SBP and financial inclusion

Inaccessibility to financial services is considered a serious threat to the economic progress of any country. For this reason, enhancing the involvement of all segments of the economy is among the main objectives of monetary policy. Ineligibility of prospective clients, non availability of services, financial illiteracy and non-affordability are recognised as the main reasons for involuntary monetary exclusion. State Bank of Pakistan (SBP) recently launched a Nationwide Financial Literacy Programme (NFLP) which aims to improve the level of financial inclusion in Pakistan. The programme would initially target the poor and marginalised segments. Such literacy programmes play a leading role in raising awareness and tackling psychological and cultural barriers. But, it is believed that much more is needed to make financial inclusion possible. Especially inclusion of the poorer segments since the financial system of this segment is totally different as their spending needs/priorities are different from relatively affluent households and businesses. The question is: Will the formal financial institutions be able to generate value for customers and be able to provide services, in the absence of the financial and legal infrastructure? Presently this segment has to revert to informal channels that very often charge excessive rates on advances. However, despite their high cost, these informal lenders create some value for the poor/rural/informal market. They provide liquidity in emergencies (illness, accidents, etc) and at occasions like marriages. In addition, very often the repayment is flexible, for example, it can be made in the form of agricultural produce. But, on the other hand, these informal lenders use unethical and illegal ways to recover money. So another issue for formal financial institutions with aspirations of banking the unbanked is the recovery of money. However, solutions can be borrowed from regional countries such as India, where the government has made debt recovery tribunals which have boosted recovery rates. This has also helped in interest rate reduction. Over the past decade many micro finance institutions (MFI) have emerged to specifically cater to this segment. In addition, Pakistan has also seen its first micro insurance provider crop up. If these institutions successfully partner and come up with products that are customised according to the needs of the target market, a significant increase in the level of financial inclusion is possible. As far as servicing is concerned, authorities to some extent can leverage on IT (mobile/internet) as almost the whole country has access to these services. However, on the infrastructure front there is a need for proper infrastructure development. And on the legal side, issues like lack of legal identity, for example, National Identity Card (NIC), driving license, etc, need to be addressed. It is understood that building infrastructure would take time. However, the legislature and SBP can contribute by working out policies and taking more initiatives like the NFLP.