Nov 26 - Dec 2, 2012

The Economist Intelligence Unit ranked Pakistan number one in the world for microfinance regulations. Hence, from a regulatory perspective, we have the ideal scenario to start a financial revolution

Pakistan is in desperate need of a financial revolution. Only 12 percent of the population has access to credit, and the total number of bank accounts after double counting is less than 15 million. This is a country of 180 million people. If that was not bad enough! Commercial banks gorging on treasury bills and an unprecedented seven percent net interest rate spread, (the difference between what a bank pays on an average on its deposits and what it charges on its loans) has resulted in the value and volume of commercial bank loans to the private sector is shrinking. The most affected segments are SME's and consumers. The branch network of commercial banks is a paltry 12,700 and that too is concentrated in the top five cities. The commercial banks have neither the desire nor the will to address needs of banked in the rural areas, let alone the unbanked across the country. Partly because of this, Rs 1.8 trillion sits outside the banking system, depriving it of potential credit creation.

There is enough empirical evidence to support the direct linkage between economic growth and financial inclusion. A recent Boston Consulting Group study in Pakistan disclosed that an increase in financial inclusion would have a direct impact on our GDP growth. The three main ingredients for a financial revolution to happen is an enabling environment, a pervasive and variable cost distribution system and an Eco system.

An enabling environment means that relevant stakeholders have regulations in place for the two pillars of the financial revolution - branchless banking and microfinance. Pakistan is one of the few countries in the world where the two principal regulators for branchless banking, i.e. the State Bank of Pakistan and the Pakistan Telecom Authority are on the same page. The two regulators have issued branchless banking regulations and created the first bank led model. These regulations have been reviewed all over the world and are viewed as cutting edge. Gates Foundation believes it is the model of the future.

As it happens, Pakistan also has exemplary regulations for microfinance. In fact, the Economist Intelligence Unit ranked Pakistan number one in the world for microfinance regulations. Hence, from a regulatory perspective, we have the ideal scenario to start a financial revolution. The second requirement to enable a financial revolution is pervasive distribution. An alternate to the existing bricks and mortar commercial bank network must exist. The alternative network must be both brick and mortar as well as digital. It must be an existing network so that the incremental cost is variable.

We are again in the money. Pakistan has over 110 million mobile phone subscribers and over 500,000 agents (shops) where subscribers buy airtime. The reality is that a financial revolution has already started and the initial results are very positive. Two years ago, Tameer Microfinance Bank and Telenor launched a branchless banking product named 'easypaisa.' The first service was utility bill payments. Rather than stand in a queue outside commercial banks and adhere to their limited banking hours, people wishing to pay a utility bill could walk into any easypaisa location and pay their bill free of charge. They were not required to be existing customers of either Tameer Bank or Telenor, and all they required to transact was the utility bill and cash. Given the number of locations (16,000), the ease of the transaction, the working hours of the easypaisa agents the service became extremely popular. Currently, easypaisa processes over a million transactions per month, with an average value of under Rs 1,000; the product is being utilized by the low income unbanked. Having built confidence with the unbanked, easypaisa next launched a domestic remittance service. To put things in perspective, it is estimated that domestic remittance is currently circa $ eight billion (Rs 720 billion) a year. The informal havala, hundi channels and the Post Office are conducting the bulk of this remittance. The typical transaction is too small for the banking system to handle. Again, the service was to enable potential customers to make a transition easily.

If the barriers were high, resistance to change would trump the service. The SBP understanding the ground realities provided risk based regulations. Hence, customers wishing to transfer under Rs 25,000 a month could approach any easypaisa agent, present their original CNIC card, fill in a simple form (one time) and provide the beneficiary's CNIC card number. As a security measure, the customer also was required to create a PIN. Within three minutes, the money would be available at any of the 16,000 easypaisa agents. This service took off beyond our expectations. On a monthly basis, we now transfer over Rs 3 billion with an average transaction under Rs 3,000. What is encouraging is that the unbanked are willing to pay for value. This means that a financial revolution is financially feasible. Easypaisa has also launched a mobile account, which requires no minimum balance, carrying no monthly charge and can be opened at any easypaisa location. Imagine a 100 million people with bank accounts, able to do transactions like bill payments, domestic funds transfer and also save money. Imagine the 1.8 trillion rupees outside banking net moving to the formal banking sector.

The reason that the revolution has not grown exponentially is due to two factors. Firstly, there is a shortage of suppliers. At present, there are only two suppliers: easypaisa and Omni. Once all the other telecoms and some of the commercial banks launch their branchless banking services, there will be more than 500,000 branchless banking outlets (compared with 10,700 commercial bank branches) and potentially over a 100 million phone owners who can have access to financial services. At an easypaisa location, a customer can open an account, deposit and receive money, make a domestic transfer and pay a utility bill. These services will grow. However, even now, the bulk of the typical needs of an average Pakistani can be fulfilled at these locations. Imagine 500,000 locations all over Pakistan as bank branches for all Pakistanis.

An eco-system will grow to reach its tipping point as more and more services are added. At present, the principal use is a person to person transaction (i.e. domestic remittance). The governments to person transactions are just starting with BISP payments and EOBI payments. What is missing is business to person transactions (for example, salary payments) person to business transactions (buying PIA tickets or paying school fees) business to government transactions (taxes or purchasing government paper) and business to business transactions (supplier payments).

Once these services are available at every branchless banking agent as well as mobile phones, the growth will be exponential. Suddenly, the average Pakistani will have the same access to financial services that the elite take for granted. The transaction volumes and value through this system will overtake the commercial banking system.

The writer is the Founder, CEO and President of Tameer Microfinance Bank.