On June 20, 2011 the State Bank of Pakistan (SBP) introduced a new circular that significantly modifies the regulation for branchless banking in Pakistan. We talked to Mr. Mansoor Hassan Siddiqui, the Director for Banking Policy and Regulations Department at SBP about why they made these changes and the impact that they expect to see as a result.
In March 2008, the State Bank of Pakistan introduced some of the first regulations anywhere in the world designed specifically to encourage branchless banking. The regulations allowed a number of different business models and permitted agents to deliver financial services on behalf of banks. Three years later the State Bank has significantly amended the regulations. Among the changes are:
- Rationalization of account opening process and requirements by removing the need to capture biometric fingerprint information at the time of account opening for the lowest value accounts. The requirement to capture a digital image of the account holder (which can be done at far cheaper cost with a low cost camera-phone) remains to ensure the physical presence of the customer at the time of account opening.
- Substantial increases in the transaction limits and elimination of the maximum balance, which remedies the situation that previously existed where a customer could perform more transactions “Over-the-Counter” than they could through their own account. Bill payments are no longer included in the transaction limits.
- Introduction of a new “Level 0″ account with the lowest transaction limits which can be opened electronically with no physical paperwork required.
We asked Mr. Mansoor Siddiqui, the recently appointed Director for Banking Policy & Regulations Department at SBP, about the reasons for introducing these modifications and their expectations for what this will mean in terms of the take-up of branchless banking in Pakistan.
1. Why did the State Bank of Pakistan think that the branchless banking regulations that were only introduced in 2008 needed to be updated?
Well, as we are all aware, branchless banking is rapidly evolving as a major arena for financial inclusion and the regulators around the world have to keep abreast of the fast paced changes in this area. After issuance of initial branchless banking regulations in 2008, we have been constantly encouraging the banks to enter into this business field. At the same time, we have also been monitoring the progress of branchless banking service providers by getting regular market feedback. This two pronged approach helped us in developing an insight of the problems that the customers faced while opening and running the branchless banking accounts. These obstacles to some extent were limiting the quick take-up of branchless banking in the country. Despite a couple of successful branchless banking deployments with significant agent/merchant networks, we were witnessing very slow take-up of financial services. The total number of branchless banking accounts was only about half a million. Given the widespread financial exclusion and very low visible success of branchless banking deployments, SBP considered it necessary to review of the branchless banking regulations in line with the industry’s feedback and international best practices. Therefore the updated branchless banking regulations have been issued to tackle the bottle necks in the take-up of branchless banking through accelerated account opening and ease of operations of these accounts.
In order to streamline the compatibility of the regulatory environment with market practices and fulfill the customers’ needs, State Bank of Pakistan started analyzing the market trends and invited feedback from different stakeholders. This exercise required us to provide suitable market-oriented solutions without compromising on AML/CFT standards. Taking this into consideration, the State Bank revisited certain aspects of its regulations including account opening requirements and transaction limits and decided to update the regulations to make them compatible with the changing requirements of the customers and the service providers. At the end of the day, the purpose of these revisions/amendments is to expand the outreach of formal financial services so that more and more people can have access to finance, within a compact regulatory environment.
2. What, in your opinion, are the most important changes to the regulation?
We have introduced a “Level 0” Account which allows for electronic account opening, which I think is a major change in the regulations. This will encourage more and more people to open a Mobile Wallet Account. Apart from that, abolition of biometric fingerprint scans and transaction limit requirements, considerable enhancement in “Level 1” transaction limits, introduction of account-to-person and person-to-person fund transfers facilities and exclusion of payment of utility bills from normal transaction limits are some of the key features of these changes.
3. Did you engage with the private sector before you made the changes? What has their response been to the new circular?
Yes, we engaged with the private sector in a very candid and comprehensive dialogue. We discussed with them all the key regulatory initiatives that we were planning to undertake. Besides this, we were also interacting with international experts and agencies including CGAP, the Bill & Melinda Gates Foundation and other banking regulators and supervisors. These discussions helped us in better judging the market expectations and industry readiness to adapt to the proposed changes in the regulations. This dialogue process also helped us in identifying the practical issues the market players and customers were facing. We have tried to address most of them in the updated regulations.
As far as the private sector’s response to the new circular is concerned, it’s been extremely positive so far. There were no major surprises for the industry as they have been kept updated throughout the whole process.
4. What do you think will be the impact of these changes?
As I mentioned before, the purpose of these regulations and the recent amendments was to help expand the outreach of the banking channels so that the financially excluded population can have easy access to formal financial services. To me, the recent changes in the regulations will surely have a positive impact on the SBP’s financial inclusion strategy. The flexibility which these regulations offer will hopefully encourage more banks to start thinking about branchless banking as a means to reach new customers and provide services to previously unbanked areas and populations.
By introducing the funds transfer category, we have tried to document financial transactions and at the same time discourage the informal sector. The Account-to-Person and Person-to-Person fund transfers allow low income customers such as migrant workers to transfer savings to their families through formal banking channels. These customers were previously using informal channels for fund transfers where records of customer’s identities and transaction histories were not maintained. By allowing fund transfers through banks’ branchless banking setups, customers at both ends are identifiable and transactions are traceable.
5. In a best case scenario, what might the landscape for branchless banking in Pakistan look like in three years’ time?
Pakistan is among the countries which have the lowest banked population. This indicates that there is a vast untapped market potential and the use of technology and branchless banking models may be the way to cater to this market. We have been providing the incentives for the private sector by defining regulatory space and monitoring the market development, but there is also need for flagging more opportunities where branchless banking can be promoted, such as with Government-to-Person (G2P) payments which have millions of potential beneficiaries. The private sector will only be able to win contracts to distribute G2P payments and other business if more investments are made to expand branchless banking networks. This expansion will increase the number of outlets and improve the convenience and quality of services. If we were to bring the financial service standards in Pakistan to a level at par with some of the middle income countries, it would require at least 80,000 branchless banking agents to offer all sorts of financial services to their clients. Erecting this kind of market infrastructure is no doubt a daunting task and will require time. However, in the medium term (i.e. three years’ time), I expect a reasonably significant number of banks, specifically the larger banks with an extensive presence in the country, to be offering branchless banking services with over 30,000 branchless banking agents and at least 5 million branchless banking users.
Going forward, our focus will primarily be on internal capacity building as a regulator to effectively monitor the market developments, capacity development of banks, strengthening consumer protection measures, and improving the efficiency of market participants. This will also require an extensive coordination and interaction with international development agencies that includes CGAP, the Bill & Melinda Gates Foundation and other banking regulators and supervisors. We would welcome feedback on our initiatives in the light of global developments in branchless banking.
State Bank of Pakistan is doing a great job in terms of expanding the outreach of financial services. A bit late though, but SBP has realized that conventional branch banking setup is not yeilding desired results for financial inclusion. The recent ammendments are perfectly balanced in terms of AML/CFT and will encourage the financial institutions to come up with innovative products. Keep the good work going. Way to go Mr. Siddiqui.
It is certainly a right step to spur up branchless banking in Pakistan in real sense. On one hand, it shows the pragmatic & liberal approach of the regulator. And on the other, it also proves the point that this nascent business model cant be handled with the same cynical & extremely conservative banking posture. I agree with Mr. Mansoor’s forecast of having 80,000 agents to ably serve this market. However, this shall only fly off if the new players (both banks & telcos) act responsibly, they should develop right value propositions, especially the ease of technology interface, enough financial motivation for the agents (read retailers) to ensure stickiness and the right brand persona to attract and retain consumers.
It’s indeed a long journey ahead!!