Prospects of Digitizing Microfinance in Pakistan
In recent years, spurred on by the outbreak of COVID-19, digital finance has gained significant popularity in Pakistan. Since the COVID-19 pandemic, internet usage has seen a tremendous surge, with nearly 80 million mobile money accounts recorded, though a significant portion of these accounts remained inactive. Mobile and online banking has grown tremendously, totalling over 500 million transactions. Despite these trends, the transition toward digital transactions has been far from comprehensive. While the global average of physical cash usage in developing countries is 20%, in Pakistan, it remains at 30%. Moreover, gender disparity is stark: only 35% of men and 7% of women have access to mobile money service providers. Many of Pakistan’s merchants view the switch to digital money adversely due to the prospect of taxes and transaction fees, necessitating that their many customers also maintain significant physical cash.
Now, despite positive trends, technology and digital finance have failed to penetrate groups that microfinance targets. While the World Bank reports that 21% of Pakistanis above the age of 15 have a mobile bank account, that number drops to less than 16% for rural inhabitants, 18% for the lowest 40% of income earners, 15% for those with no more than a primary education, and just 13% for women. Only one in 25 rural Pakistanis used a phone or the internet to pay bills in 2022, further underscoring the digital divide. In other words, while the
digitization of microfinance in Pakistan carries potential benefits, it risks marginalizing the very groups that the sector aims to serve unless systemic challenges are addressed.
Examining more general internet usage statistics does not yield much better insights. An estimated 36.7% of Pakistan’s population accessed the internet in 2023, compared to 64.4% globally, with Pakistan possessing the third-largest non-internet-using population in the world. Pakistan’s mobile internet connection speed, meanwhile, ranks 97th out of 108 countries for which data is available. Before digitization can be achieved, groundwork must be laid to give a broader range of Pakistanis both access to and familiarity with the internet, technology, and mobile finance.
Digitization offers significant benefits, including reducing the costs associated with physical cash and alleviating the burden of carrying large amounts of money. It also facilitates the expansion of the formal economy and creates larger volumes of data that financial services and FinTechs can utilize to provide more advanced financial services. If achieved, digitization has the potential to greatly enhance the reach and extent of microfinance. In countries like India, digital banks have effectively reached underserved groups, including young adults and low-income populations. Similar models could be explored in Pakistan, tailored to its unique socio-economic context. According to Karandaaz Pakistan, digital banks in Vietnam have successfully penetrated groups such as “youth, low-income individuals, and Micro, Small, and Medium Enterprises (MSMEs)”. Estimates suggest that achieving National Financial Inclusion Strategy goals could add $5.5 billion to Pakistan’s economy and create around one million jobs.
To address the issue of low financial and digital literacy, particularly in rural areas, MFIs can promote mobile money wallets by partnering with local communities to provide culturally tailored financial literacy programs. Such initiatives could include visual aids and vernacular language interfaces to simplify access for non-literate populations. Furthermore, simplifying online interfaces and streamlining processes for customers can further improve the reach of digital finance. For example, Digicel, a mobile wallet provider, surveyed its 40,000 customers, who reported that its mobile menu was difficult to understand. In response, Digicel simplified its menu and provided community-based mobile and financial literacy training, resulting in a
2,000% increase in customers within two years. To bridge the gap between often necessary cash-based transactions and digitized finance, MFIs can employ agents to deliver services to clients. A CGAP study of five successfully digitized MFIs found that all five employed agents connect with their target populations effectively.
When suitable conditions for digitization are achieved, there are several pitfalls that MFIs must steer clear of. Microfinance-related regulations, designed for traditional transactions, often create ambiguity about permissible activities in the online sphere. Digitization may require the use of application programming interfaces and cloud services that could violate regional restrictions, while there is also uncertainty about agent-related regulations. This ambiguity poses dual hazards: some MFIs that have switched to online transactions could easily violate regulations without being aware of it, while others might fail to access the full potential of digitization due to fear of regulatory non-compliance.
Additionally, during the process of digitization, the focus must remain fully on the needs of customers and clients. Many MFIs make the error of, as CGAP summarizes, “implementing technology that they do not have the management culture, IT skills, or product development experience to monetize”. Although extensive and intricate technology often appears optimal, research has shown that a minimum viable product approach is more effective than flashier solutions that go beyond or stray from customers’ needs. Rather than implementing overly complex technology, MFIs must focus on using simple, accessible methods that can both be effectively operated and meet the needs of customers. According to Harvard Business School’s Ranjay Gulati, firms that implemented customer-centric policies saw 150% shareholder returns, while also bolstering customer retention, which has been shown to increase profits by 25% to 85%.
Just as the premature implementation of intricate technology displays a lack of consideration for the needs of customers, significant digitization of microfinance in Pakistan in the near future seems to be out of touch with the reality that much of the country, especially MFIs’ target populations, faces. A vast majority of Pakistanis, especially women and rural inhabitants, simply do not have sufficient financial literacy or access to technology to utilize digitized microfinance transactions. For the time being, methods such as alternative delivery channels can be used to move transactions to an online medium without having to make drastic, population-wide adjustments. However, after a concerted effort to improve internet access and literacy among Pakistan’s rural populations, the prospect of digitizing microfinance carries tremendous benefits for the sector and the communities it aims to serve.
