The rapid rise in the digitisation of financial transactions and payment systems promises to transform micro, small and medium enterprises (MSMEs). But how fast this transformation can deliver big results depends on how soon the nation gets used to the post-pandemic new norms of life.

On 15th October 2021, the State Bank of Pakistan (SBP) made a major move to boost the usage of digital payments and digital finance. The central bank made it mandatory on banks, microfinance banks, Payment System Operators (PSOs) and Payment System Providers (PSPs) to ensure the provision of such facilities to their institutional clients including corporations, companies and partnerships etc. It asked them to make all efforts to take on-board individuals, sole proprietors and MSMEs as well regarding digital payments and digital financial services. The SBP also required them to submit quarterly reports about the compliance of its instructions.

This move is one of the several that the SBP has made in the past year to promote the digitisation of payment systems and financial services. And, the main objective of all these moves is to catch up with the fast-paced, post-pandemic changes in the dynamics of domestic and international trade and financial transactions.

Exactly one year ago, in February 2021, the SBP had directed all banks, microfinance banks, PSO and PSPs to enable fully interoperable digital payment options for their customers for repayments on consumer finance facilities.

The latest incentive package allows IT and ITeS companies and freelancers to retain 100pc of the remittances received through banking channels in their foreign currency accounts without having to convert them into rupees

Consequently, the repayment option became available on customers’ alternative delivery channels including internet and mobile banking.

Earlier, in January 2021, the central bank had launched the first phase of an instant payment system Raast to facilitate transactions from organisations to persons — or for bulk payments. Now, the SBP has introduced the second phase of it for peer-to-peer transactions.

Even before the entry of the first wave of Covid-19 in Pakistan two years ago, the SBP was busy setting the stage for the promotion of digitisation of payment systems and financial transactions — and that had put e-banking transactions on a sustainable growth trajectory. The post-pandemic changes in work and lifestyle in the country as elsewhere around the world accelerated the growth of e-banking considerably. In the last fiscal year that ended in June, e-banking transactions hit the magic mark of $500 billion for the first time ever, showing a year-on-year growth of 30.6 per cent in volumes and 31.1pc in value.

From an economic and revenue growth perspective, an important question is how much this phenomenal expansion of e-banking has benefited the growth of MSMEs and how much more growth in MSMEs can be expected in near future? Evaluating the impact of digitisation of payment systems and financial services on MSMEs is crucial because moving forward much of Pakistan’s output and revenue growth is expected to come from this sector.

The MSME sector (comprising 5.2m MSMEs as of 2020), contributes 40pc to GDP and accounts for 25pc of the total exports, according to the government’s estimates. Post-pandemic new norms of work and lifestyles, supported by digital advancement is fueling the growth of microenterprises — young men and women in both rural and urban areas are continuously setting up their own businesses to augment their income levels. And a vast majority of them are making their entry into various existing and emerging categories of e-commerce instead of setting up, individually or as a group, physical business places.

This trend is expected to continue at least in near future. According to Statista.com, global retail e-commerce sales that stood at $3.35 trillion back in 2019, surged close to $4.94tr in 2021, recording a growth of about 47.5pc in just two years — and are projected to hit the $7.4bn mark by 2025. Pakistan’s e-commerce revenue stood at $6bn in 2021 and are projected to grow at a compound annual growth rate of 7pc till 2025.

Pakistan’s e-commerce revenue stood at $6bn in 2021 and is projected to grow at a compound annual growth rate of 7pc till 2025

To tap this growth potential and to exploit IT exports in particular, Prime Minister Imran Khan launched on Feb 21 Pakistan’s national e-commerce portal E-Tijarat (trade). His claim to take Pakistan’s IT exports from this fiscal year’s targeted level of $3.5bn to $50bn in the next five years seems rather too optimistic. But gross exports of IT and IT-enabled services (ITeS) have the potential to grow in double digits year after year — thanks largely to the entrepreneurial zeal of young Pakistanis, supported by the government’s policies.

On Feb 23, the government came up with a new set of incentives for IT and ITeS companies and freelancers. Digitisation of payment systems and financial services are expected to help them also in meeting the growing needs of the domestic IT and ITeS market, reducing the gap between imports and exports of the IT sector.

Internationally, three relatively new segments of e-commerce ie live commerce, social commerce and quick commerce gained much greater traction in 2021 than in 2020 — and Pakistan was no exception. The latest incentive package allows IT and ITeS companies and freelancers to retain 100pc of the remittances received through banking channels in their foreign currency accounts without having to convert them into rupees.

Such incentives should go a long way in promoting exports of IT and ITeS companies but also for strengthening the business culture of micro and small enterprises at home. This, coupled with deeper penetration of digital payment systems and digital finance would provide greater support to small and medium e-commerce companies.

In 2021-22, most of the top 50 e-commerce companies of Pakistan posted 10-55pc annual growth in revenues — in the case of Jafferjees.com the growth rate was close to 79pc — according to ecommerce DB, a well-known e-commerce tracking research outfit.

Published in Dawn, The Business and Finance Weekly, January 28th, 2022