Ali Sarfraz is CEO of Karandaaz Pakistan. Ali has vast experience of leading initiatives in private, public, and not-for-profit sectors. He was engaged in advising private sector firms while working in senior strategy and operational roles in Asia and Europe. He also developed new strategies for increasing revenue streams of a major mobile operator in Pakistan. While working in senior policy positions in public sector, he focused on building conducive business environments, developing skilled workforce, and adopting technology use for the government. He has an MBA from INSEAD and BS in Electrical Engineering from University of Texas, Austin.

Following are the edited excerpts of conversation BR Research had with Karandaaz CEO on the financial and economic impact of COVID-19:

BR Research: Let’s begin with what are key focus areas for Karandaaz currently?

Ali Sarfraz: Karandaaz Pakistan is a not for profit company established in August 2014 to promote access to finance for micro, small and medium - sized businesses through a commercially directed investment platform, and financial inclusion for individuals by employing technology enabled solutions. Karandaaz capital uses multiple strategies for providing capital to target enterprises. These generate broad based employment in Pakistan and financial returns for Karandaaz.

Our digital arm provides infrastructure and technical support to promote financial inclusion through technology-enabled solutions. The Innovation vertical manages Innovation Challenge Fund and Women Ventures and provides risk capital and grants to generate innovative yet practicable solutions for solving complex problems in areas of financial inclusion and entrepreneurship.

And lastly, our knowledge management and communication function develops and disseminates evidence-based insights and solutions to inform the core themes of the company, including innovation, women entrepreneurship and youth, and to influence the financial eco-system to promote financial inclusion in Pakistan.

We work with a wide range of market-based institutions across Pakistan to achieve our vision of inclusive economic growth, job creation and rising incomes. Our approach seeks to harness the power of markets and the private sector to increase access to finance for SMEs and the financially excluded in the country. Funding from the UK Department for International Development and the Bill & Melinda Gates Foundation enables Karandaaz to pursue its goals.

BRR: What is your reading of the weaknesses and the opportunities lost or those that still exist in the ongoing pandemic?

AS: Digital financial services and E-commerce are much relevant than ever. Customer behavior is poised to change (i.e. avoiding large crowds, person to person contact, waiting lines), with a preference for online channels to initiate and complete transactions. Karandaaz undertook a survey of 17 DFS providers and 8 Fintechs across the country to understand the impact of COVID-19 on the DFS ecosystem in Pakistan.

Over 90 percent of the providers felt that adoption and usage of DFS, will increase in the next three to four months. 69 percent of the respondents expected a surge in new mobile wallet accounts in the next three months; while 25 percent suggested that adoption might not increase, but usage by current mobile wallet subscribers will increase. Contactless payment initiative needs to be accelerated. Awareness campaigns to educate DFS usage and creating trust for utilising DFS will be imperative moving forward.

Fintechs may find themselves at the forefront of providing innovative solutions. Previously, the conventional financial sector players had resisted adoption of new technologies, current circumstances provide an opportunity for larger financial institutions to adopt new and innovative solutions.

Some key opportunities are the development of digital lending solutions, including credit scoring models to provide fast and sufficient liquidity; digital KYC solutions, including in-app biometric verification modules; crowdfunding platforms to support small businesses; utilisation of roaming agents, especially for cash transfers to the elderly, and people with special needs; and one-window access for all DFS providers so that consumers do not have to download multiple applications to undertake transactions.

Speaking of challenges, documentation and data availability is the weakest link. As 75 percent of Pakistan’s economy is informal in nature, extending support to these undocumented businesses, has become a challenge due to data limitation. It has been 15 years since last economic census. The incumbent government and Small & Medium Enterprise Development Authority (SMEDA) are taking electricity connection as proxy to identify these undocumented businesses and it is widely accepted that an updated survey is needed.

Given the current scenario, financial institutions are facing a liquidity squeeze and an asset liability mismatch. Businesses, with stressed internal cash flows are likely to fully tap their approved borrowing lines. This is exacerbated by the slow asset conversion rate, the process of converting products and services into invoices, invoices into receivables and receivable into cash come under pressure, thereby reducing ability to pay back debt. Extended debt moratoriums will further keep the overall liquidity in check. An economic slowdown may potentially result in many MFIs moving towards insolvency given restructurings, and deferrals.

Around 866,000 borrowers are expected to be approved with the principal deferments and loan restructurings. With the subdued economic activity and the overall uncertainty, it is hard to ascertain if these businesses will be successful in meeting their obligations as per the rescheduled terms. This would induce financial institutions to take a precautionary approach, which would further take focus away from riskier clientele such as SMEs and micro segment.

BRR: What will the post COVID-19 recovery be like?

AS: The pandemic has worsened after easing in lockdown in Pakistan, with thousands of new cases reported on daily basis. Across the globe analysts have been arguing whether it’ll be a “V”, “U”, “W” or even a most pessimistic “L” shaped recovery, but with this current situation it is just really hard to predict the form it will take. Many believe that, only a vaccine can allow economic activity to return to the pre-pandemic baseline.

Even once the economy starts to reopen, measures will likely be put in place that curtail economic activity to some degree – travel will be less common, businesses will have to space workers and customers further apart, restaurants will be serving fewer customers at a time, and sporting events, concerts, and other activities involving large crowds probably will remain off limits for a long time. And even if the rules allow, many people may be reluctant to return to life as it was before the pandemic. So, one thing is certain that there will likely be no quick recovery.

Retrieval of consumption will play a major role, which depends on the ability and willingness of households. Increasing number of infections will also put a strain on household savings in terms of high healthcare costs, policy interventions to prevent our businesses (especially MSMEs) from bankruptcies and unemployment will be very crucial, and will depend on state of the overall fiscal space. Increasing number of infections will also put a strain on household savings.

The SBP and SECP have been very proactive in rolling out solutions to strengthen the domestic financial industry and support local businesses in these stressed times. However, a coherent approach is necessary to align the prevalent regulatory frameworks to make the regime less ambiguous and more encouraging for financial institutions.

Donor agencies can play a vital role in mobilising interest and ensuring the availability of resources. In addition, partnerships among industry players and institutions are imperative. Those entities which are digitally ready to offer products and services will be on a faster recovery because they will be able to reach their customers securely, swiftly and less expensively.

BRR: How do you think the financial industry will change post COVID-19?

AS: Global economy is witnessing a severe economic shock; governments and central banks across the globe are busy designing and rolling out fiscal and monetary stimulus packages, primarily, to provide liquidity to the financial markets, support to small and medium sized business that are considered most vulnerable and direct cash support to households affected by the lockdown.

Financial institutions (FIs) have become the medium to channel these stimulus packages to the real economy and as the situation is still evolving, rapid delivery system is essential. FIs are experiencing a period of intense activity and that too with limited physical presence. Institutions that have adapted quickly and can respond efficiently to the higher volume of requests, have an opportunity to increase their reputation, value and market share across the industry.

For seamless business continuity it is crucial to have a secure remote access among banks’ employees, customers and third parties. Secondly, with banks’ reduced physical presence, one of the biggest opportunities to come out of the COVID-19 crisis is customers’ rapid uptake of digital banking. Customers are using contactless payments more; in Hong Kong, the use of digital tools in retail banking has increased from 40 percent to 80 percent in recent weeks. Covid-19 has fast forwarded the arrival of digital and challenger banks.

BRR: COVID-19 is said to have already increased digital adoption in many countries including Pakistan. Do you think this pandemic could be the tipping point for digitisation in Pakistan?

AS: Covid-19 has pushed the agenda of digitisation. We have seen progress on both supply and demand side. On one hand, banks have advertised and facilitated digital payments and on the other hand, consumers have also shown increased preference towards digital transactions over cash. However, this increase has primarily been observed in the existing customers who have shifted to digital channels. It is a bit too soon to conclude that Covid-19 has shifted the demand curve permanently or will consumers shift back to using cash once things go back to normal. Move over, while digital payments have increased on e-commerce, proximity payments (e.g. merchants) are still dominated by cash.

While I would agree that the pandemic has resulted in re-thinking of the business models and also pushed policy makers to consider digitisation more favorably, however, I do not believe that it has brought Pakistan to the tipping point of digitisation. Pakistan does not have the needed underlying national infrastructure to support digitisation of mass use cases and hence we continue to see niche efforts. For example, with tele-density at 78 percent, the mobile coverage for internet is still low and expensive; internet reliability is still questionable, smartphone penetration is still low, and the banks are not motivated to serve the unbanked, be it individuals or SME sector and the value chains are still used to manual way of working.

Pakistan lags its peer countries in mobile broadband accounts for less than 5 in 10 mobile connections. Pakistan has a persistent ‘coverage gap of 54 percent (people who have coverage but do not subscribe to mobile broadband. Pakistan also scored 39.8 in the GSMA’s latest Mobile Connectivity Index, compared to an average of 45.7 for South Asia. Smart phone penetration as a percentage of all connections is just 49 percent, while South Asian average is 60 percent. Resultantly, cash circulation remains high with people preferring to use cash over digital and documented means of transactions.

BRR: Do you think increase in digital adoption could be extended to female financial inclusion? If not, why?

AS: Pakistani consumers come from diverse socio-economic backgrounds. There are great barriers and challenges that inhibit female financial inclusion. On top are the social barriers such as women not opening accounts in their names and their lack of mobility. Then the need for undifferentiated documentation required to open accounts poses issues for a large majority of women whose source of income is informal. While the pandemic has not shifted anything to motivate the banks to target female customers, we do see that with general increase in digital payments, female participation has also increased.

BRR: Karandaaz has a special focus on female financial inclusion. How vulnerable are women economically to COVID-19?

AS: Let us begin by looking at the economic status of women in the country. Only a quarter of total female population participate in the labour force, of which 75 percent are in the informal sector, and account for 65 percent of home-based workers as per Labour Force Survey 2014-15. Only 11 percent contribute to GDP in terms of paid work. Informal employment does not protect from income shocks and is the first line of casualty in economic downturns.

About 8 percent of Micro Small and Medium Enterprise (MSME) owners are women. Access to finance is 6 percent, and only 1 percent of women are engaged in entrepreneurial activities as opposed to 21 percent of men. One of the key manifestations is employment of women in the health sector, which disproportionately exposes them to COVID-19.

Women and adolescent girls take disproportionate responsibility for care burdens, which creates a negative impact on their economic empowerment. Unemployment and women’s overrepresentation in the informal sector heighten their vulnerabilities during crises and the gender digital divide will negatively affect their ability to receive vital support and services or adapt to businesses or roles as employees due to constraints posed by social distancing.

Pakistani businesswomen are facing drastic income losses since the virus broke out. Recent analysis shows that women owned microenterprises, traditionally smaller than male owned counterparts, are more likely to lose their entire revenue during the pandemic (World Bank). It is a challenging situation for women employed as well – as most are part of informal employment and these jobs are the first to go during economic slowdown.

Like other businesses, since March, Karandaaz’s own portfolio of women led businesses also faced slow down to complete halt of business operations while fixed cost liability remained. SMEs generally are a high-risk category of clients for banks and businesswomen face an added bias. Businesses are exposed to severe liquidity crisis. The timelines for receivables have almost doubled for businesses in manufacturing; in the absence of external support, most were prepared to lay off staff.

BRR: SMEs are the most affected by the ongoing pandemic and the number of expected layoffs and job losses are brutal. How do you see the situation unfolding?

AS: The current pandemic is still unfolding the impact on the overall economy and specific sectors. However, as per the preliminary survey by SMEDA covering 920 SME respondents, we have an initial estimate of the possible impact on the SME sector. Due to closure of businesses and disruption in supply chains, 48 percent of the respondents have reportedly laid off their employees, however, 26 percent of them plan to rehire the staff. These SMEs employ more than 19,000 workers and more than 8,000 daily wagers.

In Karandaaz’s equity portfolio, SMEs have reported reduction in topline and delays in expansion plans however, no employees were laid off. The temporary logistics issues are fading out as government has eased lockdown in the country. In the credit portfolio, partner banks have approved requests of deferrals of principal and interest payments by SME borrowers, particularly in auto, fleet and wholesale & trade sectors. According to SBP, banks have also approved financing of over Rs40 billion for 500 companies for providing wages and salaries to their employees.

BRR: Which sectors are you targeting for your growth capital?

AS: Agriculture and healthcare have emerged as defensive sectors amid the coronavirus pandemic while construction sector, particularly cement and steel are expected to grow post pandemic. Karandaaz expects sizeable investment opportunities of Rs1-3 billion in the next 12 months. Although climate change, pest attacks, and shortage of water remain a challenge to the sector, but the agri sector has capacity to produce not only as per domestic demand but for exports as well. In addition, Food and Beverages industry is the 2nd largest industry of the country after textile sector. Food sector outlook remains strong as supermarkets are gaining more popularity as a shopping venue and account for almost 10 percent of retail sales.

In health sector, Pharma companies have been given exemptions from custom duty on import of raw material by manufacturers of syringes and saline infusion sets, and on import of diagnostic kits for cancer and Coronavirus patients. Healthcare outlook looks strong as the federal government is exploring opportunities to increase healthcare spending through Technical Assistance program from World Bank.

The construction sector has emerged as a key beneficiary in the FY21 budget with special incentives. FED on cement has been reduced by Rs250 per ton (currently Rs2,000/ton) and the regulatory duties on hot rolled coils (HRC) of Iron and steel have been reduced to spur growth in construction sector.

BRR: What are the key initiatives that you have taken or plan to take to support key growth sectors?

AS: Karandaaz has recently provided funding to its existing investee company, Excel Labs to initiate COVID-19 testing. With this funding, Excel Labs is building its capacity to carry out an estimated 500 tests daily and more than 10,000 tests a month. This emergency response will help the country build critical testing capacity to test, track and control the spread of COVID-19. In addition to the financing at zero percent mark-up, a grant by Karandaaz will also be provided to Excel Labs for subsidising around 4,000 tests.

Subsidised tests will be available to vulnerable categories, including those above 65 years of age, doctors and nurses exposed to the Corona virus, and poor individuals who cannot afford the test. Karandaaz plans on working with other existing investee companies in food, healthcare and logistics sectors and partner financial institutions to provide further investments and capacity building to SMEs.