the need for making national level collaborative efforts with intervention of all stakeholders to have a credible alternative data for optimum credit bureau infrastructure, in addition to specialized development finance to accentuate priority lending.

Another area that the report talks about at length is financial inclusion as Pakistan accounts for 9 percent of the 1.4 billion unbanked adults across the globe. Pakistan’s financial inclusion at 21 percent, as per Global Findex Database, is found to be stagnant since 2017, and three to four times lower than those in comparable regional economies.

There is no doubt that the central bank has come a long way in addressing the financial inclusion challenges by way of policy formulation and digital transformation of the ecosystem, the road is still less travelled, so to speak.

This is where Pakistan’s banking ecosystem needs to put its act together and think digital – and move as far away from brick-and-mortar banking as possible.

The potential in the digital sphere is unlimited as Pakistan sits very low on the spectrum, with Cash-in-Circulation ratio as high as 39 percent or a one-third of total banking deposits.

The regulator and enablers must join hands to find ways to post meaningful growth in digital banking sphere, given the youth bulge, and not rue missing the bus five years down the road.

Copyright Business Recorder, 2023