Developing stronger links with global financial system will remain a challenge for Pakistani banks

The banking industry has played a vital role in the transformation of the economic landscape of Pakistan in the last decade. In this article I will share insights on three key areas where banks have played a lead role in driving the reforms and transformation agenda that will sustain growth over the medium term. These include the digital transformation of the economy, enhanced financial inclusion and upgrading the risk and governance framework to meet the enhanced standards set by the FATF.

In the past, Pakistan’s financial ecosystem has lagged behind the developments in the regional markets, most notably the vibrant GCC markets led by Dubai. Political and security challenges coupled with weak integration with the world trade and investment markets has hampered the development of the Pakistan economy and its banking industry. However, in the last couple of years we see a major shift in the focus of the policy makers, aimed at enhancing trade and investment inflows. As a result, we see the economy rebound sharply with 5.6 per cent GDP growth in 2021, following the Covid pandemic induced contraction of 0.5 per cent in 2020.

Move towards digital financial services

The pandemic and the adoption of economic recovery package have provided the impetus for digital financial services, catering to the banking needs of the underserved. Introduction of framework by State Bank of Pakistan (SBP) for granting licences to digital banks has created excitement locally and internationally with up to 40 applicants vying for the initial five licences announced.

2021 was the breakout year for Pakistan based startups raising $375million – double the total investment received in previous six years. The total valuation of the startups was placed at $1.5 billion in 2021.

To make online banking transactions cheaper and convenient, SBP launched RAAST, Pakistan’s first instant payment system that enables end-to-end digital payments among individuals, businesses and government entities instantaneously. As of June 2021, mobile and internet banking witnessed 134 per cent and 65 per cent growth in transactions volume, whereas paper-based transactions volume declined by seven per cent.

The Bank of Punjab (BOP) is catering to the various sectors of the economy by providing key digitisation services in association with provincial and federal governments. BOP Digital Kissan Program aims to provide end-to-end solution to deliver farmer subsidy through Kissan card. This program will evolve to a digital credit experience for the farmer. BOP has been mandated by Punjab Employees Social Security institution to issue Punjab Mazdoor Card to its more than one million workers who can avail various financial and healthcare benefits with it.

Roshan Digital Account (RDA), yet another initiative of SBP, provides overseas Pakistanis (NRP’s) an exclusive opportunity to remotely open an account in Pakistan through an entirely digital and online process without visiting any branch in Pakistan. Further, RDA also provides innovative banking, payments and investment activities to NRP’s in Pakistan. Banks have so far opened more than 350,000 accounts while adding more than $3.5 billion of foreign exchange.

Focus on financial inclusion

Financial inclusion has always been a primary objective of the central banks, particularly in the developing world. The regional economies of India, Bangladesh and other middle-income countries have financial inclusion rates of 80 per cent, 50 per cent and 42 per cent, respectively, compared to ours of 21 per cent only.

Women, transgender, and minorities have always been underserved by the domestic banking sector with women alone making up more than 80 per cent of the unbanked population. To inculcate a culture of gender equality, BOE is the central banks' landmark policy to reduce the gender gap and bring a shift towards women-friendly business practices in the financial sector. Under the policy, various instructions have been issued to banks to enhance the women's ratio in the financial sector and increase the outreach of women-centric products.

BOP has launched low cost housing finance under SBP’s Mera Pakistan Mera Ghar housing scheme for special segments of the society including widows, transgender, special persons etc. More than Rs3 billion has been disbursed by BOP under this scheme. BOP in collaboration with Punjab Social Protection Authority have launched Masawaat Program for financial inclusivity of transgenders.

Risk and governance framework

Integration with global financial system requires meticulous compliance of both local and international regulatory bodies. Pakistan has been on the FATF's grey list since 2018. Significant measures have been undertaken by various regulatory bodies such as SBP, SECP and CDNS to revise the AML/CFT legislative and regulatory framework. From adopting a risk-based supervision to enhanced customer due diligence techniques and appropriate screening of all employees, banks commitment to be compliant on FATF requirements is no less than commendable. Consequently, under the mutual evaluation report, Pakistan has been rated compliant on 38 out of 40 recommendations of Asia Pacific Group on money laundering.

The evolving banking landscape of Pakistan is not without its challenges. On one side, banks are making profits with low default rates and surplus liquidity but on the other hand, political instability and adverse global conditions pose risks to the domestic financial system. Developing stronger interlinkages with the global financial system will remain challenging for Pakistani banks who are moving in tandem with the regional competitors; the success to which will depend on the will and support of government and central bank.

Zafar Masud is President and CEO of Bank of Punjab. Views expressed are his own and do not reflect the newspaper’s policy.