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KARACHI: The financial inclusion remains a challenge for Pakistan with lower financial, women and rural inclusion compared to regional peers, a publication on banking sector said.

A consulting firm M/s A.F. Ferguson and Co (PwC Pakistan) has released a publication on banking sector titled “Navigating the Future of Opportunities and Challenges”. The report covers trends and opportunities in different areas particularly credit penetration, Islamic banking, financial inclusion, digitalization, anti-money laundering and sustainability.

The document also incorporates perspectives of various industry leaders and senior bankers including Salim Raza, former Governor SBP, Muhammad Aurangzeb, President and CEO HBL, Irfan Siddiqui, President and CEO Meezan Bank and Yousaf Hussain, President and CEO Faysal Bank.

“Our cash in circulation is also one of the highest in the world at 39 percent compared to Bangladesh 16 percent, India 17 percent and Kenya 9 percent,” the publication said.

The publication highlights Pakistan’s Advances to Deposits Ratio (ADR) standing at 50 percent which in 2007 was 74 percent. This contraction accompanies corresponding rise in Investments to Deposits Ratio (IDR) from 33 percent in 2007 to 77 percent in 2022. In comparison Bangladesh stands at 25 percent, Sri Lanka 31 percent, India 34 percent and Kenya 4 percent while Pakistan’s ADR of 50 percent is lower than Bangladesh 82 percent, Sri Lanka 83 percent, India 72 percent and Kenya 73 percent.

Priority sector financing has remained at sub-optimal levels with SME contribution in total loans at 4.2 percent and Agri 3.6 percent while cash flow based financing, indicated by unsecured lending stands at only 2.0 percent, the publication said adding that SME lending in other countries as a percentage of total loans is much higher e.g. Bangladesh 18 percent, Indonesia 21 percent and India 16 percent.

The report suggested infusing credit bureau infrastructure with credit and alternate data, to be contributed by a host of market participants beyond banks. Many countries around the world have achieved this through national level big data initiatives such as UK, China, Australia and India.

While Pakistan has witnessed a steady increase in digital payments, there is still sizeable room for uptake considering 25 percent mobile banking enrolment. Space for mobile engagement is signified by only 27 transactions per annum per registered user.

In Pakistan, paper-based transactions comprise 27 percent of total transactions while ATM traffic constitutes 46 percent of e-transactions. This compares to less than 1.0 percent paper-based, with ATM engagement at 5.0 percent to 10 percent of e-transactions in regional economies.

According to the report, banks may need to promote behavioural shifts through loyalty and digital engagement programmes. But there is greater need for broader government and regulatory push to create a wider eco-system that incentivises digital and disincentives cash.

As per Court decision, all conventional banks have to be converted to Islamic by December 2027. The report highlights areas where challenges may be faced during Islamic transformation and conversion.

Different financial crime risks may be emerging such as cash intensity, informal remittance flows etc., together with those associated with increasing digitisation. Banks may need to keep pace with local and international developments for effective risk mitigation.

ESG needs to be top-most priority as the world moves into a much more regulated climate risk management regime. Banks will have to fully integrate sustainability into business model, consider ESG as part of institution’s purpose and set ambitious sustainability targets.

Copyright Business Recorder, 2023

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