- The banking services innovate after Covid but will follow through
Interview with Dr. Ayub Mehar — a renowned economist
PAGE: Tell me something about yourself and your career, please:
Dr. Ayub Mehar: I am associated as ‘Economic Advisor’ with the Employers’ Federation of Pakistan and serving as ‘Professor’ in Iqra University Karachi (Pakistan). I have been serving as ‘Economic Advisor’ of the Economic Cooperation Organization (ECO) Chamber of Commerce for 3 years and also ‘Director General’ in the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) for 7 years. Development Financing, Macroeconomic Policies, International Trade and Finance are areas of my interest.
I have completed several policy research studies on strategic issues including, ‘Bridge Financing and Fiscal Policies during COVID-19 Pandemic Crisis’, ‘Ineffectiveness of ESG Policies and Incentives: Impact of GSP Plus on Central and South Asian Countries’, ‘Infrastructure Development and Public Private Partnership: Measuring Impacts of Fiscal Policy in Pakistan’, ‘Economic Integration in CAREC Member Countries: Financing Economic Corridors and Sovereign Bonds Market’, ‘Infrastructure Development by Liberalizing Economic Policies: The Straight Path of Economic Prosperity’, ‘Financial Cooperation in South Asia: Recent Development and Challenges’, and ‘FDI, Infrastructure Development and CPEC: Is There a Connection?’ for various national and international institutions including World Bank, Asian Development Bank Institute, Friedrich Naumann Stiftung (Fur Die Freiheit), SAARC Chamber of Commerce and Industry, and ECO Chamber of Commerce and Industry. The Technology Policy and Assessment Center at Georgia Institute of Technology acknowledged my membership in the distinguished panel of international experts for Indicators of Technology-based Competitiveness, which is a project of the US National Science Foundation, United States Government.
I am also alumni of the IAL Gummerbach Germany, where I got training in Public Finance. Recently, I have completed a study on “COVID-19, Digital Transactions and Economic Activities: Puzzling Nexus of Wealth Enhancement, Trade and Financial Technology” for a project on “Fintech and Covid19” jointly launched by Asian Development Bank Institute Tokyo and Cambridge Center for Alternative Finance at the University of Cambridge.
PAGE: Could you share your perspective of the technological innovations in the telecom sector on the banking sector?
Dr. Ayub Mehar: In fact technological innovation and use of financial technology in banking sector is a peripheral of global revolution in information technology. The growing use of information technology and telecom was accelerated because of the several barriers to counter the COVID-19 effects in 2020. Use of the telecom and information technology is a part of other growing ‘Fintech’ activities. It is notable that the term ‘Fintech’ covers a broad landscape from digital currencies and payment systems, mobile phone wallets, cryptoassets, and remittance services, to asset management including internet banking, online brokers, robo-advisors, cryptoasset trading, personal financial management, mobile trading, alternative finance (including crowd funding, peer-to-peer lending, online balance sheet lending, invoicing, and supply chain finance.
It is obvious that ‘Fintech’ credit offers an alternative funding source for businesses and consumers, and may improve access to credit for underserved segments. It may enhance the efficiency of financial intermediation. However, fintech credit volumes are greater in countries with less stringent banking regulation. This phenomenon invite the attention of policy makers and bankers in Pakistan. Though now the State Bank of Pakistan is working on it.
PAGE: How has the digitalization helped the banking services?
Dr. Ayub Mehar: The links between economic growth and the use of financial technology have been established in various studies, while the growth of financial technology and digitalization are closely associated with the banking and other financial services. The less risky, efficient and on time uses of financial services and transactions are possible through various modes of digital banking including credit and debit cards, e-money, electronic transfer of funds, electronic payments of utility bills and other services. Even the e-commerce and purchase of services including health services, travelling and consultancies are now attached with the use of digital banking.
However, the State Bank of Pakistan (SBP) has taken a good step last month to introduce a new series of rules for banks to encourage digital banking in Pakistan. The new rules for digital banking require the provision of internet banking services and mobile banking channels for the customers. The electronic payments of bills, funds transfer, beneficiary management, limit management, credit and debit card management, customers’ ability to stop a checks’ payment are included in the digital services which are covered in the new series of rules.
It is corroborated by the detailed descriptions of these rules that the major objective of the state bank behind the digitalization of banking is the economic efficiency. It was pointed out by the State Bank that end-to-end payment digitalization cannot work if banks only allow their customers to make transactions to recipients registered with that same bank. These rules emphasize that customers should be able to make online payments to a maximum number of billers.
PAGE: Is our banking sector keeping pace with the banking sector of the developed world?
Dr. Ayub Mehar: Despite growing use of digital banking in the country, Pakistan is still at the primary stage of digital banking. In Pakistan only 22 percent peoples of age 15 plus have their bank accounts. According to a survey carried out by the World Bank 45 percent peoples worldwide made digital payments in last year. This ratio is 20 percent in South Asia, while only 14 percent in Pakistan. The worldwide data indicates that more than 34 percent peoples have received digital payments last year which is 15 percent in South Asia, and 8 percent only in Pakistan. Twenty-nine percent peoples use internet for payment of their utility bills worldwide, this ratio is less than 8 percent in Pakistan.
A good initiative in Pakistan is that the State Bank of Pakistan in a recent policy guideline has categorically mentioned that banks will not charge any activation fee or annual charges for using such digital services. Obviously, this step will boost the banking and economic efficiency in the country. However, these initiatives should be considered as the beginning of digitalized banking. The dynamic changes in the legislation are required for economic efficiency in the contemporary world.
PAGE: Kindly compare the banking services of the past with the services being offered in 2021?
Dr. Ayub Mehar: Honestly speaking, it is not comparable. Due to drastic changes at accelerated path because of corona pandemic the banking services have been changed. The flourishing of informational technology and its peripheral businesses due to the pandemic crisis is quite obvious. Digital technology was rapidly adopted by the public for transfer of remittances, when remitting cash become a difficult option due to pandemic related several restrictions. The central banks in different countries have encouraged digital payments and mobile money transfers by waiver of transaction fee and charges on digital payments. Though it is a common opinion that COVID-19 is a temporary crisis and like other pandemics it will become history, however, the counter measures will initiate a new era in the use of digital technology. The counter measures will change the business processes and customers’ habits.
According to a survey carried out by McKinsey & Company (2020), 75 percent of people using digital channels for the first time indicate that they will continue to use these channels even after normalization. The ‘Roshan Digital Account’ is another initiative which has been taken in Pakistan. However, before discussing the economic objective, effectiveness and success of this scheme, one should understand its mechanism. According to the State Bank of Pakistan, the ‘Roshan Digital Account’ scheme provides the banking solutions for those non-resident Pakistanis who are seeking to use banking services for payment and investment activities in Pakistan. The account opening process is very simple. The non-resident Pakistani can open this account either through internet banking or visiting a branch of the participating Pakistani commercial banks at abroad. The account may be opened by visiting any branch of the participating banks in Pakistan. However, such accounts can be fed with remittances received from abroad through banking channels. Feeding from local sources is not allowed. The resident Pakistanis who have declared their foreign assets in the tax returns can also open a ‘Foreign Currency Roshan Digital Account’. Through this account, they can invest in US dollars denominated ‘Naya Pakistan Certificates’ which is a debt instrument issued by the Government of Pakistan. This instrument offers very attractive returns to investors. The annual rate of return on US dollar denominated ‘Naya Pakistan Certificates’ is 5.5 percent to 7 percent depending the maturity period which is from 3 months to 5 years, while annual return on Pakistani rupee denominated certificates is 9.5 percent to 11 percent depending the maturity period (3 months to 5 years).
No doubt this mechanism provides a much required facilitation to non-resident Pakistanis but it is not a valid policy instrument for planning the heavy inflow of foreign exchange in Pakistan. It should not be expected that this mechanism can build foreign exchange reserves or can substitute earnings from exports or can provide an alternate of the borrowing form International Monetary Fund (IMF). The non-residents will deposit limited money in such accounts, only to fulfil their requirements in Pakistan. Their remaining wealth will remain in foreign banks and their businesses at abroad. It has been noted that during first four months of the inception of this service, the size of total deposits in these accounts was 400 million dollar with total number of 80,000 account holders mostly in the Gulf region. Even now the size of total deposits is less than one billion dollar (or less than 10 percent of the annual remittances from Pakistani workers at abroad). Another important notable point is that the attractive return on these accounts are much higher than the current rates of interest in Pakistan. The monetary policy interest rate after cumulative decline of 625 basis points has arrived at 7 percent, which pushed the Karachi Inter Bank Offering Rate (KIBOR) at 7.4 to 8.1 percent (depending duration of maturity). Though, the size of foreign exchange reserves in the country has reached at 20.0 billion US dollars (at the end of February 2021), which included 7.1 billion US dollars of commercial banks. But the role of ‘Roshan Digital Account’ scheme in building of these reserves is negligible.