Governor State Bank of Pakistan Tariq Bajwa while addressing the national flag hoisting ceremony on the country's Independence Day, stated that financial inclusion is important for monetary stability and economic development. He referred to the National Financial Inclusion Strategy (NFIS) launched in 2015 which envisaged increasing the number of accountholders to 50 percent of the total adult population by 2020. He focused on branchless banking as a means to increase financial inclusion and emphasized the need to expand banking products for all tiers of the economy in particular small and medium enterprises (SMEs), agriculture and financial excluded segments of society. He added, "SMEs are among priority sectors for their significant role in any economy but they have largely been ignored."
NFIS presented a rather dismal picture even though it claimed that a large number of milestones had been achieved including: "the creation of a regulatory framework for MFBs (2001); the expansion and modernization of the online credit information bureau (e-CIB, 2005); a series of measures to strengthen the safety and efficiency of payments, including the establishment of the Pakistan Interbank Settlement System (PRISM) (2008) and the development of interoperable inter-bank card payments platforms; the adoption of Branchless Banking Regulations (2008, amended in 2011); the adoption of a tiered approach to know-your-customer (KYC) requirements; the establishment of a specialized microfinance credit information bureau (m-CIB, 2009-2012); the launch of a nationwide Financial Literacy Programme (2012); and work on an Inclusion, Stability, Integrity, and Protection (I-SIP) methodology (2014). SBP and the Government of Pakistan (GoP) have also sponsored a number of guarantee facilities and subsidized lending schemes aimed at encouraging lending to the underserved".
In spite of these milestones, NFIS acknowledged that only 10.3 percent of Pakistani adults had an account which was well below the average of 33 percent in South Asia and 41.4 percent for lower middle income countries, with 56 percent of Pakistani adults not using either a formal or informal banking product, and only 36 percent adults save and only 4 percent save with a formal financial institution. Only a one-third of adults borrowed money and only 3 percent borrowed from a formal institution. Financial inclusion was overwhelmingly male (86 percent) and predominantly urban (68 percent) and insurance coverage was 7 percent with only 7 percent of adults having a formal pension. Most financial institutions focused on the upper end of the business and retail markets and did not develop the skills, techniques and products required to serve other market segments profitably.
The Governor did not provide any data during his speech that would indicate an improvement in the data from 2015; however, the SBP website claims that it "regularly conducts surveys/research to assess state of financial inclusion, the performance of its initiatives, industry trends, and innovations and to determine demand/supply side evolutions/trends." Unfortunately, the link that may have contained the latest data was not operable and on the homepage demand side statistics revealed data for 2015.
The major reasons for low level of financial inclusion as per the NFIS are: (i) economic cycle leading to a decline in credit to the private sector. While in other countries, an economic cycle does determine demand for credit yet in Pakistan rapid increase in government debt during the past five years (2013-18) has been one of the main contributors to a decline in private sector credit demand. Incidentally, the incumbent Governor SBP held the position of Secretary Finance as well as Chairman of the Federal Board of Revenue during the last five years; (ii) Unfortunately, business climate deteriorated over the past five years notwithstanding the policy paper prepared by the government under the International Monetary Fund programme. The reasons range from a flawed policy to keep the rupee overvalued, refunds kept on piling to overstate revenue and the utility rates, a major input for most manufacturing, were much higher than the regional average; (iii) the NFIS estimated the size of the informal economy to be 75 to 90 percent of the size of the formal economy - much larger than previously estimated; this trend worsened as the PML-N government levied the tax on bank cheques of over 50,000 rupees for non-filers; and (iv) inclusion of women remained poor.
It is relevant to note that in recent months, branchless banking facility has been granted to various mobile service providers and one would hope that a robust regulatory framework has been put in place by the SBP or else this could become a major avenue for money laundering. This is especially important given the acknowledgment in the NFIS that there are "weaknesses in the basic financial sector infrastructure and the legal and judicial framework discourage lending, particularly to those perceived as riskier borrowers."