Microfinance and Digital Banking Can Transform Developing Countries Like Pakistan
FEATURED BLOG
Microfinance and Digital Banking Can Transform Developing Countries Like Pakistan
—
By Mueed Asif
June, 2024
Pakistan is home to 3 percent of the world's population, comprising 240 million people, and 8.2 percent of the world's unbanked adults, totaling 115 million individuals. Up to 40 percent of Pakistan’s population – 95 million people – live on less than $3.65/day and women, poor and less educated adults account for the majority of those excluded from the formal financial sector, according to the World Bank. Ironically, it is these people who need to save, borrow, and gain access to credit the most. This perpetuates a vicious cycle of intergenerational poverty, inequality, and inequity.
A blend of microfinance and digital banking can offer a gateway to enhance financial inclusion, alleviate poverty and inequality, and ensure inclusive and sustainable economic growth in Pakistan.
A Brief History of Microfinance
The concept of microlending can be traced back to the Irish Loan Fund System introduced by Jonathan Swift in 1720 to help impoverished Irish citizens. It gained popularity due to the success of Grameen Bank, founded by Muhammad Yunus in Bangladesh in 1983. By providing small, long-term loans with relatively easier conditions to people lacking access to traditional banking, Yunus helped the poor start businesses, impacting a quarter of Bangladesh’s population while winning a Nobel Peace Prize in the process. The success of microfinance globally sets a strong precedent for its potential in Pakistan.
The Current State of Microfinance in Pakistan
The microfinance sector in Pakistan has demonstrated significant growth and resilience over the past years, posting a CAGR of 22.8% in 2015-2021, driven by technological advancements and institutional support.
According to the State Bank of Pakistan, currently, there are 11 Microfinance Banks (MFBs) in Pakistan with 4000+ branches catering to 9.4 million borrowers, and the sector's gross loan portfolio has surged to approximately PKR 550 billion (about $2 billion). Microfinance is embedded in Pakistani society, providing financial services to those who need them most. Despite the current challenges, the potential for growth remains significant, especially with the integration of digital technologies.
Going Digital: Banking 2.0
Pakistan's proactive approach to digital integration stands out as a catalyst in the banking space. Pakistan is paving the way for a progressive, technologically-advanced financial system through several measures, including the launch of digital onboarding of customers in 2021; Raast, which is an instant payment system for bulk and person-to-person transfer of funds in 2021 and 2022; and rolling out licensing and regulatory frameworks to provide an enabling environment to digital banks and fintechs in 2022.
Moreover, the industry, led by leading telecom players, is shifting toward nanofinance, which offers smaller, tailored loans with automated approval processes, targeting those not reached by traditional microfinance. JazzCash and EasyPaisa, both of whom belong to microfinance banks, Mobilink Microfinance Bank and Telenor Microfinance Bank, respectively, offer branchless banking and all-in-one digital payment services via mobile.
According to the Digital 2024 report for Pakistan, as of early 2024, there are 189 million mobile cellular connections in Pakistan, equivalent to 78 percent of the total population. Meanwhile, internet penetration stands at around 46 percent with 111 million internet users. These numbers are expected to continue to increase, especially as the private and public sectors work together to improve the digital infrastructure in the country, launch 5G technology, and mobilize investment.
The promise and potential of digital financial services haven’t gone unnoticed. Ant Financial invested $184.5m in Telenor Microfinance Bank back in 2018 and has since then been strategically expanding. In 2022, Sequoia and Kleiner Perkins co-led the seed round for fintech firm Dbank, which raised $17.6 million, in Pakistan. UAE-based Mashreq Bank and Raqami, a venture-backed by Kuwait Investment Authority, secured digital banking licenses to operate in Pakistan in 2023. ZoodPay, a Switzerland-based buy now, pay later (BNPL) platform, acquired Pakistani digital microfinance company Tez Financial Services and Turkey’s largest fintech Papara acquired the Pakistani fintech, SadaPay in 2024.
Financial Inclusion & Empowerment
In Pakistan, microfinance was championed by Akhuwat, founded by Dr. Amjad Saqib in 2001. The initiative revolutionized microfinance by offering interest-free loans. Starting with a $100 seed fund, Akhuwat has disbursed over $1 billion and positively impacted 6 million families.
Initiatives like the Asaan Mobile Account Scheme, through which anyone in Pakistan can open a bank account in under two minutes and get access to formal banking services, are a step in the right direction. So far, more than 10 million people have opened accounts through this scheme.
By going a step further and extending credit to the underserved, low-income individuals overlooked by traditional microfinance. Pakistan can make giant strides toward creating a resilient, inclusive, and prosperous nation. There have been several initiatives recognizing the importance of enhancing access to credit in Pakistan. For instance, the International Finance Corporation (IFC) is considering investing in the country's microfinance sector, and the Asian Development Bank (ADB) has approved $155.5 million to improve women's access to credit.
Parting Thoughts
As Pakistan continues to grapple with deep-seated economic woes and geopolitical tensions, microfinance paired with digitization offers a promising path to uplift the poor. This approach ensures that individuals are not just beneficiaries of aid but active participants in rebuilding their lives and transforming Pakistan. However, several key factors must be addressed for this vision to materialize. First, a favorable investment climate is essential to attract capital and talent to promote microfinance and nanofinance initiatives. Second, stringent regulation and effective supervision are crucial to safeguard people from predatory lenders who charge exorbitant rates, ensuring that financial services remain fair and accessible. Finally, a continuous push for digitization and innovation will help streamline processes, increase efficiency, and expand reach.
This piece is written by Mueed Asif, Research Analyst, Botho Emerging Markets Group.