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Growth of digital financial services in Pakistan: Need of more improvement measures and investment in tech banking

Banking sector accounts for around three-fourth of Pakistan’s financial sector. A robust banking sector is a healthy sign for the economy of a country. It is this sector that plays the role of financial intermediation between savers and investors, which actually determine the rate of economic growth. The banking sector plays a critical role in mobilization of savings from households from across the country and placing them at the disposal of entrepreneurs. There is a dire need to make efforts for making the banking system more inclusive and focus its lending activities on the SMEs and agriculture sector. The banking authorities should reduce spreads between the deposit and lending rates and increase the profits on deposits so as to encourage the depositors to save more rather than consume.

There are reports the international rating agency Moody’s has changed outlook of five Pakistani banks to stable after changing the country’s outlook to positive from negative last week. The Moody’s has kept the rating outlook of the banks unchanged to B-3. While  the Moody’s in a report released in September, said, “Over the next 12-18 months, banks in Pakistan would see their credit profiles challenged by their high exposure to the country’s low-rated sovereign debt and a slowing economy.” The report had said that the banks’ operating conditions would be difficult, as GDP growth slowing to 4.3% in the fiscal year ending June 2019, down from 5.8% in 2018. Moody’s also observed that Pakistan’s banks face the risk of macroeconomic contagion through a range of channels, including their large holdings of government securities, which caps their credit profiles to the sovereign, and from the authorities’ weakening capacity to support the banks in case of need. The rating agency weighs the five largest banks in Pakistan by assets. These banks together by assets account for 50 percent of the banking system deposits.

Initiative for digitization of financial services

Present government and the central bank are working on plan for digitization and financial inclusion in Pakistan. The State Bank has already launched National Payment Systems Strategy (NPSS) and the MPG initiative laying out a clear and solid framework for a digital payments network in the country.

The digital financial services made its way in 2008 when the country adopted branchless banking regulations. In 2015, the country approved the national financial inclusion strategy that further paved the way for digital financial services in Pakistan. Today, a dozen of banks offer digital financial services in the country. The growth of digital financial services owe largely to the support of financial and telecom regulators in the country. It were the policies and regulations of these regulators, State Bank of Pakistan and Pakistan Telecommunications Authority (PTA), that provided enabling environment for growth of digital financial services. The biometric verification of mobile connections in 2015 brought at least 24 million new branchless banking accounts in the Pakistani market.

Last month, the National Institutional Facilitation Technologies (NIFT) signed a deal with Bank Alfalah to facilitate settlement services for digital commerce payments through NIFT’s DFS platform under the brand name “NIFT ePay” using bank accounts. The deal was an effort to promote Digital Financial Services (DFS) in Pakistan. The NIFT is an existing payment system operator offering nation-wide cheque clearing services. It has been providing consistent services to the financial industry over the past two decades. The deal will enable for the first time in Pakistan, the use of bank accounts and wallets to execute secure and interoperable digital commerce payments.


The NIFT ePay and Bank Alfalah banking customers maintaining their account with any member bank of NIFT E-payment scheme will be able to use this facility. Under the deal, Bank Alfalah will act as the settlement bank among NIFT ePay member banks in Pakistan. The settlement bank will also support NIFT for handling disputes/claims e.g. duplicate processing for a seamless customer experience across the industry. The deal will open up a new transaction set for the bank’s account & wallet holders.

Information and communication technologies (ICT) have brought about a revolutionary change in the financial sector. This revolution finds manifestations today in shape of innovative banking products and services such as Automated Teller Machines (ATMs), internet banking, tele-banking and so on. The online banking has accelerated financial inclusion gradually changing the financial landscape in the country. The banking industry, however, faces tough competition unleashed in the global arena. Pakistan has witnessed in recent years a growing trend toward branchless banking, which is actually a distribution channel strategy used to deliver financial services without relying on bank branches. It can also be used as a separate channel strategy that entirely forgoes bank branches. Initially, internet banking was launched in Pakistan to provide a limited number of services. In 2002, the government of former president Pervez Musharraf took a landmark step for promotion of electronic banking in the country by promulgating the Electronic Transaction Ordinance 2002, which provided legal recognition of digital signatures and documentation reducing the risks associated with the use of electronic media in business.

Branchless banking regulation was first introduced in the country in 2008. Today, ATMs, telebanking, internet banking, credit cards and debit cards have emerged in Pakistan as effective delivery channels for traditional banking products.

The banking sector still needs to take effective measures for improving and strengthening its competitive position vis-à-vis the foreign banks. The banking industry must be able to meet increasingly complex banking needs if it is to flourish. Pakistan’s banking system should match the developed countries’ in promoting innovative techniques and upgrading skill level within the banking system. One cannot ignore the nexus between finance and technology in the present age. Innovative technological solutions pose hard challenges to the traditional banking. Today, fintech is bringing a silent revolution in banking industry all over the world. Fintech stands for producing user-friendly, automated and efficient financial products & services.

The country cannot catch up with its Asian neighbors like India and China in terms of economic development without making investment in new banking technology. In the Asian economies, the investors and businesses are looking for more supportive financial services, with a demand for financing solutions, hedge funds, and asset-based securities. The banking Channels play an important role in enhancing the trade of a country with its major trading partners. Pakistan needs to establish and strengthen its banking channels with friendly countries including China, Iran, Turkey and Malaysia with an aim to increase the bilateral volume of trades.

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