Digital Financial Inclusion

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Only 13% of Pakistani adults possess a formal account, while more than 100 million Pakistanis are unbanked — accounting for 5% of the world’s unbanked population. These financial access statistics from the Global Findex 2014 report reveal the extent of underbanked and unbanked population in the country, and exposes the gap which can be bridged by digital and easy-access financial instruments.

In 2014, only 1.4% of adults used an account to receive wages and 1.8% of adults used it to receive government transfers.

In May 2015, Pakistan launched its National Financial Inclusion Strategy (NFIS), which is the roadmap to help a country achieve its financial inclusion goals. Of the goals set by Pakistan for 2020, the prominent ones include expansion of formal financial access to at least 50% of adults — including women and youth.

It also aims to increase the percentage of SME loans in bank lending to 15%, that’s a target more than double of the current standing as currently the Micro, Small and Medium Enterprises (MSMEs) receive only 7% of total bank credit to the private sector.

Despite the fact that our overall global standing is not much praise-worthy right now when it comes to financial access, but at the same time, Pakistan is leading the way in South Asia in digital finance and branchless banking. There may not be large leaps in the sector, however, because of the minimal legacy challenges, progress is being made. Construction is always cleaner than renovation. The more-recent disruption within the financial sector is also possible because of an ecosystem that is quite literally being built as it is being planned.

More than 6% of adults have mobile accounts, compared to South Asia’s average of less than 2.6%, as per World Bank report.

Currently the financing needs of MSMEs are unmet by the formal financial sector. There is other low-hanging fruit who simply doesn’t have the understanding nor the infrastructure outreach to actually be reached. From lending to micro-financing, the bulk population of the country resides so far away from basic technological infrastructure, the outreach itself is a challenge bigger than the issue of onboarding them.

Many ventures have tried to capitalize on this bulging customer niche, people who may never approach a proper banking institution, are in the greatest need of financial assistance and the most reliable to return it as well.

Related professionals in both public and private sectors are particularly motivated by technology-based paperless/cash-lite modes that may serve to minimize the service cost of lending and bring down high interest rates of microcredit, making it affordable for those who need it most.

History reveals that there are 3.2 million SMEs, but only approximately 188,000 SME loans are outstanding on banks’ books.

Having a reported growth-rate of more than 30% per annum, the period is termed most robust for the microfinance sector. These are Microfinance Institutions (MFIs) and Microfinance Banks (MFBs) currently exploring the vast sector and catering the needs of underbanked and unbanked individuals.

A Disruptive Solution
There are 45 institutions lending in this category. Ten microfinance banks and 25 non-banking financial institutions (NBFIs) are licensed by the SECP.

In the past few years, as technology and its adoption has increased in Pakistan, many new ventures have hit the market. These ventures aim to create a niche of their own banking on technology and providing financial services to those customers who have been neglected by the others. Though they have to play by the same rules prescribed by the Regulator, they certainly offer a fresh perspective on the monotony and tedium the brick-and-mortar institutions follow.

One such venture is CreditFix, which gathered public attention as it won the Fintech Disrupt Challenge 2017 and secured a $100,000 funding for pursuing an idea worthy of creating substantial social impact.

CreditFix is a mobile-led digital lending platform that helps new-to-credit and thin-file customers build credit scores.

The company was founded by Owais Zaidi in 2016, with a mission to “enable access to fair and transparent credit to millions of unscored Pakistani citizens.” Commenting on the functionality of CreditFix, Owais said it aims to “making fair credit available to the unbanked and underbanked customers while making it feasible for financial institutions to service them.”

“In developing countries,” explains Owais, “digital credit is used primarily for nano and micro credit, whereas, we are bringing big ticket loans to digital. So it’s a fairly unique approach,”

The CreditFix founder said that he faced problems in collecting the data and validating it to create acceptance within financial institutions. He was of the view that the central bank should create a sandbox environment that allows for such ventures to run pilots without having to obtain expensive licences and creating structures with massive paid-up capital requirement.

A higher loan price for the economically weaker client base increases default risk and de-incentivizes potential borrowers. However, digitized management can improve service effectiveness with a consolidated database and real time monitoring.

CreditFix makes use of a smartphone app. Users simply download, register, choose the product, fill out the basic application form and submit. They then receive the product after the application has been reviewed and approved.

However, like any other good thing, the venture will take time before it is available for general public as Owais said the project will go through a 12-18 months testing phase.

The target market of the microfinance sector in Pakistan is an estimated 25 to 30 million borrowers. The government has set the outreach goal to be at least 15 million by 2020. A lot needs to done to fully utilize and explore the potential of microfinance market. For this, the World Bank suggested certain selected measures to improve financial access in Pakistan. The World Bank called for shifting all government-to-person payments from cash to digital payments. It also suggests creating incentives for the private sector to use electronic payments instead of cash.

The need to expand access points to banks through agent networks or partnerships with microfinance institutions or postal networks is also highlighted. The World Bank also urges to develop legal frameworks to enable secure transactions.

The most important measure, however, is the need to improve financial education and literacy outreach, particularly among people who have little experience with the formal financial sector and digital payments.

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