Wednesday, October 15, 2014

Shaping the Financial Access Agenda

Majyd Aziz

Mark Twain, the American author and humorist once noted that “everyone talks of the weather but no one does anything about it.” It seems that this iconic quote can be applied, to a large extent, on the global debate about pro-poor economic policies. Nary has a week gone by without any conference, seminar, or a populist announcement by state leaders regarding alleviation of poverty around the world. The hyperbole is ever-present in these activities and a long list of to-do guidance is circulated, deliberated and discussed. The focus is well-intentioned but the implementation leaves much to be desired. This lack of an inclusive approach has aggravated the global initiative to bring about economic sanity. This, then, is the dilemma that is still the cause of social and political unrest, mega deprivation, and enhanced non-legal actions by people.

The election manifestos of political parties around the world proclaim in exuberant terms the priorities if elected to power. The headline priority is invariably an agenda of poverty alleviation through a defined enumeration of initiatives and projects. The direct financial cost of these measures is never taken into consideration. Resorting to catchwords and demagoguery is the marketing ploy during electioneering and the hapless crowd eagerly listens and raises full-throated slogans. For them, every election is one step away from deliverance from their misery. Reality sets in soon and the gap between the rich and poor widens further.

The above narrative is not an isolated perception but is universal and more so in less developed countries. The huge financial resources required to cut down the poverty figures take a heavy toll on the governments. Domestic assets are not enough to bring about the attainment of the objectives. Often, the election pledges and promises succumb to grandiose projects that are generally not beneficial for the less privileged but reflect the utter disregard by the rulers for the nation’s prime imperatives. This also manifests disdain for social justice, for pragmatic welfare of the people, and for human values.

The access to finance in a country like Pakistan is tragically very limited and directly affects the population, especially those on the lower tier of income groups. It also discourages micro and small sized enterprises from expanding or surviving due to lack of affordable financial resources. The unreasonably high financial transaction costs, non-dissemination of credit availability, indefinable incentives, gender discrimination, and poorly designed or non-transparent policies are the negative aspects of whatever financial access is currently available. Thus, the lack of prescribed access to finance impacts on the welfare and sustainability of small enterprises, as well as on low income households. This is undoubtedly the crux of the matter.

The International Finance Institutions, such as World Bank, IMF, or Asian Development Bank, are generally castigated for their macro-economic recipe that focus on eliminating subsidies, increasing the rates of infrastructure like electricity and gas, liberalization of trade, broadening the tax base through value added tax, etc.

However, the pro-poor and universally applicable initiatives undertaken by these IFIs, such as IMF, are noteworthy. This new approach seems to be a visionary paradigm shift and the judicious implementation of these initiatives would bring about desired enhancement in the quality and standard of living of the dispossessed and deprived populace in the world. IMF has developed the use of Financial Access Survey (FAS) that enables policymakers to map out the dynamics of promoting financial services and regulating and supervising financial institutions. According to IMF,”the FAS is the sole source of global supply-side data on financial inclusion, encompassing internationally-comparable basic indicators of financial access and usage. It provides policy makers and researchers with annual geographic and demographic data on access to basic consumer financial services worldwide.”

The FAS mapping of Pakistan reveals some key indicators regarding access to finance. The charts below from the FAS reveal a very low exposure to commercial banking, especially when there is a growing increase in number of bank branches. It shows that there are only 4 commercial bank branches for every 100,000 adults. There are less than 14 bank branches in every 1000 square kilometer radius while ATMs are about 6 for every 100,000 people. Moreover, most of the foreign commercial banks are located in urban areas and basically the government-owned banks such as National Bank of Pakistan or the Zarai Taraqiati Bank Ltd (erstwhile Agriculture Development Bank Ltd) have exposure in rural areas. It is also worthwhile to point out the fact that since most of the banks have stringent rules and excessive paperwork, the ordinary citizen is usually discouraged from entering the portals of these financial institutions. Furthermore, only about 15% of households have deposit accounts or borrow from these banks. That is why savings rate is also pathetically very low.

The IFIs can include a substantive package of initiatives in the approved loans given to various nations. For a country like Pakistan, there is a vital need to provide loans on lower-markup basis for financing of low-cost housing projects across the country. At the present moment, there is a significant shortage of over nine million housing units. Every day, this figure enhances by about 10,000 units. One major reason has been the high cost of construction as well as either non-availability of land or exorbitant cost of land. Thus, housing mortgages for a 25 year tenor at single figure markup rates would induce more people to obtain housing loans and encourage them to move to suburbs or settlements away from the hustle bustle of urban areas. Moreover, an upsurge in housing construction would be beneficial for more than 45 ancillary industries and create abundant job opportunities. This is very much needed for Pakistan and this is a recipe for economic development in the otherwise shaky business and industrial environments.  

The scheduled commercial banks are also tapering down their exposure of lending to SMEs. This has gradually become adverse to the growth and proliferation of the SME sector due to the fact that the burden of cost of capital is exceptionally prohibitive and beyond the capacity of many SMEs and MSMEs to service their debt obligations. Moreover, denial of credit from commercial banks also compels many SMEs and MSMEs to source financing from the microcredit institutions or informal financiers, albeit at a very high markup rate. This too is another discouragement of easy financial access for those who have less collateral or who are unable to obtain third party guarantees. A glance at the chart below demonstrates this tough situation.