Borrowing from the public

The sovereign remains the biggest borrower in the country, making up more than 70 percent of all banking assets, either borrowing directly, or througg state-owned entities.  As the state continues to run perpetual budget deficits, borrowing requirements continue to increase.  Higher borrowing requirements generally means a greater demand of funds, and that leads to a higher interest rate, since the available of supply of funds has gradually moved outside the formal financial system.  Currency in Circulation as a % of GDP remains close to it’s all time high of 20 percent.  As funds continue to stay outside the system, fueling a parallel economy, available of loanable funds within the system remains constrained, resulting in high interest rates.

When a depositor places money in a bank, a significant chunk of that is inadvertently lent out to the sovereign.  The bank essentially makes a healthy profit by just being an arbitrator, or a conduit between depositors, and the sovereign.  The bank isn’t really taking any private sector credit risk, other than sovereign risk.  This effectively keeps the return that depositors can get on their deposits suppressed, as banks carve out a substantial spread just to act as a conduit, rather than covering for any risk.

The holdings of sovereign borrowing instruments is also fairly narrow, as they are mostly held by banks, mutual funds, pension funds, insurance companies, and a handful of other institutions.  As the base remains narrow, there exists a potential for collusion that can drive up interest rates without active market participation, either due to regulatory constraints, or other barriers to entry.

There exists a case for the sovereign to directly reach out to the population, and provide access to subscribe to sovereign debt with no barriers to entry.  This will also enable the population to get access to the risk free rate, rather than being made to pay high interest rate spreads to banks for holding their savings.

The technology required to accomplish the same already exists.  The identity stack available with NADRA essentially has biometric data of all citizens with an identity card.  Similarly, with more than 100 million mobile subscribers, it is entirely possible to make all of them savers in debt issues by the government while completely bypassing legacy financial institutions.  Leveraging the capability of Raast, which is still being evolved by the Central Bank, it is possible for individuals to save in government issued debt instruments through even a text message, as Raast enables connectivity of a mobile number with a bank account, closing the loop, and ensuring greater financial inclusion

Enabling savings through such a mechanism can ensure that financial inclusions increases, in addition to increase in savings rates, and a potential reduction in currency in circulation.  It may be noted here that Pakistan has one of the lowest savings rates in the world, which eventually leads to lower level of investments, higher interest rates, and non-availability of long-term capital that can be redeployed towards long-tailed infrastructure projects, or other projects of economic significance.

In order to prop up financial inclusion, it is also critical that radh mobile phone number that is biometrically verified automatically becomes an account number that can be linked to any bank.  Using the same account number, the citizen should also have an option to subscribe to government issued debt instruments through a simple and intuitive interface.  Currently, the process of investment in government issued debt instruments is extremely difficult, and definitely not intuitive.  As banks are mostly responsible for enabling access to the same, they discourage existing and potential customers as that cannibalizes their existing income streams.

It is time for the government to embrace technology and rollout issuance of debt thlo the public through utilization of existing technology infrastructure.  This will not only enable penetration of financial instruments among the masses, but also make them savers without having to go through the cumbersome, and often bureaucratic route if a bank.  There is an opportunity to rethink the way people save, and the way government borrows, and the same has never been easier given presence of payment and identity rails.




Ammar H. Khan
Ammar H. Khan
The writer is the chief risk officer for Karandaaz Pakistan, an organisation that seeks to promote financial inclusion in Pakistan. He has previously worked at several financial institutions in Pakistan, both in commercial banking and capital markets



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