Old Players, New Game: The Changing Landscape of Financial Inclusion in Pakistan

> Posted by Hannah Sherman, Project Associate, CFI

Despite all the talk about fintech start-ups transforming how financial services are offered to the base of the pyramid, recent efforts by the government of Pakistan remind us that change can also be led from the top.

“Accounts” includes mobile money accounts, while “accounts at a financial institution” is comprised of bank accounts. (click to enlarge)

Pakistan has extremely low levels of access to affordable, diverse financial services. In the Center for Financial Inclusion’s (CFI) report By the Numbers, which assesses progress toward financial inclusion by 2020, Pakistan was identified as one of the countries predicted to fall short of the goal of universal account access by 2020. In Pakistan, only 13 percent of adults have accounts, compared with about 46 percent of adults in all of South Asia. Microfinance reaches less than 3 percent of the country’s population, and less than 7 percent of small and medium-sized enterprises (SMEs) use formal finance for working capital or investments. (To explore available data on the state of financial inclusion in Pakistan, check out the FI2020 Inclusion Visualizer.)

(click to enlarge)

While financial inclusion in Pakistan remains low, recent trends suggest that the country is poised for rapid growth in the near future. Pakistan placed fifth in the Global Microscope 2015‘s list of enabling environments for financial inclusion, up six points from its 2014 score. This reflects an energetic, sustained effort by the government to strengthen the financial inclusion landscape of the nation.

Historically, there have been three major types of financial inclusion players in Pakistan: microfinance banks (MFBs), microfinance institutions (MFIs), and rural support programs (RSPs). While these three players continue to dominate the financial inclusion landscape in Pakistan, previously “benched” players have begun to play an increasingly important role.

The State Bank of Pakistan (SBP), the country’s central bank, has also developed a National Financial Inclusion Strategy (NFIS), which provides a framework and road map for priority actions, aimed at addressing constraints and significantly increasing access to and usage of high-quality financial services. As part of this strategy, the Government of Pakistan has instituted the Asaan Account initiative, which greatly simplifies the process of opening a bank account, and includes lower minimum initial deposits. SBP is also working on developing guidelines for the development of e-money channels and instruments in Pakistan, as well as promoting a National Financial Literacy Initiative. The government has also joined the global Better than Cash Alliance, further signaling its commitment to digitizing payments.

One particularly interesting initiative that was initially bankrolled by the government is the country’s National Population Database, managed by the National Database & Registration Authority (NADRA). The database covers 98 percent of the entire population. It is the sole source for identification data in Pakistan, and is linked to a Computerized National Identity Card (CNIC) which acts as the nation’s primary form of identification verification. Since the identification program has been successful in registering much of the country’s population, it has extended to traditionally under-registered communities, including tribal groups, transgender populations, and women.

Biometric data is collected during the card registration process and is stored on a CNIC chip. The availability of this biometric data has greatly reduced the prevalence of dual identities and identity theft in Pakistan. NADRA is no longer funded by the government and now operates on fees for identity services provided. For example, banks are charged around 35 rupees each time they request NADRA to authenticate an individual. In recent years, NADRA has become a central player in a number of program areas – pioneering applications of biometric technology, and successfully administering smart card programs for disaster relief programs and financial inclusion schemes for the underserved.

In addition to its own public initiatives, the Government of Pakistan has also worked jointly with the private sector. In 2014, the Bank of Punjab, a government-owned bank, and MasterCard announced a Social Security Program which transfers government assistance to individuals through electronic payments. Through the initiative the Bank of Punjab has already distributed millions of payment cards, on which Pakistani citizens receive wages and benefits in areas such as healthcare, pension, microlending, and education. The cards can also be used at merchant locations, where the identity of the cardholder is verified via biometric data. According to Raghu Malhotra, MasterCard’s Division President for the Middle East and North Africa, “We see this initiative as a catalyst to empower the population and help the government to improve transparency and efficiency.”

Despite these significant advances, the Government of Pakistan still faces a number of inclusion challenges. The NFIS has many obstacles in increasing and diversifying financial-service access points. The supply of credit to underserved markets is constrained by poor contract enforcement, deficiency in land titling and registration, and the absence of a secure transaction framework and electronic collateral registry for movable collateral. Lack of capacity in financial institutions will also remain a constraint to greater financial inclusion. Finally, a continued lack of financial literacy and awareness will continue to limit demand for financial products and services.

The Pakistani Government’s recent efforts demonstrate the important role that regulators can play in addressing the primary barriers to financial inclusion. Pakistan has become, if not a leader, at least a model example for many other developing nations whose governments have not historically played an important role in financial inclusion. Perhaps this new game of old players will be enough to prove our By the Numbers prediction wrong.

Financial Inclusion 2020 (FI2020) is a global multi-stakeholder movement to achieve full financial inclusion, using the year 2020 as a focal point for action. This blog series will spotlight financial inclusion efforts around the globe and share insights from key thought leaders in financial inclusion, with a specific focus on quality beyond access.

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