Banking 100 Million Pakistanis
Earlier this year, a team from Bankable Frontier Associates – David Porteous, Brian Le Sar, Johan Bezuidenhoudt, Ignacio Mas, Khurram Sikander, David Reed – and I started a project to understand how interoperability in retail payments affects the outcome of financial inclusion in Pakistan.
The author is overlooking an essential point that needs to be taking into account in Pakistan in a similar manner as co-authors Messrs. Porteous and Bezuidenhout should have done years ago in their country South Africa. Namely, government and banking sector need to be coherent in their strategy, its implementation and be held accountable on results (or the absence or weakness) according to agreed fixed objectives after a fixed period of time.
In South Africa, the 4 banks that dominate the banking sector promised government banking inclusion in exchange for not having legal obligations a decade ago. Still over half of the population is as then unbanked. As you know technology and partnership with world class telecom firms was not the issue in South Africa. The banks, 3 of the 4 largely being foreign owned, hold on to their oligapoly, including owning the National Payment System and their fat profit margins. They exclude financial institutions such as Capitec and Postbank from the National Payment System. Government did not take responsibility for the state of its economy, over its banking sector policy; the separation of responsibilities between Reserve Bank, Finance Ministry and Industry ministry is is hopeless. It still allows the big banks to do what they want and, on the other side, they have not come any closer to integrating semi- and informal finance (including Postbank, pawnshops, regulated moneylenders, the Stokvels and the Burial societies, the last two probably holding more deposits than the private deposits of banks) into the formal bank sector. And then I don’t speak of the cooperative MFIs; small, perpetually ailing and totally dependent on charity, political bodies and donors, while members, the key to success of coops, have nothing to say.
In Pakistan an increasingly more important problem between banks and government is how to implement financial inclusion of poor people. Also with modern technology, profits will be insecure and small as there is no legislation on labor contracts or minimum income (as salary or social security). Furthermore, Supreme Court of Justice already recognised in several cases that RIBA, the Islamic prohibition of Interest Rate, is (with Zakah, to take 2.5% of current accounts each end of Ramadan, which also faces challenges) the determinant obligation for banks but, because of also the secular legal system and the external relations of the banks and the economy, the interest rates may still co-exist. However, in the politicised area of “banking the poor” the Interest Rate prohibition approaches and the closure of the politicised credit focused cooperative banks (central government not being able to change the constitution that ensured provincial responsibility over coops) has made government believe that it is a good idea to quickly transform credit programs and NGOs into commercial banks.
Discussing “interoperability” is not the issue in financial inclusion. State Bank has produced good Branchless Banking legislation as a result of excellent collaboration with telecom firms, where legal responsibility is with the licensed banking partner – reason for which Telenor, a worldclass (Norwegian owned) telecom company, got a banking license by buying Tameer bank.
As I said, the core issue in Pakistan is to ensure the poor that government will collaborate with banks and civil society (including especially religious organisations, parliament and political groups) to develop a coherent strategy and policy with subsequently, exact performance indicators and a regulatory framework that can hold all stakeholders responsible for having emancipated the poor as citizens that are allowed to have a decent life, including managing their money as they wish with the help of professional, sustainable and accountable banks.
Peter, I share your view that no one thing is a cure-all for financial inclusion in South Africa, Pakistan or elsewhere. I am not sure if there is “the issue in financial inclusion” and I am sure a random poll of various stakeholders in both countries would throw-up different priorities. Ultimately, in this report, we take an approach that is similar to your suggestion in your last para that government action needs to be collaborative and results driven. In fact, from pages 27 to 38 of the report, we suggest how the SBP and PTA need to define success and build on the “good” work they have already done to date in branchless banking, as you put it. David, Johan, Brian and the rest of us are keen on a proposed new measure of interoperability in part because we think it is a step towards that exactness in measurement that you wish government interventions had. The new measure is described on pages 15-19 in the report and we will also summarize it in a forthcoming blog post.