Home / This Week / Cover Stories / Paradigm shift in banking industry: microfinance, financial inclusion and access to finance

Paradigm shift in banking industry: microfinance, financial inclusion and access to finance


Microfinance is just one tool in the war against poverty. For microfinance to be successful at poverty reduction, it must be used in conjunction with education, health and other social interventions. Microfinance becomes a multiplier force in such a scenario. Not only does it reduce poverty, it creates an even playing field by bringing the marginalized population into the banking net. The reality is that this customer-base pays an exorbitant price for the services that the banked population uses.

The microfinance industry has been successful in opening mobile accounts, but has yet to make these accounts active. The microfinance industry has had healthy growth in Pakistan, but now needs to grow exponentially if it is to become a major player in addressing financial exclusion and poverty. Apart from microfinance, agriculture and small business are critical sectors in Pakistan’s economy that play a significant role in job creation and poverty reduction.

Pakistan has a growing and vibrant microfinance industry. While it has been in existence over the past 15 years, the real growth has come in the past 10 years. Unlike Bangladesh and India, Pakistan has been able to use the branchless banking route to harness deposits. Pakistan has been ranked by the Economist Intelligence Unit as having one of the top three regulatory mechanisms in the world. Recently, the Securities and Exchange Commission of Pakistan (SECP) has also created regulations for the unregulated segment of the industry, further enhancing it.

The microfinance industry has had healthy growth in Pakistan, but now needs to grow exponentially if it is to become a major player in addressing financial exclusion and poverty. The industry must embrace the technological revolution taking place in Pakistan. It must harness the benefits of branchless banking. It must use the smartphone and data that exists in the smartphone, to provide solutions to those at the bottom of the pyramid.

Islamic Microfinance has great potential to provide support to the poor by providing financial services at their doorstep. The asset based nature of Islamic modes of financing safeguard customers against mis-utilization of financing and thus over indebtedness. The regulatory environment for developing Islamic MF in Pakistan is quite conducive as detailed guidelines for Islamic Microfinance industry including detailed licensing criteria are already available. Going forward, support is being provided by SBP to the Islamic MF industry for capacity building, coordination & collaboration among various stakeholders, focused research and pilot projects to develop this sector.

Financial inclusion

Due to several conflicting objectives of government and banks which goes hand in hand, rural areas of developing nations are still not in the shadow of banks. Although efforts are being made for promoting financial inclusion in the country. In recent years, financial inclusion is one area where stakeholders of the financial ecosystem have been focusing lately as part of a broader strategy to reduce poverty, encourage economic development, and promote stability and security. The term ‘financial inclusion’ refers to the provision of accessible, usable, and affordable financial services, either through the formal or informal financial sector, to underserved populations. Financial inclusion also applies to ‘underbanked’ communities, where people lack reliable access to or are unable to afford the associated costs of financial services. On a macroeconomic level, financial inclusion is linked to economic and social development, and improvements in financial access have been shown to contribute to reductions in extreme poverty and wealth inequality. Additionally, expanded access to the financial sector helps finance small business and microenterprise: a positive correlation has been found between financial inclusion and employment opportunities, and it is generally believed to positively affect economic growth.


In Pakistan, three sectors that have witnessed tremendous growth in terms of innovation and users are Information Communications Technology (ICT), telecommunications and financial services. By joining hands, they could bring millions of marginalized people into formal banking channels. The exclusion of an entire customer base from the formal financial sector has created a window of opportunity for financial service providers in creating digital value propositions. Digital banking is likely to provide huge impetus to financial inclusion. Surrounded by so much potential, it is likely that financial service delivery coupled with technology will have a transformational impact on the world’s unbanked and financially excluded populations.

Financial inclusion status is more likely to improve through technological advancements as:

  1. Conventional banking models are not feasible for low ticket size of transactions, deposits, loans etc.
  2. There is a lack of awareness of financial products.
  3. There is a high requirement of trained and skilled manpower.
  4. Consumer behavior is changing towards rapid adoption of digitization.
  5. Demographic dividend is likely to create a large digital savvy customer segment.
Access to finance

Access to financing is now widely acknowledged as a path to meaningful economic inclusion and reduction in poverty. Policy efforts to increase access to finance in Pakistan have taken time to bear fruit, but now access is indeed expanding quickly in certain financial sectors (microfinance, remittances) albeit from a very low base. Nevertheless, policy measures cannot single-handedly increase financial access; financial institutions’ willingness to expand access in Pakistan has been stinted by slow technologic advances, weak legal foundations, and unsuitable financial processes and products.

Major constraints to financial access, despite policy reforms, arise from the high levels of poverty, combined with low awareness of and information about available financial services, as well as gender bias. Technology can be harnessed to help expand geographical outreach, as well as overcome low literacy levels. Physical access can be stepped up using a two-pronged strategy, in view of limited financial infrastructure and penetration via existing agencies with higher penetration as well as via new technology solutions such as branchless banking and mobile banking.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

Check Also

Pakistan garners support to avert FATF blacklisting

Pakistan garners support to avert FATF blacklisting

Finally, Pakistan managed to garner much-needed support from three-member states of the Financial Action Task …

Leave a Reply