Salman Ahmed Shaikh

The latest statistics reveal that there are 203 million bank accounts including 88 million branch-based accounts and 115 million branchless accounts in Pakistan. But, when it comes to credit, agriculture and SME sector obtain less than 10% of total financing from banks. The major chunk of financing goes to large corporations and government. In such a scenario, Pakistan’s banking sector is largely inclusive in deposits and exclusive in credits.

To improve outreach, it is important to enhance financial literacy. Local language accessibility in mobile banking apps is a fundamental step which every bank can take.

It is also important to build trust with the customers and improve the complaint resolution system. Currently, Bank Mohtasib requires that customer should approach bank and wait for 45 days unless bank provides a letter to decline the complaint. The wait is too long, especially for micro-entrepreneurs and SMEs who do not have enough working capital if their incoming remittance is stuck for some reason.

Furthermore, the current procedure requires the complain to have sign of Oath Commissioner. It makes the process cumbersome. Currently, complaints regarding Microfinance Banks do not come under the purview of Banking Mohtasib.

It is also important to improve competition and remove entry barriers. While it is understood that competitive market forces will put a check on schedule of charges, it is important to monitor if there is a significant deviation from the market norms which can result as a barrier to financial inclusion.

Charges and taxes on IBFT transfers shall be reduced or removed for small transactions to encourage use of banking channel. This will help in documenting economy. Rather, there shall be fees and charges on cash handling to encourage use of banking channel for transactions.

Opening a business bank account requires registration with tax authorities. Tax registration shall be eased so that entrepreneurs are encouraged to use business bank accounts. Currently, some banks do not have internet and mobile banking option for business accounts. This can be quite limiting for SMEs, MSMEs and single member companies.  

Furthermore, Pak-ID App of Nadra shall be designed in local language as well. Bank staff shall be trained to provide support to those customers who want to use Pak-ID App of Nadra to get their CNIC. NADRA and banks can liaison to provide joint services. Banks also verify residential address of customers, employment status and salary.

They also take signatures and bio-metric verification. Part of these procedures are also followed in CNIC application to NADRA. There is a possibility to share the data collected by banks to be usable for NADRA CNIC application whereby clients with no CNIC get CNIC and open bank account in a single coordinated procedure.

In rural areas, people hold certain assets which are not documented and registered formally. Hence, this does not count in their asset ownership. As a result, they may remain excluded or underserved with lower credit limit than would have been the case if their assets were counted in their net worth.

For instance, a rural farmer may own cows, bulls, goats, sheep, donkeys, bullock cart, wheelbarrow, hand carts, seeds, fertilizers, storable agriculture produce, other tools etc besides land. Some of these can be used as collateral and to calculate net worth of a potential client. This can reduce credit risk and allow greater credit limit and/or lessen the cost of financing for the farmer.   

Going forward, climate-smart financing is also needed. It is important to broaden it to all segments, especially consumer financing. For instance, financing electric cars, energy efficient cars, energy efficient appliances, inverted air conditioners and solar generators, for instance. In providing finance for renovation of house or construction of house with at least a minimum specified open space, it can be made mandatory to install solar panels.

In offering credit to free lancers for laptop financing, software financing and educational financing, it is important to account for the income they generate from outsourced and freelancing work. They may not have assets, but the revenue stream. On the other hand, farmers may have assets, but not stable or documented revenues. Therefore, the credit scorecard needs to take into account contextual factors.

Other than providing rate subsidy through refinancing, SBP may also evaluate the proposal of setting up a reserve fund to provide third party guarantee or absorb part of the genuine losses incurred to encourage banks to increase the share of SMEs and MSMEs in their financing portfolio.

Ministry of finance needs to be on board to have the incentives in right place. Income from financing SMEs, agriculture, MSMEs, youth, women, freelancers etc must be taxed at a lower rate. These earnings should also not count in calculation of Rs 300 million earnings, above which there is a super tax of 10% on banks.