(May 19, 2009) The primary purpose of this report is to measure and describe the state of financial services in Pakistan. The average Pakistani household remains outside the formal financial system, saving at home and borrowing from family or friends in cases of dire need.
Facts: - Only 14 percent of Pakistani adults (30 percent of households) are using a financial product or service from a financial institution. - Major constraints to financial access arise from high levels of poverty, low awareness of available financial services, and gender bias. - Over half of the population saves, but only 8 percent entrust their money to formal financial institutions. - Life insurance is the most used insurance product, yet only 1.9 percent of the population is insured.
Fourteen percent of Pakistanis are using a financial product or service of a formal financial institution (including savings, credit, insurance, payments, and remittance services). When informal financial access is taken into account, 50.5 percent of Pakistanis have access to finance. Informal access can occur through the organized sector (though committees, shopkeepers, moneylenders, hawala/hundi money transfers, and so forth), or informally through friends and family.
Access to finance in Pakistan has an important potential for significant improvements. Credit to the private sector amounts to 29 percent of gross domestic product, as individuals and SMEs prefer to rely on retained earnings to finance their working capital, investment, and other financial needs. Of the total population, 14 percent have access to formal finance, and about 40 percent have no financial access to formal or informal financial systems. Lack of information on financial services, high levels of poverty, low literacy rates, and gender bias result in low levels of financial inclusion.
Chapter 2: Access to Finance: Evidence from the Demand Side
The average Pakistani household remains outside formal financial system, saving at home, and borrowing from family/friends on need basis. Disparate as formal access might be among rural and urban areas, men and women, income levels, as well as along education and employment lines, interest in financial services is virtually identical. The challenge is to translate financial interest into access. The popular informal finance is perceived to have minimum access requirements in direct contrast to formal finance documentation, creditworthiness requirements, and associated fees that overburden women, and low-income or rural populations. Several groups that seem particularly excluded could be viable customers if the formal financial sector adopts appropriate services and instruments to reach them.
Despite the high interest rates, widespread rationing, segmentation, and a sizeable gap between lending and deposit rates, the informal sector can be competitive for clients with alternative option. Formal markets are growing fast (at 40 percent), but from a negligible base. A key challenge is the sustainability of Microfinance Institutions, which still rely considerably on noncommercial funding. The total lending portfolio of all MFIs in Pakistan stood at $340 million in 2007 with 1.7 million clients in the estimated potential market of 10-20 million. There is a considerable potential for other products such as insurance, payments, savings that could also bank on the postal services network and mobile phones.
Chapter 4: Improving Financial Access for Small and Medium Enterprises (SMEs)
SME demand-side factors, including limited SME accounting, budgeting, and planning capacity have constrained the financial services market. Continued promotion of an enabling environment for SME lending and a large-scale downscaling effort involving both the public and private sectors can forge rapid growth in SME lending. Increasing access to finance for SMEs could also be facilitated by attracting institutional investor with a track record in SME lending. Work still remains to be done in the area of secured transactions. Progress has also been substantial on credit bureaus, though more could be done to facilitate the creation of credit histories by SMEs.
Chapter 5: Harnessing Remittances for Access to Finance
Remittances to Pakistan are estimated at around $16 billion and have experienced considerable growth in recent years. They offer significant potential to support incomes of poor and vulnerable groups. The lion’s share of remittances is transferred by banks (80 percent), with a further 17 percent accounted for by Exchange Companies (ECs) and a small share by the Pakistan Post Office. Banks have excellent urban and some good rural coverage, and usually can deliver within 24 hours. Pakistan Post has a large rural network and is the most common channel for domestic remittances, but services remain relatively inefficient. New technologies offer significant potential to reduce transactions costs and therefore allow new business models for unreached areas where traditional bank branch models are unviable.
Chapter 6: Expanding Access to the Underserved: An Action Plan
The road ahead certainly lies in product diversification, with more services and less requirements catering to the mass population of lower-income capacity. Products (savings, insurance, and credit) for old age, children’s education, pregnancy and medical expenses, and livestock are a few examples of those that take account of women’s needs for life-cycle events. Home-based businesses should be given consideration. Access would also improve with the use of alternative forms of collateral, such as social collateral, compulsory savings, personal guarantees, crops or machinery to be purchased or household assets. Saving products, which are expected to be especially popular, can be built upon traditional saving arrangements and rotating saving and credit associations that women use.
World Bank Program Website maintained by the World Bank Office in Islamabad, a launching pad to all information on World Bank activities in the country (strategy, projects, publications, etc.)
Development Data A wide range of social and economic measures on Pakistan, including links to the World Bank's most important online development databases.
Analysis and Research Compilation of all the World Bank's publications on Pakistan, with 'search' options and links to analysis and research on other South Asian countries.
World Bank Program in South Asia Launching pad to all information on World Bank activities in Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
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