ISLAMABAD ( MEDIA REPORT )
THE potential for growth in digital financial services in an economy like Pakistan are immense. A quick look through the following data reveals a sharp contrast between the demand for and supply of financial services in the country.
— Eighty five per cent of Pakistan’s population lack access to formal financial services.
— Out of one-third of adults borrowing money, only 3pc take out loans through formal financial channels.
At the same time, we have:
— Teledensity (mobile phone ownership) of 69pc of the population.
— One hundred and thirty-two million biometrically verified SIMs making the opening of mobile wallets relatively easy.
Juxtapose the above data with the strategic focus of the State Bank of Pakistan to enhance financial inclusion amongst the unbanked, and we can see the emerging importance of technology companies in the field of finance.
Necessary infrastructure for digital financial services has already been created in Pakistan owing to some progressive regulations by the State Bank. These include:
— Branchless banking regulations which capitalised on the extensive network of telecom operators to facilitate the opening of 13.2m branchless banking accounts.
Essential infrastructure for digital financial services is already in place.
— Payment services provider/ payment service operator regulations of 2014 which granted licences to develop an electronic platform for the clearing, processing, routing and switching of electronic payments.
— An MOU signed between the State Bank and the Pakistan Telecommunications Authority to enable the root level inter-operability between mobile wallet players.
However much more needs to be done. The creation of a conducive ecosystem for the emergence of financial technology, or FinTech companies is the next step. Currently FinTechs have to be registered as technology and service providers since no separate category exists. Recognition of this new type of entity is a first step. Here the regulator will need to distinguish between FinTechs working on top of incumbent financial institutions and those working independently. The high capital requirement of $200m is a barrier to the entry of small FinTechs. However at the same time, the existing licence holders can act as platforms for FinTechs to develop, while providing them with a mature regulatory compliance environment.
Recognition of this category will also necessitate a change in the skill set of the regulator. The State Bank may want to follow the example of the Financial Control Authority (FCA) in the UK where a separate wing has been created to not only engage with the industry in a meaningful manner but also provide regulatory ‘sandboxes’, ie space to experiment with new products and modes of service delivery while minimising risk through limited outreach and added safeguards to protect consumers.
This will have to be supplemented by heavy investment in regulation technology, ie the use of technology to simplify compliance. This will not only help the regulators provide effective oversight over technology dependent regulatees, it will also reduce the cost, complexity and time in regulatory reporting for traditional players in the industry.
For the emergence of any new industry, effective oversight has to be accompanied by facilitative policies. In the UK, the FCA has mandated all large financial institutions to refer small businesses that they themselves cannot cater to, to alternate finance providers. Imagine what a similar policy in Pakistan could achieve.
The right type of policy support will, of course, have to go hand in hand with the availability of funding sources for these start ups as well as an available pool of high-quality talent. Investments in global FinTech grew by 75pc in 2015 to $22.3 billion. In Pakistan, given the dearth of seed financing for start ups, some institutions are, with the assistance of bilateral donor agencies, attempting to fill this funding gap by organising events such as the Fintech Disruption Challenge that recently attracted over 60 proposals. The finalists presented innovative ideas for the development of mobile applications from facilitating the farmer to retail consumers wanting to avail their SIM balance to purchase online digital content.
The icing on the cake is, of course, the potential of digital disruption in enhancing the access and outreach of service providers to those currently outside their radar of interest. We can conclude with another statistic. Only 2.9pc of the 15pc of Pakistanis with access to financial services are women. At the same time 29pc of the female population in Pakistan have a mobile phone. Financial inclusion for women can be enhanced as well, in some small measure, should the impact of technology be allowed to play its part in filling this widening gap.
The writer Sadia Khan has recently edited a publication entitled Corporate Governance Landscape of Pakistan.
Published in Dawn, February 21st, 2017