Wednesday, October 15, 2014

Shaping the Financial Access Agenda

Majyd Aziz

Mark Twain, the American author and humorist once noted that “everyone talks of the weather but no one does anything about it.” It seems that this iconic quote can be applied, to a large extent, on the global debate about pro-poor economic policies. Nary has a week gone by without any conference, seminar, or a populist announcement by state leaders regarding alleviation of poverty around the world. The hyperbole is ever-present in these activities and a long list of to-do guidance is circulated, deliberated and discussed. The focus is well-intentioned but the implementation leaves much to be desired. This lack of an inclusive approach has aggravated the global initiative to bring about economic sanity. This, then, is the dilemma that is still the cause of social and political unrest, mega deprivation, and enhanced non-legal actions by people.

The election manifestos of political parties around the world proclaim in exuberant terms the priorities if elected to power. The headline priority is invariably an agenda of poverty alleviation through a defined enumeration of initiatives and projects. The direct financial cost of these measures is never taken into consideration. Resorting to catchwords and demagoguery is the marketing ploy during electioneering and the hapless crowd eagerly listens and raises full-throated slogans. For them, every election is one step away from deliverance from their misery. Reality sets in soon and the gap between the rich and poor widens further.

The above narrative is not an isolated perception but is universal and more so in less developed countries. The huge financial resources required to cut down the poverty figures take a heavy toll on the governments. Domestic assets are not enough to bring about the attainment of the objectives. Often, the election pledges and promises succumb to grandiose projects that are generally not beneficial for the less privileged but reflect the utter disregard by the rulers for the nation’s prime imperatives. This also manifests disdain for social justice, for pragmatic welfare of the people, and for human values.

The access to finance in a country like Pakistan is tragically very limited and directly affects the population, especially those on the lower tier of income groups. It also discourages micro and small sized enterprises from expanding or surviving due to lack of affordable financial resources. The unreasonably high financial transaction costs, non-dissemination of credit availability, indefinable incentives, gender discrimination, and poorly designed or non-transparent policies are the negative aspects of whatever financial access is currently available. Thus, the lack of prescribed access to finance impacts on the welfare and sustainability of small enterprises, as well as on low income households. This is undoubtedly the crux of the matter.

The International Finance Institutions, such as World Bank, IMF, or Asian Development Bank, are generally castigated for their macro-economic recipe that focus on eliminating subsidies, increasing the rates of infrastructure like electricity and gas, liberalization of trade, broadening the tax base through value added tax, etc.

However, the pro-poor and universally applicable initiatives undertaken by these IFIs, such as IMF, are noteworthy. This new approach seems to be a visionary paradigm shift and the judicious implementation of these initiatives would bring about desired enhancement in the quality and standard of living of the dispossessed and deprived populace in the world. IMF has developed the use of Financial Access Survey (FAS) that enables policymakers to map out the dynamics of promoting financial services and regulating and supervising financial institutions. According to IMF,”the FAS is the sole source of global supply-side data on financial inclusion, encompassing internationally-comparable basic indicators of financial access and usage. It provides policy makers and researchers with annual geographic and demographic data on access to basic consumer financial services worldwide.”

The FAS mapping of Pakistan reveals some key indicators regarding access to finance. The charts below from the FAS reveal a very low exposure to commercial banking, especially when there is a growing increase in number of bank branches. It shows that there are only 4 commercial bank branches for every 100,000 adults. There are less than 14 bank branches in every 1000 square kilometer radius while ATMs are about 6 for every 100,000 people. Moreover, most of the foreign commercial banks are located in urban areas and basically the government-owned banks such as National Bank of Pakistan or the Zarai Taraqiati Bank Ltd (erstwhile Agriculture Development Bank Ltd) have exposure in rural areas. It is also worthwhile to point out the fact that since most of the banks have stringent rules and excessive paperwork, the ordinary citizen is usually discouraged from entering the portals of these financial institutions. Furthermore, only about 15% of households have deposit accounts or borrow from these banks. That is why savings rate is also pathetically very low.

The IFIs can include a substantive package of initiatives in the approved loans given to various nations. For a country like Pakistan, there is a vital need to provide loans on lower-markup basis for financing of low-cost housing projects across the country. At the present moment, there is a significant shortage of over nine million housing units. Every day, this figure enhances by about 10,000 units. One major reason has been the high cost of construction as well as either non-availability of land or exorbitant cost of land. Thus, housing mortgages for a 25 year tenor at single figure markup rates would induce more people to obtain housing loans and encourage them to move to suburbs or settlements away from the hustle bustle of urban areas. Moreover, an upsurge in housing construction would be beneficial for more than 45 ancillary industries and create abundant job opportunities. This is very much needed for Pakistan and this is a recipe for economic development in the otherwise shaky business and industrial environments.  

The scheduled commercial banks are also tapering down their exposure of lending to SMEs. This has gradually become adverse to the growth and proliferation of the SME sector due to the fact that the burden of cost of capital is exceptionally prohibitive and beyond the capacity of many SMEs and MSMEs to service their debt obligations. Moreover, denial of credit from commercial banks also compels many SMEs and MSMEs to source financing from the microcredit institutions or informal financiers, albeit at a very high markup rate. This too is another discouragement of easy financial access for those who have less collateral or who are unable to obtain third party guarantees. A glance at the chart below demonstrates this tough situation.

The advent of branchless banking and the use of mobile phone service operators for widespread banking access has been greatly appreciated by the people as this provides them with alternate banking facilities, is proximity-convenient, and it does not compel users to maintain bank accounts. In an article, “Mobile Banking: The Fingertip Solution”, this writer emphasized that “The favorable attitude towards mobile banking is a manifestation of consumer financial empowerment. The customers are getting hassle-free service and in close proximity to their home or place of work. The guiding line for service providers is, and should be, that customer behavior is re-defining the ways of conventional banking and that customers are less interested in visiting branches and wasting precious time.”

The chart prepared by Tameer Bank Easypaisa displays an eye-popping scenario of those with formal financial access in eight Asian countries. The figures are depressingly low for Pakistan. To further amplify the idea of seamless banking through the use of mobile phones, Easypaisa observes that only 15 million Pakistanis have bank accounts while there are 130 million SIM users across the country. There is a formidable scope for promotion of branchless banking in the years to come and this would definitely make a monumental difference in the attitude of people and may also, to a substantial extent, encourage savings at the grassroots level.

Some relevant information about seamless banking in Pakistan:
·         In first quarter of 2014, value of branchless banking transaction was Rs 225 billion while volume was 55 million compared to Rs 52 billion and 12 million in first quarter 2012 respectively
·         In first quarter of 2014, the number of retail agents involved in branchless banking transaction was over 115,000 compared to less than 20,000 in first quarter 2012
·         In first quarter of 2014, the number of accounts involved in branchless banking transaction was over 3 million compared to less than 0.75 million in first quarter 2012
·         Adults with an account at a formal financial institution (percentage-wise) in Pakistan, India, South Asia and among lower middle income are 7%, 33%, 31% and 26% respectively in rural areas and 15%, 41%, 38% and 34% respectively in urban areas
·         Adults with an account at a formal financial institution (percentage-wise) in Pakistan, India, South Asia and among lower middle income are 17%, 44%, 41% and 34% respectively among men and 03%, 25%, 25% and 23% respectively among women

Her Majesty Queen Máxima of the Netherlands who was designated as the UN Secretary-General's Special Advocate for Inclusive Finance for Development, in a speech highlighted the imperative need for providing financial access to those who are denied this due to the conventional rules and customs prevalent in most of the countries. She said that “financial inclusion means universal access, at a reasonable cost, to a range of financial services, provided by a variety of sound and sustainable institutions. We therefore have advanced from the term "microcredit", stressing also the importance of savings, mortgages, insurance, payments and remittances.  When talking about access to finance around the world, the challenges are huge. Despite some important developments over the past 10 years, over 2 billion people still do not have access to financial services. This means that over 2 billion people lack the tools that will help them generate income, help them to reduce life's uncertainties, and protect their families from unforeseeable shocks.”

Queen Máxima proposed that “national strategies and visions need to be developed. These strategies need the engagement of governments, the country's regulators and supervisors, financial institutions (including NGO's) and even telecom providers or retailers. All of these should work together to increase access to financial services.”

The Washington-based Center for Global Development (CGD) constituted a Task Force in June 2008 of leading experts from around the world, including Dr Ishrat Hussain, Former Governor of State Bank of Pakistan,  to identify key principles that initiatives and programs for improving access to finance need to meet to be considered sound and successful. According to Nancy Birdsall, President of CGD, the Task Force deliberated on “ten principles to deal with three issues: (1) expanding financial access, including best practices for stimulating informed demand as well as for adequate competition among suppliers; (2) regulation of financial service providers, and (3) avoiding distortions when public resources are used to provide financial services.”

Ms Birdsall added that “in the spirit of CGD’s goal of generating ideas to support efforts by developed countries to improve the wellbeing of the majority of the poor and near poor in the developing world, we also hope that the principles will be useful to donors and bilateral and multilateral organizations that play a key role in designing, advocating, and in a number of cases, financially supporting relevant policy initiatives for improving financial access.”

The non-availability of desired financial products, the high capital cost, the low rate of return in savings accounts, the lack of proper knowledge about financing, the low literacy level especially in rural areas, and the narrow base of consumer credit, etc have all been critical factors in structuring financial access for guidelines. The system of exorbitant rates of usury by loan sharks, the proliferation of Ponzi-type scams, the misuse of credit facilities, the evolution of unregulated financial predators, and the expensive inputs of raw material or unaffordable land prices are also debilitating factors in taking advantage of the presently available financial products and initiatives.

CGD notes that “access to finance is about who gets offered what products at what price. Limited access to financial services reduces welfare and slows firm growth; in addition, it can increase the risk of financial instability as the poor seek to develop their own means of informal access. Access for low-income households (or individuals) and small firms are more limited than it should be because of information frictions, distorted incentives, and, above all, disproportionately high transaction costs. Some of these can be alleviated through policy actions, and some may be worsened by side-effects of poorly designed policy.”

The onus lies on the governments and the Central Banks to work out pragmatic financial access policies in consultation with the domestic financial institutions as well as trade and industry representatives. Continued apathy would be anathema to the welfare and prosperity of the nations and the denizens. IFIs and recognized think tanks can activate the spur mode that would enable the governments and the financial institutions to revolutionize their commitments to the people and provide them affordable access to finance. Edward Osborne Wilson, the American biologist who is known as the Father of Sociobiology, remarked that “the great challenge of the twenty first century is to raise people everywhere to a decent standard of living while preserving as much of the rest of life as possible.”­