Building financial empowerment in Pakistan through fintech

In less than a decade, financial technology has permanently transformed the financial services sector. Challenging the monopoly once held by large banks, fintech startups now have the potential to become established brands. Mahmood Shamsher Ali, Alif Bank’s country representative in Pakistan, outlines why Pakistan is prime for a fintech revolution.

Last year, investors pumped more than $200 billion into start-ups en scale-ups active in the world of financial technology, almost $90 billion more than the year previous

While this is a positive development for the sector, we should not let this overlook the role of fintech in digitally empowering populations who have not yet had access to new generations of banking technologies. Pakistan offers exciting opportunities in this regard.

Pakistan is prime for a fintech revolution

Pakistan is an emerging economy at a critical stage of its economic modernisation. Annual GDP growth is sitting above 4%, though concerns over inflation have led to calls for additional reforms and initiatives that put economic growth at the heart of the agenda. It is partly the reason why the State Bank of Pakistan (SBP) is looking to digital challenger banks as part of a long-term economic strategy.

To properly understand why Pakistan is ideally positioned for a fintech transformation, we need to first appreciate the country’s financial landscape. There are three trends to take note of.

The first is the number of people who regularly engage with a retail bank. At the moment, only 21% of the adult population in Pakistan are bank card owners, compared to 50% in Bangladesh and 80% in India. The reasons for this range from accessibility of branches to strict lending and credit regulations currently in place by the major banks.

Yet, for a country of over 220 million people, there are 181 million mobile subscribers – meaning teledensity stands at 85%. This demonstrates the potential of fintech. The high proportion of mobile phone penetration means fintech can overcome issues of accessibility by allowing Pakistani residents to use their mobile phones to access banking services.

The second is access to formal credit lines. Only 3% of adults in Pakistan borrow from a formal channel, with more than 30% instead borrowing from family, friends or semi-formal processes. A report by Karandaaz Pakistan stated that this reliance on informal credit lines stems from its ease of access and the fast deployment of loans for both businesses and consumers.

In comparison, established banks in Pakistan have a preference for lending to large corporations. The customer experience when applying for credit at a bank can also be complicated and time consuming..

While the preference of informal credit over formal avenues is common in emerging markets, it is still proportionally higher in Pakistan than countries with similar economic conditions. For example, 9% of adults in Bangladesh are said to have engaged with formal credit in 2017. Fintech can play a significant role by using technology to offer customers seamless access to credit that is simple, competitive and fast to be deployed.

The third issue is linked to Pakistan being a cash-based economy. Pakistan’s currency circulation amounts to around 15% of GDP – one of the highest ratios of any emerging economy. A policy paper from the Center for Global Development revealed that the reliance on cash is a reflection of Pakistan’s institutional weaknesses, facilitating the rise of an informal economy with a preference for cash.

Interestingly, the lack of trust towards current institutions has meant that even mobile phone owners who are technologically literate still have a preference for informal finance.

These three issues demonstrate the reasons why Pakistan stands to benefit from digital challenger banks. By overcoming barriers of accessibility and trust, SBP can see the importance of fintech in supporting the country’s economic advancement. As such, the SBP has become a progressive regulator, creating a financial ecosystem that supports innovation and ultimately seeks to improve the customer experience.

Recent initiatives include the development of a “Customers’ Digital Onboarding Framework” for banks which outlines the basic parameters for opening of bank accounts through digital channels in Pakistan.

Fintech as a tool of financial empowerment in Pakistan

In recognition of fintech’s disruptive potential, the State Bank of Pakistan has this year launched a licensing and regulatory framework for digital banks, effectively allowing an initial quota of five digital banks to begin operations in the country.

It’s a vital step for Pakistan – the SBP has publicly recognised the benefits fintech can offer in creating a digital ecosystem that overcomes many of the financial challenges the country is facing. For this reason, the SBP is heeding the experiences of advanced economies by looking to private digital banks for innovation.

When talking about digital banks, we are referring to a combination of online banking and mobile banking. The latter is synonymous with fintech innovation – accessing banks via a mobile device means greater security and the ability for users to better manage their finances, be it a small business or individual consumer.

Further reading: Digital transformation trends in the retail banking industry.

Pakistan is also a unique example given the demand for Shariah compliant financial products and services. Even in advanced economies, there is still a significant gap when it comes to understanding what Islamic finance is and how banks can become Shariah-compliant. This is why Islamic fintech, that is digital banks and financial apps that are Sharia-compliant in the services they offer and the funding they themselves receive, are core to the digital empowerment of Pakistan and neighbouring countries around Pakistan.

Fintech is not just about giving people financial tools to better manage their finances. In emerging markets, fintech is symbolic of a wider social and cultural transformation that challenges preconceptions about modern banking, empowers populations and promotes financial inclusion. This is a point the SBP understands.

As noted by Reza Baqir, Governor of State Bank of Pakistan, in his keynote address, the first wave of digital banks must focus on addressing the underserved segments of Pakistani society while also creating new and improved customer experiences.

Pakistan is ripe for a digital revolution, and moves by the SBP to introduce digital challenger banks are a welcome step in the right direction. However, the granting of licenses should be the beginning of this process.

Emerging markets like Pakistan are ideally positioned to benefit from fintech innovations – they must constantly ensure everything is being done across the private and public sectors to encourage fintech adoption. Doing so will digitally empower a new generation of consumers, investors and businesses, who in turn, can fulfill their full potential.