Pakistan needs GDP growth driven through domestic investment as it usually more reliable, sustainable and less volatile compared to the foreign investment. Usually, investment comes in with the snowball impact i.e. greater investment means greater employment, income, spend and possibly further investment.
Domestic investment is mainly dependant on local savings or domestic credit to the private sector. Unfortunately, both are facing significant headwinds. In 2005, Pakistan’s domestic credit to the private sector and domestic savings were at 29% and 15% of the GDP respectively. However, by 2018, they both dropped to 19% and 6% of the GDP respectively.
There are different economic factors driving the headwinds however lack of financial inclusion is one of the major ones. Financial Inclusion refers to the efforts of making financial products and services accessible and affordable to all individuals and businesses. There is a strong correlation between developed countries and financial inclusion i.e. generally more developed the country, higher the proportion of Financial Inclusion. Financial inclusion has many benefits such as that;
- It encourages and provides people a platform to save money
- Providing banks with higher deposit base to lend a greater amount of credit to households and businesses
- Providing significant productivity gains for individuals and businesses as they can manage their cashflows online or by phone, allowing greater time for their core businesses or value add activities
- Removing inefficiencies as lenders support and encourage efficient business models and industries
Unfortunately, Pakistan is lagging in Financial Inclusion. Findex report 2017 reported that only 20% of the adults in Pakistan have bank accounts. This is significantly behind the international average, including regional countries such as Bangladesh (50%), India (80%), Nepal (45%) and Sri Lanka (74%). Among the countries where half or more adults are unbanked, Pakistan has the largest number of unbanked adults in the world.
As a result, banks in Pakistan have a limited deposit base for which they take a conservative view to only lend to large corporate and government bonds. Therefore, their credit to agriculture and small businesses has immensely dropped to negatively impact the overall economy and GDP growth.
Hence, Pakistan must prioritise financial inclusion. Not only it is a medium to enable greater savings and lending within the financial system but it has many other significant benefits such as
- Efficient allocation of resources
- Risk mitigation for savers
- Facilitation of trade
- Wealth accumulation for savers through added return or profit
On a positive note, Pakistan does not need to reinvent the wheel on how to improve financial inclusion. They are a lot of examples globally and especially in South Asia where countries such as China, Indonesia and India improved its financial inclusion.
The Federal Government and State Bank of Pakistan (SBP) as a central bank need to play a critical role in ensuring access to financial instruments for masses and protecting backs from the instability and risks. Below are some of the successful regional tactics which Pakistan can look to leverage and implement:
- Government legislation shall encourage the financial sector to take more risk in lending money and incentivise them to open new customer accounts. This is similar to the Jan Dhan Yojana scheme in India where government-mandated state banks to open a new customer account
- Government to encourage individuals to use the banking system by mandating small to large businesses to use electronic payments for wages and purchases
- Banks to offer government-backed frill accounts where banks offer small overdraft facilities once a new customer is transacting for a certain minimum time period
- Government to legislate strong laws, procedures for recovery in case of bad debts
- Educating businesses about the potential productivity gains by using electronic banking
- Pakistan due to nationwide NADRA electronic identity cards and high usage rate of mobile phones has a strong foundation to build or improve Financial Inclusion. All it needs is for the government and central bank to take the right measure and steps with greater urgency
The writer is a Sydney based banker who has a keen interest in Pakistan’s economy and politics