Digital finance and financial inclusion offer several benefits not only to financial services users but also to digital finance providers, governments and the economy at large as well.  Prominent ones are enhanced access to finance among the poorest, reduced cost of financial intermediation for banks, and increased aggregate expenditure for governments.[1] The Sustainable Development Goals (SDGs) also aims at strengthening the capacity of domestic financial institutions to expand access to banking, insurance and financial services (SDG target 8.10)[2].   However, one key ambiguity remains on the measurement of Financial inclusion. Various definitions, measurement tools and divergent readings among different institutions make it difficult to rely on one source or measure, leaving market participants utterly confused on the actual financial inclusion scenario within a country. This is very much relevant to Pakistan, different sources/surveys quote significantly different figures for this measure and the need for adopting a harmonized approach becomes vital to formulate targeted strategies and programs to improve the situation.

Pakistan adopted financial inclusion as a national priority well before many other countries did. In 2008, Pakistan became one of the first few countries to adopt branchless banking regulations, which paved the way for digital financial services. With 60,000 retail outlets throughout Pakistan, Telenor’s Easy Paisa has played a significant role in catalysing the financial inclusion in the country. The branchless banking industry has grown over the years – UBL’s Omni, Ufone Upaisa, Zong’s Paymax and Mobilink’s Jazzcash represent the unique implementations. The latest quarterly Branchless Banking newsletter released by the State Bank of Pakistan (SBP) reveals an 11.1 percent expansion in the number of branchless bank accounts compared to the last quarter, taking total accounts to ~40 million. However, number of active accounts stand at 22 Million, a QoQ contraction of 1.3 percent.[3]

In 2015, the government developed the National Financial Inclusion Strategy (NFIS) to increase financial inclusion in the country by promoting digital financial services. The NFIS targets 50 percent adults having transactional accounts by 2020 and 65 million digital transaction accounts by 2023 (enhanced NFIS)[4]. A recent development to achieve this target is the partnership between SBP and Karandaaz Pakistan to create a micropayment gateway to enable low-cost digital transactions to formally include the excluded population and promote financial deepening of the already included.[5] This gateway will be a digital payment platform based on modern technology making real time interoperability of smaller digital transfers possible.

Varying Picture of Financial Inclusion (FI) in Pakistan

Despite all these early head starts, the Financial inclusion numbers from Pakistan are significantly poor than its cohorts. According to Worldbank’s Global Findex survey, the percentage of adults with accounts rose just 8 percentage points between 2014 and 2017, bringing the total to 21 percent, while the percentage of adults with accounts rose by 27 percentage points in India (53 percent in 2014 to 80 percent in 2017) and 19 percent in Bangladesh (31 percent in 2014 to 50 percent in 2017).[6] On the  other hand supply side data, circulated by State Bank of Pakistan (SBP) paint a different picture. The extent of variation in numbers is presented in figure 1.1. Just a cursory glance shows the dissimilarity in numbers – FII numbers are almost half of Findex numbers for the same year which are almost half of A2F[7] numbers.

Fig 1.1: Various Financial Inclusion Readings in Pakistan

Note: World Bank’s Global Findex, a demand side dataset, is conducted after every three years. A2F is the demand side survey developed by SBP to measure financial inclusion in the country, last wave was conducted in 2015. Financial Inclusion Insight Survey, developed by Bill & Melinda Gates foundation is an annual demand side survey.

The Access to Finance Survey 2015 (conducted by Gallup Pakistan for the State Bank of Pakistan)[8], on an aggregated level states 47 percent of the Pakistani population as financially served. Excluding the 24 percent informal users, the statistic drops to 23 percent formally served users (16 percent of the population having access to bank accounts (including mobile wallets); 7 percent other formal users). The reading, however, is drastically different from other surveys conducted in 2014/2015 due to expansive definition used by the SBP.

Problems of Varying Picture on National Indicators

The varying numbers about seemingly similar indicators are problematic on multiple fronts. Firstly, indicators act as a common currency to understand the state of the industry (in this case Financial Inclusion). When the definitions are so varied from each other nothing can be said with certainty about progress, and measurement seems flawed.

Financial Inclusion Definition in the Global Context

Financial Inclusion is a relatively recent entrant into a long list of development indicators adopted by the United Nations. Any indicator that has a global usage is bound to have issues and differences in meaning, interpretation and application. Definitional issues surrounding Financial Inclusion in Pakistan (and globally) are nothing unique or out of context and different institutions use varying definitions currently to measure similar phenomenon. Table 1 details the definition used by each source (survey / institution), the corresponding FI reading for Pakistan and the measured indicator.

Table 1: Financial Inclusion Definitions and Measurement Indicator

Note: i) World Bank Findex, a demand side dataset, is conducted after every two years, last wave of Findex Survey was conducted in 2017. ii) A2F is the demand side survey developed by SBP to measure financial inclusion in the country. The last wave was conducted in 2015. iii) Financial Inclusion Insight Survey, developed by Bill & Melinda Gates foundation is an annual demand side survey. Last wave was conducted in 2017. iv) Data for IMF is available for 2018 as well, commercial Bank branches and ATM per 100,000: 10.28, 10.45, respectively.), however, 2015 & 2017 figures have been used for comparability.

A Coherent Approach to Track Financial Inclusion

The overarching reason for the disconnect between various numbers circulating within the industry about Financial Inclusion is that each number means and measures an entirely different progress towards financial inclusion.

An official national definition of financial inclusion provides a basis for a shared vision, and helps in setting goals and mapping out the framework for achieving them. The Bank of Tanzania developed an official definition of financial inclusion, “The regular use of financial services, through payment infrastructures to manage cash flows and mitigate shocks, which are delivered by formal providers through a range of appropriate services with dignity and fairness.”[9], which provides the following benefits:

1. The definition will also serve as a cornerstone for financial inclusion strategies and actions;
2. It will be a useful benchmark and help set the direction for policy priorities;
3. The definition also provides a de facto test for public and private sector initiatives. That is, the term can be used to determine whether initiatives meet the required criteria when claiming to promote financial inclusion;
4. A clear, standardized definition of financial inclusion also allows policy outcomes and other initiatives to be measured against each other consistently because it also allows appropriate indicators to be formulated;
5. By collecting accurate data, progress can therefore be tracked and analyzed over the long term.

The 2015 NFIS defines the vision for financial inclusion in Pakistan as “individuals and firms can access and use a range of quality payments, savings, credit and insurance services which meet their needs with dignity and fairness” . From table 1, it is evident that all three surveys use a different definition of financial inclusion than the vision in NFIS, resulting in different FI readings. Gallup Pakistan was involved in mapping of the NFIS on the three demand side datasets for Karandaaz Pakistan and found that out of the 33 demand side indicators, FII covers 68 percent while Findex covers 58 percent.

Although Findex survey’s multidimensional definition is very close to the NFIS vision, given its global methodology the survey cannot be localized to track performance of all NFIS indicators. A nationalized survey, aligned with the NFIS can be developed to map the progress on financial inclusion in the country. In this context, BMGF intends to nationalize FII survey in context of Pakistan. Scope of the FII survey can be expanded, ideally to track all demand side indicators under the NFIS and the resultant data set can be used to measure financial inclusion as per the NFIS vision, while remaining comparable at the global level.

[1] Ozili, Peterson K. “Impact of digital finance on financial inclusion and stability.” Borsa Istanbul Review 18.4 (2018): 329-340

[2] https://sustainabledevelopment.un.org/topics/sustainabledevelopmentgoals

[3] Branchless Banking Key Statistics(Jul-Sept 2019)

[4] National Financial Inclusion Strategy (2017). Government 100 Day’s Agenda, State Bank of Pakistan, Karachi, Pakistan; (The Unbanked: A Hundred Million Question, Karandaaz Pakistan)

[5] Micro Payment Gateway

[6]The Global Findex 2017

[7]A2F is the tool used by SBP to measure financial inclusion in the country. The last wave was conducted in 2015 and for comparison purposes 2014 / 2015 figures from other demand side surveys are being used.

[8] “Financial Inclusion Highlights.” Access to Finance Survey. Horus – Gallup Pakistan and State Bank of Pakistan, 2015.

[9] Defining Financial Inclusion, Alliance for Financial Inclusion (AFI)

[10](National Financial Inclusion Strategy, SBP)