ONE of the main hurdles in extending financial inclusion has been to increase the outreach of financial services to low-density areas and low-income populations, as this is deemed to be not financially sustainable under traditional banking models and corresponding regulatory requirements.

The problem of financial exclusion is compounded if the focus is shifted towards people living on less than $2 per day, as their income is not only low but also irregular. Thus, they are more vulnerable to external shocks and their cash flows are uncertain.

There are many reasons why individuals or groups may not take full advantage of mainstream financial service providers.

A recent World Bank study shows that the most frequently cited reason for not having an account globally is a lack of enough money to use. The next commonly quoted reasons are: banks or accounts are too expensive; another family member already has access to an account; banks are too far away or difficult to access; and lack of documentation.

The working poor (living on less than $2 a day), who make up over 60pc of the total labour force in developing countries, represent a key target market for expanding financial inclusion. Meanwhile, because small and medium enterprises (SMEs) are overall one of the largest employers of the working poor, the SME market is a big opportunity for expanding financial access.

Pakistan has one of the lowest financial-penetration levels in the world, with 56pc of the adult population totally excluded and another 32pc informally served. The microfinance sector has been able to tap a small fraction of the market, with around 2m active borrowers, as per a 2011 State Bank of Pakistan (SBP) report.

In order to deepen financial inclusion in the country, the regulator should focus more on customer-protection issues, capacity-building of the loan applicants as well as of BB agents, the formulation of an efficient and effective complaint redressal mechanism etc

Mobile banking is the best alternative to minimising financial exclusion. According to a Pakistan Telecommunication Authority report last year, the country’s teledensity had reached 75pc of the population, whereas mobile penetration stood at 76.6pc and total mobile subscribers numbered around 139.9m.

Mobile services are being availed nearly by every Pakistani regardless of his or her income level and social status. They not only serve the basic purpose of communication but are in fact helping business concerns and the country’s economic well-being.

The SBP developed branchless banking (BB) Regulations in 2008 and revised them in 2011 by enhancing know-your-customer (KYC) requirements and agent due diligence.

BB operations through ‘agent banking’ are gaining popularity in most developing countries. In Pakistan, the BB agents’ network has grown to 204,073, according to the SBP Branchless Banking Newsletter October-December 2014). The network is spread across almost 95pc districts of the country, largely through Telenor and Tameer Bank’s Easypaisa and UBL’s Omni.

Pakistan has achieved lot of milestones in building infrastructure for smooth and equitable access of financial services through the creation of a regulatory framework over the years. In 2011, the Economist Intelligence Unit’s Global Microscope Report ranked Pakistan as the best country having microfinance regulations, while the Global Microscope 2014 put it among the top 10 countries with enabling and conducive environments for financial inclusion.

Despite these continuous efforts, the level of financial inclusion is very low. Only 10.30pc of adult Pakistanis have an account with a formal financial institution, which is far below the South Asian average of 33pc and all middle income countries’ average of 41.4pc, as per the National Financial Inclusion Strategy 2015.

Developments in BB operations: The SBP had issued BB licences to eight banks by December 2014 and they were rolling out full-scale BB operations. One of the primary impediments to providing financial services to the poor through branches and other delivery channels is the high cost inherent in these traditional methods. The emergence of alternative delivery models has drastically changed the economics of banking the poor.

Developing an agent channel presents a range of technological and operational challenges for a bank. The challenge is particularly greater for banks pursuing agents to offer financial services to those who previously had no bank accounts. The success of BB operations relies mainly on agents as they are the ones providing frontline customer services.

In order to deepen financial inclusion in the country, the regulator should focus more on customer-protection issues, capacity-building of the loan applicants as well as of BB agents, the formulation of an efficient and effective complaint redressal mechanism, and the interoperability of mobile financial services.

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