Scientific discoveries and scientific method of thinking have played a substantial part in improving human conditions. These have enhanced our understanding of the universe and the life span on average. In recent times a number of inventions have brought in efficiency by raising Total Factor Productivity gains and agricultural yields, that is helping to feed a population which has increased from almost 2.0b in 1920 to 7.7b in 2020. However, adoption and usage of technology is not the same across the globe or even within the countries. Time lags are sizable and dependent on the income levels, literacy rates, cultural and social norms, and many other factors. Let us take the example of tractors that were invented in 1894 and its usage was widespread across the developed world however, this was not the case till the recent past in Pakistan as some of the smaller farmers still used bullocks for ploughing. Electricity consumption is another example wherein its per capita usage in Pakistan is around 550KWH while in USA it is above 12,000KWH. We see similar pattern in case of recent inventions such as internet and mobiles. Almost 66% households in developed countries have internet compared to just 22% in least developed countries. Surprisingly however the pace of adoption and usage of mobile phone is much faster compared to usage of electricity.
Still vast majority of population especially women do not have mobile connection according to GSMA. In my recent field visit to a village of Pindi Bhattiyan sitting with very confident women who were involved and running numerous micro-enterprises, I was informed that only two out of twelve possessed a mobile phone. “It is socially still not acceptable in our village for most of the women to own a mobile phone”, explained one of them. The others agreed, “We use mobile phones of our husbands, sons and brothers when we need to talk to someone” the lady continued. This reminded me of a famous saying by Peter Drucker, “The culture eats strategy for breakfast”. Change in cultural values take time. Patriarchy has still strong roots outside 4 or 5 major cities of Pakistan.
Digitization is transforming many industries and the financial services industry is no exception. It is bringing a lot of efficiency and reducing turn around time, but is it really benefitting the microfinance clients, especially those living in deep rural areas, the last mile clients, the rural women? In my opinion the basic premise based on which conventional financial institutionshave stayed away from a typical MF client is lack of information and data, business proposition and adverse selection. In order to address these arguments MF institutions were formed and facilitated by number of governments across the world. The problem of information asymmetry and to some extent adverse selection was addressed through forming groups and group lending, especially in rural areas, which provided the social collateral. Group meetings did not only provide information about the clients but also mitigated adverse selection by filtering out those clients that were socially not acceptable in the group and perceived high credit risk.Whatever risk still remained was compensated through charging higher risk premiums compared to what a commercial bank would charge to ablue-chip company.
Digitization has unbundled the operationsof financial service providers from acquisition of clients to storage of data and some of the middle office operations that have been outsourced, although the balance sheet capacity to bear risk still needs to be cracked. In Microfinance (MF) sector disbursement of sizeable proportion of loans and repayments can now be done through mobile applications. This has enhanced efficiency of the MF institutions and saves many hours of their clients. But the real challenge comes with a lending modelwhich is based on credit scoring ormachine-basedlearning. The problems here are multidimensional. Firstly, the preparation and testing of this model has high costs. Secondly, to fine tune these models, one needs to have sizable default rates, which provide data and in future ability to reject those clients who exhibit bad credit behaviour, thus further increasing cost of operations in the initial phase. These are conveniently and largely passed on to the consumers, presently. Thirdly, almost 80% of women and 60% of men do not have smart phones and a similar number do no use mobile internet regularly or any other medium that exposes their behaviors (data) based on which they can become clients of digital based models, hence exclusion. The mobile ownership may change in the next few years but till then market mechanism is failing. If the argument is that higher level of financial inclusion brings substantial economic gains, then its penetration needs to be facilitated as a public good.
Numerous initiatives have been taken by the government, SBP and SECP which ranges from introducing regulations for branchless banking, EMI licenses and digital banks, to formulation of National Financial Inclusion Strategy, sandbox approach to pilot test new ideas and address the challenge of interoperability through RAAST. These efforts have been complimented by client education and stricter rules for client protection. All these steps have improved financial inclusion numbers in the country.
There is now a need for the development community to focus on and facilitate developing a good credit scoring model that doesn’t put cost on the clients for its testing, refinement or even failure.The R&D cost should not be passedon to poorer clients. This would still not satisfy thebigger constraintposed by cultural values which would take its natural courseand time to evolve where women are not restrained from owning a mobile phone. There is also empirical evidence that women are much more unlikely to take their financial decisions on mobile phone applications. In my opinion, in the meanwhile, those who do not own a mobile phone or have weak digital footprint, efforts should continue to be provided financial services through conventional models.
— Yasir Ashfaq is a
freelance contributor.