Big gap in financial services
A HIGHER economic growth and reduction in poverty cannot be achieved without creating equal opportunities for all individuals to develop their capabilities and incomes.
Financial inclusion (FI) is considered to be a key tool for poverty alleviation. In Pakistan the low level of FI is due to a number of reasons such as the shortage of financial service providers and their unwillingness to serve the poor, and the lack of awareness, financial literacy and education among the poor. Here comes the role of the state.
Just 10.3pc of Pakistani adults have formal bank accounts and only 3pc borrow money from a formal financial institution (even though the banking sector dominates financial services, representing 90pc of total financial sector assets).
The government has only one crop loan insurance scheme in place. Those who do not avail loan remain out of the ambit of insurance
No doubt, the government has taken a number of steps to provide financial services to the untapped segments of society. The State Bank of Pakistan initiated the Financial Inclusion Programme in 2008 with a focus on financing of micro and small enterprises, low-income housing and rural development.
In 2014, Global Microscope ranked Pakistan in top 10 countries for its efforts on the FI. Last year, Economic Intelligence Unit of The Economist, London, has ranked Pakistan 5th in the world among 55 countries surveyed for policies to promote financial inclusion.
Yet the situation does not seem to be rosy when Pakistan’s performance is compared with some other developing countries like Kenya, Tanzania, Nigeria, Uganda and Bangladesh.
However, things have begun to change. Pakistan is one of the fastest growing markets for branchless banking contributed by three factors: ease of use, safety and speed. Around 7pc of the adult population use mobile money, but just 0.4pc of them have registered mobile money accounts.
In housing finance, the total number of outstanding loans (for all banks and development finance institutions) is just 76,000 with a mortgage loan portfolio amounting to Rs58bn or 0.6pc of GDP (September 2015). The insurance penetration ratio is just 0.93pc (premium/GDP ratio), which is one of the lowest in the region. To quote the State Bank, the insurance coverage ratio is just 7pc mainly in urban areas and a large rural part of the country is still neglected.
This shows the limited effect of the financial inclusion programmes and government initiatives, which do not target the most poor and marginalised segments of population.
The five-year National Financial Inclusion Strategy (2015-2020) envisions: “Individuals and firms can access and use a range of quality payments, savings, credits and insurance services which meet their needs with dignity and fairness”.
However, the bleak FI situation demands serious efforts with primarily focus on the agricultural sector to address the issues of food security and malnutrition.
The FI programmes have urban bias. Currently, 85pc of farmers are formally excluded from the financial services. Agricultural loans only account 7.6pc of the total bank loans and that too with the lending concentrated in Punjab. The informal credit market is dominated by Arthis (middle men), who charge exorbitant interest rates.
Low-income farmers are also badly affected by climate change. Pakistan has suffered cumulative losses of $39bn until 2014 due to 25 major floods. In the super flood of 2010, the country suffered a loss of $10bn, out of which 50pc occurred in the agriculture sector alone, which contributes 20.9pc to GDP.
The government has only one crop loan insurance scheme in place. Those who do not avail loan remain out of the ambit of insurance. That’s why only two out of the 7m farm households were insured during the 2010 super flooding.
We do not have any single universal insurance cover available to the farmers. This affects not only the farmers but the whole rural population with most of them relying on farm income. Credit and insurance programmes having pro-poor agriculture bias need to be designed and implemented vigorously.
Published in Dawn, Business & Finance weekly, February 1st, 2016