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WorldOctober 1 2014

Pakistan's microfinance industry identifies growth path

Pakistan's microfinance industry has slowly been gaining traction in recent years, and is in for a huge boost when new biometric identification methods are brought into the mainstream – primarily to help combat terrorism – which will allow banks to verify new customers remotely.
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Pakistan has been admired in some quarters for its policies on financial inclusion and the framework that exists to encourage it. But, the fact remains that in a country of more than 180 million people, there are still (including duplications) only 35 million banking accounts. While the microfinance industry continues to make steady progress, branchless banking may be about to go into overdrive – boosted, curiously enough, by anti-terrorist measures.

Microfinance in Pakistan had just short of 3 million borrowers in the first quarter of 2014, according to the Pakistan Microfinance Network, and nearly 6 million savers. Total loans were Rs57bn ($555m), or less than 1% of the total outstanding bank stock. The biggest lender is Khushhali Bank, in which United Bank (UBL) has an effective 30% stake. Its revenues increased by about one-third in 2013, thanks partly to improved risk assessment and monitoring.

Tameer Micro Finance Bank has the next biggest loan portfolio, followed by the National Rural Support Programme. The industry’s average loan size is about Rs25,000.

Small value, high volume

Branchless banking is a relative newcomer, but between 2011 and the end of 2013, the number of accounts in Pakistan rose from 236,000 to 3.5 million. It began to develop when Nadeem Hussain, the former Citi banker who founded Tameer, looked for ways to grow more quickly. In 2008, Norwegian telecommunications group Telenor bought a 51% stake in Tameer, which then launched its Easypaisa mobile phone branchless banking the following year. (The central bank allows 'super agency' revenue-sharing relationships between banks and their appointed agents.) Today, Easypaisa has 1.3 million accounts or nearly 40% of the market.

UBL was next with its Omni branchless banking service, using not a telecommunications company but its own agents. Mobilink, Ufone, Warid Telecom and Zong are other telecommunications companies that have entered the market, and Habib Bank (HBL) has launched HBL Express, also using its own agents.

HBL has some 5000 agents. Easypaisa, with its telecommunications company connection, has 55,000. “The telecommunications companies will always dominate, because they have the distribution muscle,” says Mr Hussain, adding that telecommunications companies understand the worth of a small-value, high-volume business. “Commercial banks will never get the scale required to be in this business. But I’m not eating their lunch, because they don’t think this is their lunch.”

Mobile banking is one thing, Mr Hussain continues, but the “real game” is the mobile wallet. “There’s no margin in the burger – the margin is in the shake,” he says. “And now it’s time to get into the shake.” For the mobile wallet to be viable, however, it needs an ecosystem that uses it for many things, not just paying utility bills. “You need to be able to use the account to pay for a cab, to do online shopping, to go to the cinema,” says Mr Hussain.

Importantly, opening an account needs to be paperless. “You don’t have the same quality control over your agent,” Mr Hussain explains. “Tell him to fill in a form and he’ll say no or fill it with garbage.”

Tip of the iceberg

But, a solution has arrived. To stop the use of subscriber identity modules (sims) in mobile phones by terrorists, telecommunications companies and the National Database and Registration Authority (Nadra) recently agreed that sims will be activated only after biometric verification of customers.

“By the end of this year, 20,000 of my 55,000 agents will have devices for biometric identification,” says Mr Hussain. “So you will be able to open an account in one minute – get the thumbprint, get the personal information from Nadra and use the thumbprint as a signature.”

Now Mr Hussain has his eye on 20 million to 30 million branchless banking accounts. As transaction types evolve, they will become more profitable. Person-to-person remittances are the low-margin, low-hanging fruit that everyone goes after. Person-to-business is just starting, with the security and convenience of using the phone to buy groceries.

Government-to-person is very much up and running. Omni and Easypaisa are the biggest players here, being used for payments in social programmes such as the Benazir Income Support Programme and a Sindh provincial scheme that makes payments to girls who do not drop out of school. Business-to-business applications are still in the pipeline and person-to-government – paying taxes by phone, for example – has yet to happen.

Mr Hussain predicts that there will be phenomenal change in financial inclusion, but from branchless banking, not microfinance. Microfinance will take another five years, to get into its stride. “Today, branchless banking is 20% of my bottom line,” he says. “In five years, it will be 80%.”

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Read more about:  Digital journeys , Fintech , Asia-Pacific , Pakistan