Financial inclusion and mobile banking

Still a better love story than Twilight

The usual path of development has been one of developing countries catching up to their more prosperous brethren. From governance to technology, developing countries follow the lead of the developed world. Catching up is easier, being on the cutting edge infinitesimally harder. The advent of branchless banking has been contrary to the above mentioned trend, with developing countries such as Pakistan and Kenya taking the lead in the development of and innovation in the field.

Branchless banking holds much promise for lower-income segments of society. Through the provision of basic financial services to the financially underserved and excluded, branchless banking has the potential to help alleviate the poverty of lower-income segments.

For most readers of this newspaper, not much is noteworthy about money saved in a bank account; very few experiences trump the mundaneness of a visit to the bank. These people, for whom a bank transaction is an everyday affair, are part of a minority of Pakistanis who have the privilege of access to a bank account, the financially included 11 per cent of Pakistan. The boredom a bank elicits belies its importance as an institution. Because while we tend to take for granted our ATM cards and savings accounts, people who are financially excluded, those without a bank account, are the ones for whom bank accounts could very well be an important instrument of poverty alleviation.

It is interesting to note the large gap between female account ownership and male account ownership. Account ownership for men stood at 19 per cent and that for women at 4 per cent, according to a study conducted by the planning and development department in collaboration with DFID. The tentacles of male chauvinism making their way into datasets; how Pakistani.

Conventional wisdom suggests that poor people would be unable to save anything from their incomes. It would be completely reasonable to assume that for people belonging to lower-income brackets saving a part of their income would not be possible, given their inability to fulfil all necessary consumption needs. What a tragi-comic situation it would be; doling out bank accounts to people who cannot save.

Economics though, often turns solid, reasoned conventional wisdom completely on its head. From the champions of RCTs (Randomised controlled trials) I quote an experiment. Abhijeet Bannerjee and Esther Duflo at the Innovations for Poverty Action, randomly provided half of 1,236 households selected in a survey, from 19 slums in Nepal, with access to a savings account. At the time of the study, the weekly household salary was around $20, coming to $80 a month and at the current rate of exchange, around Pak Rs8,000. Consider, these are household and not individuals’ incomes.

One year after the intervention, households who were provided access to a bank account had monetary assets 25 per cent higher than those who were not administered the savings account. Interestingly, this did not come at the expense of other savings such as livestock, which also registered a 12 per cent increase for households with savings accounts.

The mechanism behind this increase in savings is profoundly simple. Just the inability of the household to have ready access to their money results in that money being less likely to be spent.

The joys of financial inclusion do not end there. Apart from registering growth in their assets, households with access to savings accounts also showed a ‘strong’ increase in education expenditures. Such households are also better able to weather emergency situations such as unplanned health expenditures and are able to smooth out their consumption patterns without cutting back on other essentials. And being part of the formal financial system opens up to people a large number of other financial services that would otherwise not be available to them.

The study mentioned above comes with a caveat; the savings accounts provided to the households did not have any transaction costs attached to them. Withdrawals were not penalised and a minimum balance was not required. At present mobile banking is quite an expensive alternative with high transaction costs. These will have to be brought down or in an ideal situation eliminated, before mobile banking can realize its full potential.

As mobile banking progresses to its next level, becoming full-fledged banking channels where loans and even mortgages will be provided through these channels, poorer people will have unprecedented access to a range of financial services that at present are only available at a prohibitively high cost through informal channels such as local money lenders.

As of 2011 according to a financial inclusion study conducted by the World Bank, only 10.30 per cent of people over the age of 15 held an account at a formal financial institution. Compare the same with the regional average of 33 per cent and you get a picture of where Pakistan stands.

Small meaningful steps in the right direction coupled with some training in financial literacy could propel this rate beyond what it is. There is potential, vast amounts of it that could very easily be tapped through good policies and institutional support.

To that end, credit must go to the State Bank of Pakistan for providing a very enabling regulatory environment that has fostered growth and innovation in the mobile banking sector.

It is surprising to think that the provision of something as basic as a savings account has the potential to alleviate people’s poverty. While the core idea is simple in nature, expanding the same across the financially excluded will pose a challenge. Telenor and Tameer Bank have been at the forefront of leading this revolution but much more needs to be done to bring formal financial services to the large number of people unable to access the same.

The author can be contacted at [email protected] Twitter: Ahshafi