The Dimensions of Financial Inclusion in Pakistan

Pakistan has a regulatory environment that is strong and conducive for microfinance institutions (MFIs). The country has a huge un-banked population, and as such, presents an opportunity for MFIs to serve this large untapped market. But to date, MFIs have not been able to cover more than 7% of the potential market.  

Over the last decade, there has been a growing sense within the industry that financial services to the non-banked should be expanded to include savings, deposits, insurance, and remittances. But it hasn’t happened.

Until now.

In the last five years, there’s been a telecom revolution in Pakistan, and it has changed the game for the financial services industry. We have over 120 million mobile phone SIMs issued by six telecommunications companies, and this number is increasing. Even if we estimate that 40% of Pakistani males hold 2-3 SIMs, and that 20% of SIM holders have dormant or little-used SIM cards, we’re still left with a tremendous number of active mobile phones.

This technological revolution has changed the thinking of the financial services industry when it comes to targeting the lower end of the market. It’s no longer just about credit, no longer just microfinance. Instead, it’s about providing inclusive financial services for all the unbanked.

The level of education in Pakistan isn’t high. There are hundreds of thousands of economically active Pakistanis who don’t fall into traditional definitions of poverty, but aren’t linked to the banking system. In fact, only 10-11% of Pakistanis are banked, because the banking system isn’t encouraging small savers to deposit small amounts in the banks..

Now, the government and investors are thinking along the lines of why not provide some financial services through these mobile phones? Why not create a payment system at a national level for payments, remittances, opening bank accounts, and saving using the large network of agents across the country? Then microfinance banks or even corporate commercial banks could offer their products through that network and extend their services to far flung areas of Pakistan.

At the strategic level, there is a broader understanding that the financial sector can efficiently provide a range of financial services through cell phones. And it’s not just for those under or over the poverty line. It’s a service to all those outside the corporate commercial banking sector, who don’t have access to financial services, or are excluded by the formal banking system

Today, Pakistan’s mobile banking providers enable people to pay their regular monthly bills – such as utility bills – with their phones. And keep in mind there are an estimated 44 million bills of this sort generated in Pakistan every month. It’s a big opportunity.

You can also use mobile payments to top up your SIM card. In Pakistan, about 95% of SIMs are pre-paid and of these, the bulk are in low income communities and   represents a large, easily accessible market.

Another service being provided is remittances. Unfortunately, in Pakistan today, remittances don’t cross bank platforms. So if you send money to someone through an Easy-Pesa outlet, it’s received at another Easy-Pesa outlet, and from Omni to Omni.

But discussions are taking place about platform interoperability, with CGAP  playing an important role with the regulatory authorities: Pakistan Telecommunication Authority and the State Bank of Pakistan. So ideally, if you send money from Easy-Pesa, it could be received by another bank in the network, like Omni through a switching system, just as banks use for ATMs. This would obviously be more attractive to the client and would dramatically increase the volume of transactions.

The size of Pakistan’s untapped market is mind boggling, because in the case of remittances and bill paying, these aren’t just one-time or irregular transactions or purchases. Now, with mobile banking, these transactions can be made more conveniently and cost-effectively. Everybody wins – the telcos, the banks, and the customers.

Khalid Nawaz serves as Chief Operations Officer with SBI Pakistan.