Financial development and ‘inclusion’

Oftentimes, parting lament in Pakistani drawing-room conversations is that things will never change. On at least one count, folks may be right. The insularity of Pakistan’s financial sector remains sticky. Regional peers like Bangladesh, India, Sri Lanka and Vietnam have visibly improved their financial development index between 2007 and 2014. But the needle hasn’t moved at all in Pakistan (see the illustration).

Among other critical areas, “financial inclusion” has also been discussed in the recently-released IMF Country Report on Pakistan. Another graphic from the report (reproduced here) is instructive: At a given level of financial development, countries can be more or less financially inclusive. Pakistan lags Vietnam on financial inclusion index, despite having similar reading on the financial development index. Indonesia achieves a similar level of financial inclusion as India, despite being low on financial development.

Perhaps the takeaway is, when it comes to developing countries, a higher level of financial development may not necessarily lead to improvement in financial inclusion. But Pakistan is not even making progress on its low state of financial development. The gap is significant – the fund noted that developing Pakistani FIs to average EM levels would yield “annual per capita growth dividend of about 1 percent”.

In the report, the fund highlights the government’s “National Financial Inclusion Strategy” (NFIS), which is expected to financially mainstream the neglected demographic and business segments. There is a generic emphasis on enhancing financial literacy, women representation, ICT infrastructure, consumer protection, and policy environment for SME, agri and housing finance.

One would have liked some critique on the government’s strategy on financial inclusion (NFIS). The SBP seems to be looking at branchless banking (BB) sector to drive much of the NFIS financial coverage agenda. And the BB market has been responding, too. It is now channeling over $5 billion worth of transactions every quarter. The number of BB accounts (m-wallets) had reached almost 24 million, with 368,738 agent locations, as of March 2017.

But the progress is hazy. As per the latest SBP BB newsletter (Jan-Mar 2017), less than a third of agent locations had the capability to open customer accounts. More than half of m-wallets were found inactive. Over 40 percent agent locations were inactive. Females only had a 22 percent share in m-wallets. Share of remote regions such as Balochistan, AJK and GB in BB accounts and transaction volume is marginal at best.

As far as deepening financial coverage is concerned, commercial banks will need to aggressively partake. There, the fund recommends “continuing fiscal consolidation to channel more funds to private credit,” besides “pursuing prudent monetary policy to encourage savings.”

It is in the realm of legal and regulatory frameworks where the fund highlights some specific measures. These include “operationalising the planned deposit insurance, reforming credit information systems, creating an electronic collateral registry”, “moving toward registering prize bonds”, “ensuring tax neutrality for some Islamic products”, to list a few.

Pakistan still has a long way to go. And judging by the policy priorities regarding bank competition, documentation, taxation, debt markets, digital divide, et al; don’t hold your breath for a grand progress on financial inclusion by 2020. Be that as it may, the low state of financial development is an opportunity to grow the system in a more inclusive manner.