Pakistan’s high financial exclusion rates

LAHORE: Despite efforts from both the government and the private sector, Pakistan continues to have the highest rate of financial exclusion in the region, limiting the ability of the majority of its citizens to build economic resilience.

Financial exclusion refers to the lack of access to basic financial services such as bank accounts, credit, savings and insurance. It predominantly affects low-income individuals, those in rural or remote areas, and marginalised communities. This exclusion hinders people’s ability to engage fully in the broader economy, preventing them from building wealth and economic resilience. While financial exclusion remains a regional issue, its degree varies across countries. In many ways, financial exclusion can be seen as a modern form of apartheid. Those without access to digital funds are cut off from essential online goods and services, digital education platforms, and even healthcare solutions. As more services migrate online, those excluded from digital finance face increasingly significant disadvantages, creating a digital divide that exacerbates inequality.

Financial inclusion is relatively high in China, with approximately 80 per cent of adults having bank accounts, although disparities still exist in rural areas. A decade ago, 35 per cent of the population in China was financially excluded. In India, around 20 per cent of adults remain financially excluded, although the situation has improved thanks to the government’s push for financial inclusion through the Pradhan Mantri Jan Dhan Yojana; a decade ago, 65 percent of people were excluded from financial services.

In Pakistan, financial inclusion remains limited, with only 21 per cent of adults having access to formal financial services. A decade ago, the excluded population was 85 per cent, indicating slow progress in this area. In Bangladesh, despite improvements, about 40 per cent of the population remains financially excluded.

Financial inclusion offers numerous benefits for the state, including improved tax collection, as digital financial services make it easier to track and collect taxes. It also boosts economic participation, driving higher growth and development. Financial inclusion supports social safety nets and government-to-person payments, aiding faster poverty alleviation.For individuals, financial inclusion provides access to credit, enabling borrowing for personal needs or business investments, which can improve living standards. It also allows people to save securely and access insurance, reducing vulnerability to financial shocks. With access to funds, individuals can invest in education, healthcare, and other productive assets, promoting overall well-being.Promoting financial inclusion requires a multifaceted approach, including policies that increase access to banking, encourage digital finance, and build trust in the financial system. The state must expand the network of bank branches and ATMs, particularly in underserved rural and remote areas, where physical banking facilities can bridge the gap for those without digital access. Encouraging banks to collaborate with local agents or shops to offer basic banking services in remote areas can also expand access. Banks should offer low-cost or no-frills accounts with minimal documentation.

Partnerships with telecom companies and financial technology (fintech) firms can help people in remote areas access digital wallets, mobile payments, and other digital financial services. A national digital ID system, already in use in Pakistan, can streamline the account-opening process and assist individuals who lack traditional identification documents, enabling wider participation. Incorporating financial education into the national curriculum can equip future generations with financial management skills, fostering a more financially savvy population. Allowing fintech companies to test new products under flexible regulatory oversight can help them develop innovative solutions while managing risks.

Delivering subsidies, pensions, or other welfare payments directly to beneficiaries’ bank accounts, as is being done in Pakistan, encourages individuals to open accounts and familiarize themselves with digital financial systems. Additionally, protecting consumers from hidden fees, predatory lending, or data misuse is essential to building trust in formal financial systems. Since financial inclusion relies heavily on connectivity, investing in affordable, widespread internet access with a stable power supply is critical for the adoption of digital banking and payments.