Bank­ing the Un­banked

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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.

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