Banking the Unbanked
Digital finance is the way to provide access to the unbanked population in the country, a majority of who are women. It will facilitate banks to better assess risk and provide loans to the poor. This will also enable the state to gain immensely and reduce leakages, simultaneously improving tax collection.
The best thing about digital finance is that it leaves a trail, therefore, any payments made digitally, can be easily traced. This enhances the ability of the government to collect more taxes.
It will also help reduce poverty. The poor are often denied accounts in formal banking channels, and are forced to seek loans from loan sharks, who charge exorbitantly high markup. The return of the loan with the high mark-up eats all their potential savings. There are times when the poor are able to save a minute amount, which is then often utilised for consumption in the absence of a bank account. Access to digital finance can increase savings, especially in the rural areas where formal banking channels are not available.
Providers of financial services can also gain big from providing digital accounts, as managing digital accounts, according to experts, is 80-90 percent cheaper than maintaining traditional bank accounts. The economic potential of going digital varies depending upon the current digital status of the country, as assessed in its report by the McKinsey Global Institute.
The report states that lowerincome countries, such as Ethiopia, India, and Nigeria have the largest potential. These countries have the opportunity to add 10 to 12 percent to their GDP, given low levels of financial inclusion and digital payments today. However, Pakistan has a somewhat lower GDP potential, at seven percent. Pakistan, the report points out currently has a less developed financial system, requiring greater upfront investment, and thus will not have as large an increase in productivity as some of its lowerincome peers.
The report points out that in Pakistan, 13 percent of the people own an account, whereas the rest of the 87 percent is without a bank account. Another fact worth noting is that 95 percent of the women in Pakistan do not own a bank account. Among the 13 percent account holders, a majority resides in urban centres. In fact 88 percent of the rural population is unbanked.
For going digital, the country needs to use the best available communication technologies. It is not possible to go for digital finance without good communication infrastructure. Out of the 185 million people in Pakistan, network coverage is available to only 50 percent. Mobile phone is owned by 45 percent of the population, while only five percent of the population operate and own smartphones. Only 47 percent of the nine million micro, small, and medium enterprises (MSMEs) have access to credit, which means that 4.23 million MSMEs do not have access to formal credit. The share of digital payments in Pakistan is less than one percent, while mobile money accounts are available to only six percent of the adult population.
Pakistan possesses the potential to add 93 million additional individuals in the financial system by 2025. According to the McKinsey Global Institute report, this will boost the GDP by $36 billion that will be seven percent of its GDP, and government leakages will reduce by $7 billion. It would create four million new jobs, and add $263 billion in new deposits.
Additional credit of $230 billion would be disbursed as a result of digital financial inclusion.
The rapid spread of mobile phones is the game changer that makes this opportunity possible. In 2014, nearly 80 percent of adults in emerging economies had a mobile phone, while only 55 percent had financial accounts. This is a huge potential as mobile phone penetration is growing quickly. Data mobile payments/other technologies can enable lenders to assess the creditworthiness of borrowers, and can help businesses better manage their finances.
Businesses and government leaders will need to make a concerted effort to secure these potential benefits. This can be achieved through widespread use of mobiles and availability of digital infrastructure that provides a dynamic business environment for financial services. Digital service providers will have to introduce digital finance products that meet the needs of individuals and small businesses in ways that are superior to the informal financial tools they are using today.
Financial regulation needs to strike a careful balance between protecting investors, consumers, and governments; avoiding costly and disruptive banking crises; and giving financial-services providers’ space to innovate and compete.
Prudential regulation must ensure that providers remain healthy and hold enough capital to avoid losses from over-exuberant lending or operational issues such as fraud, cyber risk, and other systemic information technology (IT) failures. Protection of consumers is also needed, particularly those who are most vulnerable and least economically valuable to the provider.
Digital finance solutions can radically speed the progress, and at a relatively affordable cost. Imagine the person in a rural area winning back the time spent travelling many miles on foot or by bus to a cash agent, and being able to work instead.