PAKISTAN’S initiatives towards achieving financial inclusion are apparently paying off and some, though nominal, improvement is visible in the outreach of formal financial services.

But at its current level, financial inclusion is still not wide and strong enough to make a real impact on sustainable economic development. Various societal segments and sub-economic groups remain deprived of access to formal financial services, while the distribution of these services remains uneven from various angles. This continues to fuel the growth of the black economy.

According to official data, 16pc of Pakistan’s adult population now has a bank account, including mobile wallets, up from 11pc in 2008. Speaking at the launching ceremony of the SBP’s Access to Finance Survey 2015 two weeks ago, SBP Governor Ashraf Wathra informed that in 2008 only 12pc of adult Pakistanis had access to formal financial services; the number has now almost doubled to 23pc.

‘Documentation of the economy and blocking of opportunities for a wide circulation of ill-gotten money are as much important as the central bank’s drive to push banks to reach out to unbanked people’

More importantly, only 4pc of women had access to formal finance in 2008, but now about three times more women (11pc) have access to this facility.

The central bank has taken several initiatives in this area since 2008 and above-cited statistics speak for the success of these initiatives. They include mobile banking, franchising limited banking services to cellular phone companies, focus on Islamic finance, allowing microfinance banks to spread their wings and reforms in agricultural credit programmes.

The first Access to Finance survey has been launched to achieve the dual purpose of gauging the impact of the SBP’s financial inclusion initiatives and to obtain baseline data for the central bank’s National Financial Inclusion Strategy, which was unveiled earlier this year.

“In our culture, as elsewhere in the world, we see both voluntary and non-voluntary exclusion from financial services,” says a central banker. “Whereas regulatory authorities like the central bank can address the issue of non-voluntary exclusion to promote financial inclusion, other societal segments, including the government, have more direct roles to play to address voluntary exclusion.”

And unless voluntary exclusion is properly analysed and its causes are remedied, financial-inclusion drives are bound to remain wanting, he says, adding that cultural and religious reasons can be bracketed into voluntary exclusion.

“That is where Islamic banking comes into the picture and the SBP is making efforts to promote financial inclusion through Islamic banks and clusters of dedicated IB branches of conventional banks. But religious scholars, academics and the government also have to play more active roles to put an end to voluntary exclusion from formal financial services.”

A former chairman of the Rice Exporters Association of Pakistan once told this writer that he had stopped borrowing money from not only conventional banks but also from IBs because he believed Islamic banking in the country was also not purely Shariah-compliant.

This mindset is promoting individual- or group-lending and borrowing in the markets. Little do these people realise that exclusion from formal financial services is bound to promote informal money transactions and the informal economy.

“From the perspective of financial inclusion, documentation of the economy and blocking of opportunities for wide circulation of ill-gotten money are as much important as the central bank’s drive to push banks to reach out to unbanked people,” says a central banker.

“When a lot of money is circulating in the black economy — currently estimated at around 75-90pc of the formal economy — the need for access to formal financial services is compromised [thus negatively impacting financial inclusion].”

“The challenges for the promotion of financial inclusion are deep, diverse and difficult,” says a former SBP deputy governor. “While there is some voluntary financial exclusion in our society, there are many areas of involuntary exclusion where the central bank alone can make lots of improvement.”

Discrimination, lack of information, weak contract enforcement, product features and price barriers due to market imperfection are generally regarded as some key reasons for involuntary financial inclusion. “Instances of each of these can be found in our recent banking history,” he says.

For example, whereas total assets and deposits of the banking sector doubled since 2008, the ratio of private sector credit to GDP declined from 22pc in 2009 to 14.7pc in June 2014. Similarly, bank credit to small and medium enterprises (SMEs) fell from 16pc of total bank lending in 2008 to 7pc in June 2014.

In a country with a population of over 180m people, just around 71,000 housing loans are outstanding in the banking sector.

Meanwhile, banks have been investing heavily in government debt papers and private businesses now get slightly more than 40pc of overall bank credit. As of June 2014, this supply was “skewed towards larger enterprises with around 0.4pc of bank borrowers accounting for 65pc of all bank loans,” pointed out a SBP report.

This indicates how seriously the central bank and the government will have to work to make the financial inclusion drive a real success, and how long and arduous this journey can be.

Published in Dawn, Business & Finance weekly, December 28th, 2015