Improving financial inclusion in Pakistan under bilateral relations with China

Improving financial inclusion in Pakistan under bilateral relations with China

Lack of access to financial services is a direct barrier to many important services that underwrite development and social inclusion. Even though financial inclusion is not a standalone goal itself. Currently, it has been identified as an enabler for seven of the 17 Sustainable Development Goals. For this reason, researchers are increasingly integrating financial inclusion objectives into projects that focus on issues pertaining to economic growth, women empowerment, agriculture and other development objectives. There is a significant potential in financial services to spur solutions to some of the most pressing challenges in international development. Thus, tackling this issue will require financial services which are underpinned by innovative solutions, made attainable and more effective through the use of digital finance.

CPEC and its benefits have been discussed widely and in detail since the agreement was signed. The money is not the only thing being transferred to Pakistan as part of the deal. The spillover benefits such as technology, experience and knowledge make the real difference. China is anticipated to play a pivotal role in strengthening the capacity of the Pakistani government to design and introduce effective policies for rapid and continued social and economic advancement.

One of the most important issues that China can help Pakistan deal with is financial inclusion. Currently, in Pakistan only 21.3 percent of the total population has bank accounts in formal financial institutions with a gender gap of 27.6 percent. To be part of the real economy, banking needs to be convenient and within the reach of the common man. And the solution is in people’s hands: cellular phone. At present, 34 percent of Pakistan’s population uses a smartphone with a broadband connection and according to a study by Google this number is expected to grow significantly due to the increasing availability of inexpensive smartphones and internet services in the near future. While, currently only 21.3 percent of adults have registered bank accounts, this discrepancy provides an opportunity to accelerate inclusive financial growth promptly and without the need for major investment in costly additional infrastructure. Particularly, in this case Pakistan can learn from China in terms of the formulation and implementation of financial innovation in Pakistan.

Recently the use of mobile phones for financial transactions has grown in China like nowhere else in the world. China has become a major global player in mobile payments with almost 11 times the transaction value of that of the United States. This has led to huge progress in financial inclusion which is combined with China’s conducive policies and regulations, strengthening the banking sector. This can also be attributed to the rapid spread of payment apps like Alipay and We Chat Pay that have spearheaded the country’s digital finance innovation and made financial services available to millions.

The accumulated experience of both these tech giants in mobile payments stems from years of chasing the urban users with convenient and need-based services. They have generated a seemingly endless list of user services by linking mobile wallets to almost every consumption or bill payment service. Likewise, financial institutions in Pakistan need to design products and services that reflect an average Pakistani’s everyday needs more accurately. The password or biometric controlled mobile wallets are more secure and can protect against fraud. Whereas, on the demand side, digital finance providers need to improve the perceived need of financial services for the masses.

Chinese and Pakistani government can set up credit lines in affiliated banks for stakeholders involved in special economic zones. They can offer financial services such as microfinance for small and medium businesses to enable them to participate in trade along the CPEC routes

This limitation can be traced back to two factors. First, is the limited financial literacy i.e. only 20 percent. Second, the nature of Pakistan’s economy is still cash driven as ATMs are scarce and mostly merchants accept only cash. Hence, client-centric product and service designs combined with increasing merchant acceptance of non-cash transaction tools will help expand the access and usage of the financial system. Another consequence of this bilateral relationship is the cross-border expansion of commercial banks and other financial institutions. China can incentivise its state-owned and local private banks to set up branches in partnership with Pakistani banks to tap this promising but underdeveloped market.

Under the CPEC, China has already planned the installation of fiber optics and satellite internet connections in remote areas of Pakistan. This will help enhance the internet user density. Hence, there will be a wider access to digital financial services.

Since, CPEC is expected to create employment opportunities for locals along the route of the economic corridor, it can be made mandatory for the local workers employed in CPEC projects to have accounts with formal financial institutions where their salaries are directly credited.

The Chinese and Pakistani government can set up credit lines in affiliated banks for stakeholders involved in special economic zones. They can offer financial services such as microfinance for small and medium businesses to enable them to participate in trade along the CPEC routes. Hence, attracting relevant parties to formally register with financial institutions.

Simultaneously, Chinese private sector also actively participates in Pakistan’s financial inclusive growth. Currently, Ant Financial, the internet finance affiliate of e-commerce giant Alibaba Group Holding Ltd, has already bought a 45percent stake in Telenor Microfinance Bank (TMB) that is one of Pakistan’s largest mobile financial service providers. This strategic partnership combines TMB’s knowledge and local market presence consisting of more than 20 million customers, and Ant’s technology in Alipay, the world’s largest digital payment platform and other financial services; to bring mobile payments and other inclusive financial services to individuals as well as small and micro businesses in Pakistan. Given Pakistan’s current dynamics, the market is ready for transition to cashless payments. It will not only help the economy grow as more money in banks will mean more investment opportunities for the industry but will also help individuals save more as they will have credit available based on their payment history, which will be established through the payment pattern data stored in apps.

The direction is set, the market is ripe and it is time that Pakistan implements world-class payment solutions for masses to adopt with the help of China. Since the last decade, China has expanded its financial inclusion tremendously. Unless Pakistan involves both the Chinese government and private investors and uses their technical and advisory support to boost its inclusive financial growth to gain comprehensive mutual benefits from CPEC, it will remain hostage to economic constraints due to under-banked population and limited digital financial infrastructure.