Pakistan lags behind neighbours in financial inclusion, report says

KARACHI: Pakistan lags behind its neighbours and other emerging economies in financial inclusion, with a large amount of cash circulating outside the formal banking system, consultancy firm AF Ferguson and Co said on Friday.

The government is making efforts to encourage digital payments in an effort to assist households move away from cash and draw more people into the formal economy, but most transactions are still made using cash.

Cash-in-circulation ratio continues to remain higher in Pakistan at 39 percent, said “Banking Publication 2023: Navigating the Future of Opportunities and Challenges.”

This study by the member firm of the PWC network offers comprehensive trends, insights, and analyses for 2022 and beyond, making it the first thought leadership initiative of its sort in Pakistan.

Kenya has a cash-in-circulation ratio of 9 percent, Bangladesh has a ratio of 16 percent, and India has a ratio of 17 percent when compared to Pakistan, according to the report.

In Pakistan, cash in circulation stands at Rs7.69 trillion, a huge 96 percent increase from Rs3.93 trillion in 2017, approximating 1/3rd of total deposits held at banks, it said. “This increase in cash exceeds 84 percent growth rate in total deposits over the same 5-year period.”

Salim Raza, former governor of Pakistan’s central bank, was quoted in the report. “If cash-in-circulation somehow contracts to around 5 percent to 6 percent of deposits, there may be a sizeable increase in mobilised funds, which through the banking multiplier has the potential to exponentially expand our banking system. This is where digitisation can make the biggest difference,” Raza said.

Despite alternative practical payment methods including cards, RAAST, online fund transfers, and QR being readily available, cash continues to be the dominant payment option, it said. Given the predominate preference for cash and various structural and logistical obstacles related to e-commerce in Pakistan, digital payments for online purchases remain insignificant, it added.

Compared to certain regional peers and emerging economies such as Bangladesh, Sri Lanka, Kenya, and India where financial inclusion is well above 50 percent, Pakistan’s positioning reflects enormous space, the report said.

Around the world, 1.4 billion adults do not have a bank account. Pakistan is home to 120 million financially excluded adults or 9 percent of the world’s unbanked population.

Global Findex Database 2021 reports financial inclusion ratio of 21 percent for Pakistan, stagnant since 2017, the report said.

Financial Inclusion Survey released in February 2023 by Karandaaz Pakistan, however, indicates a rise in this ratio to 30 percent in 2022.

According to the World Bank, financial inclusion means that people and companies have access to practical and reasonably priced financial services and products that satisfy their needs for transactions, payments, savings, credit, and insurance that are provided in a responsible and sustainable manner.

The analysis quoted the Global Findex Database 2021 to state that the most often cited reasons for not opening bank accounts range from a lack of documentation, decreased trust, religious considerations, and physical closeness of branches, to affordability of financial solutions, and insufficient finances.

“On-going measures by the government and regulators around limited KYC [know your customers] account schemes, broadening access to financial services, and financial literacy – to name a few, may help boost this vital benchmark, going forward,” it noted.

While rate of women inclusion reached double digits from 7 percent in 2017 to 14 percent in 2021, relative positioning vis-à-vis certain other economies represents vast scope for intervention.

Lack of CNIC, mobile phone access, and basic numeracy skills are key hurdles commonly cited for low inclusion. Whilst these apply for both genders, the widest disparity may exist for financial literacy and mobile SIM ownership, the report observed.

Over the last 3 years, some banks have introduced women-centric propositions, with females at these institutions now comprising 20-25 percent of the customer base, with an active account ratio between 60-70 percent.

Generally, people who are unbanked are also those who are the hardest to reach and may mainly include those residing in rural areas. Financial inclusion in rural Pakistan stands at 15 percent, and in terms of value is 16 percent of the total deposit balance held by individual customers as of June 2022, according to the report.

Some banks are actively working on broadening access to financial services through a physical footprint complemented by digital propositions. They have managed to optimise rural accounts in the range of 25 percent to 35 percent of the total individual customer base.

In relation to banked population, there has been gradual increase in low value accounts since 2017, relative to the total number of accounts. Recent trends also indicate 31 percent decline in the number of accounts held by businesses ie from 8.9 million in 2017 down to 6.1 million in 2022, it noted.

Introduced in 2008 with the primary objective of financial inclusion and option for remote on-boarding, today there are 16 branchless banking players with 97 million wallets, holding an aggregate balance of Rs88 billion. Over the last 5 years, the balance per wallet has slowly increased from Rs565 to Rs900.

The active account ratio over the same period, however, has declined from 52 percent to 44 percent.

“Industry has been successful in acquiring new to bank customers on wallets but the activity in those wallets needs to significantly increase,” Muhammad Yahya Khan, Group Head-Digital Banking, Bank Alfalah Limited said in the report.