According to the Global Microscope 2015, Pakistan currently has one of the top five most enabling financial inclusion environments in the world. In the coming months it will be interesting to see how this environment impacts the nation’s financial inclusion progress, and if 2016 will be the year of financial inclusion for Pakistan. Pakistan has created a national strategy for access to finance which lays out an aggressive inclusion agenda and impressive targets, including a goal of 50% inclusion by the year 2020. A review of contemporary research indicates certain empirical lessons that can aid in the path towards universal financial inclusion.

1. Institute high quality regulation and supervision. Gaps in supervisory capacity tend to be the largest in countries that have low financial inclusion and can destabilize an economy further in the event of rapid financial expansion. Increasing access to credit in particular, without simultaneously strengthening critical institutions has negative implications for consumers and overall financial stability. Countries need to strengthen rule of law, enforcement of contracts, and regulatory oversight before expanding their financial sector. Interestingly, only credit expansion is linked to a destabilized effect on the banking sector; expansion of other financial instruments can be carried out safely to the extent that they continue to promote macroeconomic benefits. Taking such steps and then maintaining high quality regulation will also reduce involuntary exclusion.
2. Target private sector market failure: Given that financial expansion comes with certain caveats, policy makers may be better off addressing market failures by making financial inclusion viable for banks and other NBFIs. In a state of low financial inclusion where only those with the highest incomes are banked, and private sector actors are already profiting from high bank deposits, there is a lack of incentive to change the status quo. This is particularly true in countries like Pakistan where traditional financial infrastructure penetration is weak, and expansion of services to lower income segments would require a significant investment. Direct and targeted transfers to the financially excluded which encourage the use of formal accounts, such as PMJDY (Prime Minister’s People Money Scheme) in India or BISP (Benazir Income Support Programme) in Pakistan may be one of the most effective ways of achieving financial inclusion goals.
3. Address associated impediments to financial inclusion

• Financial Literacy: Research indicates that 55% of adult Pakistanis are financially literate. Broadening inclusion without taking this number into account, and ideally working towards improving it would in all likelihood exacerbate the problem of dormant accounts; on average the account dormancy rate is around 70%. The government made an effort to tackle this issue in the form of the Nationwide Financial Literacy Program which launched in 2010, but the results from this are still coming in.
• Gender structures: Across all regions, South Asia’s gender imbalance in account ownership is the worst in absolute terms, with a gap of 18 percentage points. Pakistan is no exception to this trend as men are three times more likely to be financially included than women. Even when women have accounts under their name, studies show that the decision making power still resides with the men in their household. Any successful financial inclusion agenda will have to push policies which promote female financial empowerment.
• Demographic characteristics: The demographic characteristics of emerging economies in developing Asia significantly impact their level of financial inclusion. Countries with high dependency ratios tend to have lower financial inclusion. Pakistan has a particularly high age dependency ratio – as of 2014 there were 66 dependents in the country for every 100 working age individuals. The bulk of Pakistan’s dependents are young people; this has important policy implications and presents some significant opportunities as well.

4. Promote a more inclusive and diverse financial sector governance structure: Evidence suggests that adding women to governance structures of banks and regulatory agencies could have a positive impact on indicators of bank stability, specifically the fiscal buffer banks have to hedge against shocks to earnings. While it still unclear what causes this relationship, it is an important learning for South Asia economies where women only have a 9% share in boards of directors of banks across the region.