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Promoting Inclusive Markets and Financial Systems

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Empowering the poor to save as little as one rupee every day

by on Oct 28, 2011  |  posted in Microfinance  |  0 Comments
Despite the dramatic growth in microfinance, especially microcredit, in the past few decades, the road to total financial inclusion remains a long one. While 190 million people have been reached so far, 2.7 billion people still lack access to formal financial services. In large part, this is because brick and mortar models are costly and take time to spread. The story is the same in Pakistan. Here, microfinance reaches between 2 and 3.6 million clients—2 million for microcredit, 2.6 million for insurance, and 3.6 million for savings—and a recent CGAP report called the country one of the world’s fastest-developing markets for branchless banking. However, potential clients for microfinance range between 10 and 29 million (depending on how one defines microfinance). In the last 60 years, Pakistan’s entire financial system has been able to reach only about 20 million deposit accounts, or 32% of the adult population. Part of the problem has been that until recently, the provision of savings in Pakistan was confined to commercial banks, most of which are located in urban or semi-urban areas. Some NGOs with rural support programs, however, have collected savings and parked them in commercial banks as part of their credit risk management and social mobilization strategies. There is also anecdotal evidence that Pakistanis are great informal savers. A PMN study found that committee and home savings are common among poor people seeking to amass lump sums for upcoming personal expenses or planned investment in assets. In light of Pakistan’s low-level financial access, the Microfinance Institution Ordinance was enacted by the government in 2001 to allow a category of financial institutions called microfinance banks (MFBs), which are allowed to mobilize and intermediate deposits. As a result of this new framework, five green-field MFBs and three transformed MFBs were established. These institutions provide a menu of financial services, including savings products for the poorest. Since 2001, savings uptake has been consistent, and very recently the total number of MFB depositors crossed 1 million savers; close to 80% of these are retail microfinance clients. The State Bank of Pakistan has also created the right enabling environment for branchless banking to grow, leading to increased outreach of all kinds of financial services. Initiatives such as United Bank Limited’s OMNI service and Telenor-Tameer’s EasyPaisa have been able to open about 700,000 branch accounts through a network of 18,500 agents in a short period of time. These are the early days for branchless banking in Pakistan; currently customers use these channels mainly to make payments or send transfers, even though both OMNI and EasyPaisa offer a broader range of services including account opening, cash deposits (without interest), and cash withdrawals. Most customers either time their deposits to coincide with bill payments or cash withdrawals, leaving a near-zero balance in their accounts—or they do not open a savings account at all. While great progress has been made, we still have a long way to go toward total financial inclusion. More research is needed to distinguish how customers feel about savings in general, about the benefits of saving in banks, and about the branchless banking channels available to them. ____ See Dr. Rashid Bajwa, Chairman of the Pakistan Microfinance Network and CEO of the National Rural Support Programme, at the 2011 SEEP Annual Conference. He will be speaking at the plenary session titled “State of the sector: microfinance in an evolving landscape.” 

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