It makes sense, intuitively. The numbers also add up, if you take a look at the books. So why don’t we yet have anything resembling it?
“People would hear good news regarding the availability of smartphones through easy instalment plans,” said the caretaker IT minister Umar Saif, talking to the media on Thursday 4th November. He was referring to the proposed plan to get the telcos in on the phone leasing game, as is the norm in many countries across the world.
Earlier this year, Profit covered the reasons for why Pakistanis do not have access to smartphone financing in its feature titled “Why don’t we have phone plans in Pakistan?” The piece concluded that due to a lack of mechanism, high risk, high exposure and lack of customer loyalties companies cannot do it in Pakistan.
Recently, however, the government has decided to unveil a policy in this regard called the “Smartphone Financing Policy”. The policy does exactly that, makes it possible for a layman to access a phone through financing by the
The caretaker IT ministry under Umar Saif, is determined to deliver on this policy, despite oppositions from within and outside. The real question is, does the ministry’s policy solve the already highlighted problem?
To answer that let us first understand the problem.
How does Cell Phone financing work?
With the increasing dollar prices and high duties, even the cheapest smartphones are above $100, making it unaffordable for most people. So the idea is simple. The telecom operator buys the phone and sells it to the customer. However, rather than charging the full amount they give it away in instalments.
Say that you are a user unable to afford a smartphone. The telco helps you structure a payment plan that fits your budget. Instead of shelling out a significant sum upfront, you make affordable monthly payments over a specified contract period, typically one or two years. This not only eases the financial burden but also provides you with a predictable monthly expense.
Depending on the telco and the plan you choose, you may have the option to enter into a contract or go for a no-contract plan that offers more flexibility. Conventionally, contracts come with added benefits, such as lower device prices and exclusive perks. But the catch is that you cannot use another carrier’s sim for a fixed period of time. This is often referred to as a network lock.
Not only does this benefit the telco in the form of a higher future cash flow but also drives down the price and terms of the instalment. On the other hand, a no-contract plan grants you the freedom to switch carriers or upgrade your phone whenever you desire, in which case the telco is essentially doing what a bank does, simply giving a loan for a phone. The government’s policy mainly refers to a “contract financing” arrangement.
In addition to the device payment plan, you’ll also need a mobile plan that covers calling, texting, and data usage. Telcos frequently bundle these services with cell phone financing, simplifying your monthly expenses making the option even more attractive. And that’s not all – many telcos offer enticing extras like device insurance, free upgrades, and exclusive discounts. However these things are less likely to happen in Pakistan.
With the Telecom average revenue per user (ARPU) dropping below $0.6/month and 48% of Pakistan still not using smartphones, not only does this plan help increase the digital footprint, but also acts as an approach to increase telecom sector revenue in the longer term.
This might sound like a no-brainer and one might feel that Pakistan should have taken this step a long time ago. But why didn’t we?
What are the problems?
The problem is deep and complex. Explaining the problem to Profit, CEO Jazz Mr. Aamir Ibrahim stated that “Telcos have not been in the handset selling business in Pakistan because there is no credit scoring system, so a company cannot go after a defaulter and reduce their credit. That is also a reason why credit cards are not prevalent. Even when we tried it, it did not work”. He stated that at least 99% of the handsets sold in Pakistan are decoupled from the telecom companies.
“Phone loans are unsecured. Financing for phones exists for credit card customers, using their cards as collateral,” explains Muhammad Naqi, CEO of Premier Code, one of the oldest mobile phone assemblers in Pakistan. Many Pakistanis do not own credit cards. According to Karandaaz, only 1.9 million credit cards existed across Pakistan in December 2022.
“Across the developed world the risk is borne by a bank or telecom operator, and not the brand, so unless the operator gets involved, obstacles will persist. There’s always a chicken-and-egg problem for a brand. If a brand has decent volumes on cash sales, why give a year’s worth of credit?” Naqi adds further.
“Let’s assume a telecom operator wants 100,000 devices on credit for a year. If I take the exposure of say Rs 300 million for a year and the delinquency rate is 30%, that’s Rs 90 million lost. Manufacturers don’t operate on high enough margins to bear such costs,” laments Naqi. However, isn’t this just a case of underwriting then? Surely, the banks could do it. No?
Shehzad Ishaq, the Chief Digital Officer at MCB states that “Banks finance handsets directly through credit card guarantees or personal loans. But that’s different from signing up for a service contract as it operates abroad. Of the bankable population in the country, just 18% currently have bank accounts. This constrains what we can do, but we can do something for that 18%,”.
“If the bank were a partner, the contracts would be underwritten. Underwriting involves checking the repayment ability, debt burden, bureau checks, past records, and more. With a good underwriting process, you can reasonably foresee that the customer will pay,” explains Ishaq.
But what is the biggest problem from the Telco’s perspective? As narrated earlier by the Chief Executive Officer (CEO) of Telenor, Mr Khurram Ashfaque, “Our country operates on a prepaid market model. Most consumers avoid long-term relationships with operators,”
”In contrast, the global postpaid or contract market necessitates customers to sign up for 1-2 years. This establishes a long-term commitment with their telecommunications provider. This arrangement affords the provider the opportunity to offer bundled handsets as part of the contract, with payments spread out in instalments.” Ashfaque explains.
“Our core business provides data and connectivity services and does not entail lending or loans for handset purchases,” Ashfaque clarifies. “The average revenue per user for a telecommunications subscriber within the local industry is less than $1. This demographic diverges significantly from the typical clientele banks serve. The checks and balances required to assess creditworthiness incur exorbitant costs, rendering it an unappealing model with high credit risk. Banks shun such territory,” Ashfaque elaborates.
“Even if we could surmount financial hurdles, technical complications pose further challenges. For instance, in other markets, telecommunications providers do not permit customers to switch to competitors while bound by a contract.,” Ashfaque continues.
“Enforcing such technical control here is unfeasible due to the prevalence of ‘jailbreak’ technologies. Handsets procured through loans can be effortlessly unlocked in the open market,” Ashfaque adds. Ashfaque’s argument is supported by the case of a Pakistani citizen named Fahd, who was sentenced for 12 years in the United States for setting back the global telecom giant, AT&T, by $200 million, doing exactly the; breaking the network lock. Hundreds of Fahd’s are likely to emerge, if the opportunity is provided in Pakistan.
Afterall, even if we could brick the phone by blocking the IMEI, what’s to stop individuals from storing it in a drawer or using it as a paperweight? They could even disassemble it, and sell the parts. Of course, locking the IMEI, as has been seen in the case of PTA taxes, does not render the phone entirely useless. And the workarounds for that are already widely spread in the market.
What is proposed?
Most of the aforementioned problems sound too difficult to be solved. The IT ministry cannot possibly bank half the population, maintain credit scores and inculcate ethical practice in the market. Yet there are some solutions presented by the ministry.
To answer the primary concern regarding people defaulting on those loans, the caretaker IT minister, Umar Saif told the media that the ministry is working towards blocking the IMEIs of the issued phones and in worse cases the CNICs of the users.
Blocking the CNIC of a user is not a piece of cake. With a long standing legal kerfuffle, the Sindh High Court, in 2021, ruled that even NADRA itself cannot abrogate the citizenship of someone i.e. block their CNIC.
However the latter part of the solution turned out to be different than it was perceived by certain sections of the press. Talking to Profit, the CEO of Jazz, Aamir Ibrahim stated that the two proposals pushed by Jazz and under consideration by the ministry were a) blocking the IMEI of the said smartphone and b)blocking all the sim cards issued on one CNIC. Hence giving rise to the term CNIC lock, not cancelling CNICs, as assumed by certain sections of the press.
He further expounded that, “The problem with only blocking the phone is that it is enough. Our proposal was to let MNP to monitor the system and whosoever defaults, loses access to all the sim cards issued on their CNICs”
For those who don’t know, Pakistan Mobile Number Portability (MNP) Company is jointly owned by the top four telcos in Pakistan, which are Jazz, Telenor, Zong, and Ufone. MNP allows mobile phone users to switch their service provider while retaining their existing mobile phone number. The Pakistan MNP Company facilitates this process by managing the porting of SIM cards and ensuring smooth transition. The company possesses the tools to monitor such a ban because it has the data to do so.
The “CNIC-lock” though a smart solution also presents the opportunity of workarounds. One CNIC provides access to 5 SIM cards. Even if all the defaulter’s SIMs are blocked the phone might not run a SIM but the user could always use someone else’s SIM card to stay mobile.
“A defaulter is a defaulter of the telecom industry, and the industry should band together to find a workable solution. We should be able to do it in a manner that the customer is aware of what they are getting into. And if they realise that they cannot pay, they have the option of returning the handset with a specified penalty.” said Ibrahim.
“The goal is to get a food delivery guy, or a security guard with an easy solution to purchase a 24,000 rupee phone by paying 1000 every month. People whose productivity increases with a phone are our focus, not iPhone owners.”, said Mr. Ibrahim. He further elaborated that his goal has always been to facilitate local cell phone manufacturers rather than making imported phones accessible.
What is the disagreement?
With the recommendations tabled, and a policy set to be in the works, two of the top four telcos are not on board with the proposal of blocking the SIM cards of the defaulters. These telcos are Telenor and Zong. When asked about their disagreement, Telenor referred to the already cited reasons (mentioned above) as their reservations.
It is important to note here that Jazz has been at the forefront of this policy despite the failure of their earlier campaign of their “Jazz Digit 4G” being given on instalments. On the other hand, Telenor, earlier this year agreed to partake in a partnership with local startup Kistpay, where the telco assumes less of the financial responsibility, passing it onto the startup that specialises in doing so. It is also important to note that in the Telenor-Kistpay financing scheme, the solution to defaulters is a proprietary algorithm that will shut down the phone as explained earlier to Profit by CTO Kistpay, Khurram Shaikh.
A response from Zong could not be garnered till the filing of this report. As reported earlier, banks have also shown reluctance to partake in the exercise. However, telco-owned EMIs, namely Mobilink Microfinance Bank, Telenor Microfinance Bank, and UBank, have shown eagerness to offer phones in instalment plans.