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ISLAMABAD: Despite Covid-19 and other technical hurdles, the newly licensed digital lending fintech Non-Banking Finance Companies (NBFCs) have disbursed cumulative loan over Rs13 billion to 600,000 borrowers in last two years.

According to the latest Securities and Exchange Commission of Pakistan (SECP) data, out of the total amount, over Rs11 billion have been disbursed only in the first nine months of the fiscal year 2021-2022.

The near 1000% growth indicates that the digital lending platforms are integrated well into the social fabric of the country; however, Pakistan still has a long way to go in this dimension, SECP data added.

The SECP has issued licenses to 8 digital platforms to provide instant and unsecured loans through digital apps. According to SECP data about two licensed fintech in Pakistan – Seedcred Financial Services Limited and Sarmaya Microfinance - Seedcred’s lending volume to common citizens is approximately Rs. 4.3 billion, while Sarmaya Microfinance lends to 100,000 customers on a monthly basis, with loans ranging from Rs. 2000 to Rs20,000.

The upsurge of the FinTech industry in Pakistan is rapidly changing the very structure of the financial system as a larger proportion of the population is unbanked having no access to formal or informal financial services. Almost 53% of the population has no access to financial services and out of the remaining 47%, only 23% are formally served. While huge prospects of financial inclusion and growth exist on one hand, the diffusion of technology is also posing some challenges.

Talking to Business Recorder, some creditors expressed their concerns regarding the high-interest rates and fees, inadequate disclosures, data privacy issues, and coercive collection practices of such digital lending platforms/apps.

SECP introduces concept of ‘Digital Lending’ for NBFCs

When contacted, Habib-ur-Rehman, CEO Sarmaya Microfinance told Business Recorder that since rise of digital lending in Pakistan is a recent phenomenon, such concerns about digital lenders can be partly due to lack of familiarity and awareness among the general public about loan pricing, its terms and conditions. However, he agreed that some of the concerns appear to be genuine and need to be addressed at various levels by the industry and SECP through regulatory changes, awareness campaigns, stakeholders’ engagements and promoting competition.

Habib stated that as per directions of the SECP, lending platforms are liable to disclose all the terms and conditions of the loans to the borrowers prior to entering into loan agreement. Besides, he said, digital lending is a globally tested and currently practiced model. Seamless consumer lending has greatly transformed the consumer experience in the developed world, where too it has been challenging in the start. Since the sector is relatively new in Pakistan, it might take some time to formulate the required framework and legislation.

Technically, Habib added, the cost of financing of such platforms shall always be higher than conventional lending platforms (banks, microfinance, etc) because of the higher risk, instant and unsecured nature of the personal loans on offer.

By their very nature, these digital lenders are in a better position to provide emergency funds in small amounts at higher interest rates to individuals with middle and low incomes.

Currently, the law does place a cap or limit on loan pricing, which is determined by the market forces and bilateral agreements between the lenders and the borrowers. However, the pricing charged by these platforms shall fall with an increase in competition in the digital lending space, with the borrowers having more options to choose from.

The evolution of consumer financing has huge future prospects for the country. Pakistan having the lowest household credit access ratio can benefit largely from it. The evolution of the Microfinance industry in Pakistan provides a good example to understand the recent technological innovation.

Copyright Business Recorder, 2022

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