The State Bank of Pakistan loves to promote its digitization process on its pages. Same goes for other banks as well: that is why you have HBL, the country’s largest bank, like to say it is a technology company with a banking licence (newsflash: it is not).
However, behind all the propaganda, and PR management, is this actually accurate? Has digitization in the Pakistani banking space actually materialized? Hamza Kamal, senior investment analyst at AKD Research, the research arm of investment house AKD Securities, certainly seems to think so. In a note sent to clients on January 14, he said that while the digital revolution had been ‘painfully slow’ to come to Pakistan, the PTI-led government has put wheels in motion. In fact, it has brought to fruition major initiatives, capitalizing on catalysts such as increased teledensity and mobile broadband penetration to upgrade major economic pillars.
Kamal first lays out the seriousness of the problem. As is well documented, Pakistan’s financial under-penetration has been a pain point for over a decade now, with just over 42% of bank accounts to the adult population. Compare that figure to the 80% in India, or 47% in Bangladesh.
Pakistan lags behind regional peers in terms of the digital adoption index (DAI): Pakistan stands at 1.55, while India and Bangladesh’s DAI stand at 2.01 and 1.86 respectively.
“Additional benchmarks such as Cisco’s Internet Readiness Index, WEF’s Global Competitiveness Index indicate the relatively low-base Pakistan currently occupies on technological readiness and digital infrastructure (including quality of human capital) compared to regional peers.” explains Kamal.
For instance, teledensity in Pakistan stands at 79.6% compared to 84% in India, and 102% in Bangladesh, of which around 50% are 3G/4G subscribers. Only 10.5% in Pakistan are registered as subscribed to mobile banking services, while internet banking users make up only 4.7% of total broadband subscribers.
So to combat this, the PTI-led government in 2018, began to embark on a series of steps. For instance, the government took steps to curb informal transactions (the impact of which could linger for some time due to higher out-of-bank settlement of transactions). To be fair, the government was also being given a good ‘push’ in the right direction, in the form of the dreaded FATF. The financial watchdog had a strict list of steps for compliance and combating money laundering while enhancing the tax net – that actually help with the digitization of the economy.
Kamal explained that while Covd-19 disrupted the steps, and also caused severe social and health dmanages, it actually was a huge boost to the acceleration of digital financial services. There was a massive increase in the adoption of such services via banking e-channels. Payment systems data also indicated a major uptick, growing at 53.4% year-on-year in the third quarter of calendar year 2020, and gaining a 2.6% share in all payment transactions, up from 1.5% in the same period last year.
There was also huge growth witnessed in deposit accounts, which grew by 10.7% in fiscal year 2020, compared to the 7.4% annual average growth rate for the last five years. Most of this was driven by personal deposits, which grew 13% year-on-year. According to Kamal, this might indicate a better than expected deposit growth of say, 10.2% in calendar year 2021 to 2023, compared to the 9.3% witnessed between calendar year 2017 to 2019.
The State Bank of Pakistan also played a more active role in these last two years. For instance, it started the waiver on fees on online transactions, and allowed the outsourcing of cloud based services. It also started the Roshan Digital Account, a way for non resident Pakistanis to set up bank accounts completely online. It also introduced Raast, which is an instant payment system.
“Crucial aspects which need to be addressed for improving adoption and utility amongst existing (and prospective) customers, in our view, are to ensure cost competitiveness (low transaction costs) and linkages to a comprehensive identity stack (ideally NADRA database),” says Kamal.
One spillover effect? Kamal expects that ‘relatively robust’ private FinTech ecosystem, which includes commercial bank payment platforms, will end up building front-end applications for end users. This will in turn maximize gains from digital financial services, and establish these platforms as profitable platform in their own right. This is also why one can see an uptick in early stage funding in Pakistan, as domestic startups raised $57.7 million in 2020, compared to $47.7 million in 2019 through VC funds, according to data collected by i2i ventures tracker.
But anyone looking to invest in digitalization needs to have a big wallet, and long term vision. According to Kamal, investments in digitalization could ramp up costs of the banking sector in the medium run, while consequent returns would be long-term. While developments on financial digitalization have been concentrated in end-to-end payment gateways, which should result in a shift in fee drivers, there has yet to be any material structural change in cost structures in the banking space in the medium run.
So what is a bank to do? There is still hope to make some profit. Kamal explains: “Evolving digital lending space (HBL has begun entertaining/disbursing personal loans digitally) provides greater opportunities for the banking space to target smaller segments and in return yielding higher returns.”