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Why people remain unbanked

The News, Shahid Mehmood

Friday, May 30, 2014
From Print Edition

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It was a pleasure to read Dr Idrees Khwajas article on these pages on the low financial inclusion of
Pakistans populace. He dwelled upon the advantages of being banked. My article is an attempt to
examine reasons behind the low level of financial inclusion.

Collaboration between financial and non-financial institutions leads to impositions of transaction costs
upon society, which is in complete contradiction to the understanding that financial institutions help
decrease costs.

For example, during my stint as a visiting faculty member, I was asked to open an account at a
particular branch of a particular bank. I was told that was the only branch where the salary to faculty
members was remunerated. Recently, my debit card stopped working. I was told to come and pick up
the card from that particular branch.

After passing through countless security procedures and considerable effort at finding the branch, I
was handed my new debit card after checks and counter checks by a bevy of bank staff. In short, this
effort at getting a new debit card cost me substantially in terms of time and money expenditure.

The above example is a reflection of what happens all over Pakistan, where collaboration between
banks and non-bank organisations (government or private) end up hurting the end user. Banks realise
a hefty deposit in their accounts, while doling out some favour to individuals at the collaborating
organisation. While they both make merry, the customer is the one who suffers.

Other instances of financial institutions imposing a cost upon the society abound. Take the example of
out of order ATMs that users frequently encounter. For a consumer who sees his time and money (in
terms of travel expenditure) go to waste due to this, there is little incentive to keep money in a bank
or use ATM services. And the majority of the times, banks do it deliberately to hoard cash (given a
high interbank rate, its expensive to borrow money from other banks. So, better to hoard cash than
giving it out).

Add to this the spectre of laodshedding (which makes ATMs unusable) and hidden charges, and we
have a situation where the incentive to keep cash in person outweighs the incentive to keep money in
a bank account. In this particular instance, laodshedding may be a boon to banks but a disincentive
for customers to become banked. Plus, ATMs are now a major attraction for robbers in big cities like

Also, as Mr Khawaja rightly mentioned in his article, one needs to have substantial savings to think
about depositing money. In other words, the use of banking services is positively linked to the growth
in savings and personal wealth. With the kind of backbreaking inflation that seems hard to contain,
even the middle classes find themselves hard pressed to save or realise an increase in wealth. There
remains little sense in depositing money in banks when you dont have much.

Last, but not the least, it is irritating for depositors when they realise that part of the money that is
being lent out by banks is not finding its way into real economic activity. The reality is that at present,
banks in Pakistan are financing the governments operations that add little to economic efficiency or
output. Lending for investment purposes is at an all-time low. In this way, there is a double cost being
imposed upon society: first by banks who lend to government rather than the investor/entrepreneur,
and second by the government through its non-development expenditures and poor governance.

In conclusion, it would be fair to say that it is the behaviour of financial institutions over time that has
led many people to remain sceptical of banking themselves. Instead of helping out people and
reducing transaction costs, they have tended to be the source of an increase in transaction costs. The
emergence of branchless banking is a welcome step. But I fear that it will suffer if banks take over.
Independent branchless banking operators like telecoms offer a welcome competition to the
oligopolised nature of banking in Pakistan. By taking them over, banks (especially the big ones) will
only pre-empt the competition to their organized monopoly. If the aim is to bank more people and
induce more financial depth, then financial institutions will first have to demonstrate to the unbanked
that it is in their interest to do so. Frankly, I have yet to see that happen.

The writer has a masters in economics from Northern Illinois University, USA.