Money Matters

Uncertain times for EMIs

By Zeeshan Ahmad
Sun, 03, 24

In the rapidly evolving and turbulent landscape of Pakistan's financial technology sector, Electronic Money Institutions (EMIs) find themselves at a crossroads amid regulatory curbs on margins, increasing costs of doing business, and other operational challenges.

Uncertain times for EMIs

In the rapidly evolving and turbulent landscape of Pakistan's financial technology sector, Electronic Money Institutions (EMIs) find themselves at a crossroads amid regulatory curbs on margins, increasing costs of doing business, and other operational challenges.

The recent news stories surrounding a distressed deal between SadaPay and Turkish fintech Papara, which was preceded by a similar sale of Finja to OPay, have cast a spotlight on the precarious position of fintech companies in the country. This underscores the need for regulatory intervention to ensure the stability of the sector.

The investment climate for startups in Pakistan has notably shifted in the past few years. The once-burgeoning flow of venture capital that marked the mid-2010s has experienced a significant downturn. In the heyday of Pakistani tech startups, investments flowed generously, fostering a vibrant ecosystem of innovation and entrepreneurship. However, in 2023 Pakistani startups only managed to attract $75.6 million, which is a drastic reduction of 77.2 percent year-on-year.

Economic uncertainties, coupled with global financial constraints, have led to a cautious approach from investors. This drying up of funds has placed additional pressure on EMIs and tech startups, which already grapple with operational and regulatory challenges.

The macroeconomic conditions of the country, particularly the rampant inflation and currency devaluation, further exacerbate these difficulties. Companies like SadaPay, which aim to revolutionize the digital finance space, are hit hard by these economic tremors. Inflation erodes the purchasing power of consumers, making it challenging for EMIs to maintain a steady growth in user base. Moreover, the depreciation of the Pakistani rupee against major currencies like the US dollar adds a layer of complexity to financial operations, especially for fintech firms dealing in international transactions.

Adding to the woes of EMIs and startups, the government has introduced new fiscal measures, including increased taxes on transactions, a super tax on certain sectors, and higher income tax rates for salaried individuals. These measures, intended to bolster the national treasury, inadvertently place a heavier burden on the fintech sector. The increased tax on transactions directly impacts the bottom line of EMIs, which operate on thin margins in a competitive landscape.

Furthermore, the hike in income tax for salaried individuals has had an unintended consequence on the tech talent pool in Pakistan. The allure of freelancing, which offers tax incentives and payments in stronger foreign currencies like dollars, has become increasingly attractive. This shift is not only due to the financial benefits but also the flexibility and global exposure that freelancing affords. As a result, EMIs and tech companies face an uphill battle in retaining talent, with professionals opting to freelance for foreign tech companies or pursue opportunities abroad, notably in the US and Saudi Arabia. This talent drain not only deprives the local tech ecosystem of its brightest minds but also challenges the growth and innovation potential of EMIs.

Regulatory limits restrict the transfer of funds from traditional bank accounts to digital wallets to a meager Rs. 5000, making it impossible to conveniently fund digital wallets. This is concurrent with caps placed on interchange fees chargeable by EMIs like SadaPay and NayaPay , which issue debit cards to citizens underserved by the traditional banking sector. Such restrictions become like ankle chains for these start-ups to generate revenue from customer deposit float and transaction fees as they attempt to stay afloat.

The State Bank of Pakistan (SBP), as the banking regulator, is urged to step in and provide a framework that can address and prevent crises similar to those experienced by traditional financial institutions in the past. The SBP has demonstrated its commitment to ensuring the stability of the financial sector through strategic interventions.

For instance, in 2015, KASB Bank faced a moratorium due to its failure to meet the SBP's minimum capital requirement. After six months, the bank was merged with BankIslami Pakistan, aiming to protect depositors and preserve financial system stability. Similarly, in 2010, MyBank's liquidity challenges led to its merger with Summit Bank, showcasing the SBP's role in safeguarding depositor interests.

Amid these developments, concerns have been raised by employees and customers of SadaPay. Discussions on Twitter and various websites such as have highlighted allegations of unpaid salaries for months, pointing to potential deeper issues within this startup. These allegations, if true, not only raise questions about financial management but also highlight the broader struggles faced by EMIs in meeting required regulatory capital, sustaining operations, and retaining talent in Pakistan's challenging economic environment.

The fintech sector has seen its fair share of aspirations and setbacks. Companies such as PayMax, Careem Pay, Checkout, and YAP ventured into the EMI space with high hopes but found the journey fraught with obstacles, leading to the surrender of their licenses and applications. The SBP's lowering of margins on debit card transactions, high regulatory overheads, skyrocketing inflation, and the persistent depreciation of the Pakistani rupee have compounded these difficulties.

It's pertinent to note that the SBP has recently awarded five digital banking licenses. However, despite this progressive step, none of the licensees have yet launched their services, possibly due to the same set of challenges faced by existing EMIs. The increased costs and regulatory burden, coupled with the economic uncertainties prevailing in the country, may be hindering the progress of these digital banking initiatives. While the issuance of these licenses holds promise for expanding financial inclusion and innovation, without proactive measures to alleviate regulatory constraints and create a conducive environment for digital banking, these new ventures risk facing a similar fate as previous fintech aspirants such as Paymax and Careem Pay, ultimately jeopardizing their viability and potential contribution to Pakistan's financial ecosystem.

While the promise of digital finance remains vast, the path forward is mired in regulatory, economic, and operational hurdles. The SBP's proactive engagement and the formulation of supportive policies could be necessary for fostering a stable and thriving digital finance sector. As the landscape evolves, the resilience and innovation of Pakistan's EMIs and the upcoming digital banks will be tested. However, with the right mix of regulatory support and internal governance, they can navigate these uncertain times towards a more secure and prosperous future.

The write is an industry official