World Bank’s 2016 statistics highlight the fact that there are still circa. 100 million ‘unbanked’ adults in Pakistan. That demographic accounts for 5% of the 2 billion adults globally that don’t have access to ‘formal and regulated financial services’. Fintech banking and microfinance companies are, however, making strides towards the greater financial inclusion that is a key pillar to grass roots economic development in Pakistan. Banking and other financial services that use the simplest mobile phone technology and networks of local representatives are now reaching the country’s demographic not within convenient walking distance of physical bank branches. This article is going to highlight how blockchain technological innovation can be utilized in banking the unbanked in Pakistan.
There are several repercussions to the continued existence of the ‘unbanked’ population in Pakistan. On a personal level, lack of access to banking facilities makes it hard for the unbanked demographic to earn, save and transfer money securely. Employers are more easily able to exploit workers paid in cash. This can mean remuneration levels below the legal minimum wage and lack of recourse if wages are not paid. The unbanked are also vulnerable to the theft of savings and lack access to credit and can also often be exploited by unscrupulous middlemen who facilitate grey market money transfers. On a macro level, the inhibition of personal economic development has a knock-on effect on wider economic growth on a national level. The grey economy also denies the administration tax income which has a similar negative economic impact on a national level.
Blockchain Technology
Blockchain technology, first devised as the technology platform that allowed cryptocurrencies to work, is also now being applied to Fintech banking and financial services platforms. It is proving to have particularly rich potential as a technology platform for inclusive banking applications of the kind now reaching Pakistan’s previously unbanked population. Pakistan’s National Financial Inclusion Strategy (NFIS) has targeted universal financial access, with a 2020 milestone of at least 50% of the adult population having a bank account. How is Blockchain technology already contributing towards that goal being achieved and why is it considered to hold such significant potential?
Blockchain technology is, at core, a ledger-based database validated by a network of computers, each computer referred to as a ‘node’, rather than a single central authority. Blockchains can be either public, like those used for cryptocurrencies, or private, such as those used internally by private enterprises or organisations. The difference between how public and private Blockchains work is simply the computer ‘network’ that validates the changes to the database being either the general public or internal computers. In both circumstances, the strength of the system is that unlike a centralised database, the information is not vulnerable to being tampered with from one location. Any change has to be validated by a majority of the nodes. Once changes have been validated, they are cryptographically sealed into ‘blocks’ of interlinked data, that form the database ledger’s history.
This adds a valuable layer of security and means corruption or fraud is almost impossible. It would require the collusion of a majority of the network, with the presumption that corruption and fraud is always only in the interests of a minority. Blockchain technology also allows for much faster settlement times for money transfers, a particularly significant benefit in emerging markets.
Blockchain Application in Fintech Banking
There are several possible reasons why a Pakistani adult may still be unbanked, with a combination of those in play in most circumstances. The most common are:
- Impractical location in relation to physical bank or microfinance branches.
- Banking fees & low income.
- Bureaucracy involved.
- Lack of trust; and
- Lacking the personal documentation required to comply with the Know Your Customer rules regulated financial services providers are obliged to adhere to.
- Lack of financial incentive for traditional financial institutions to overcome the above factors.
The security and automated nature of Blockchain-based financial services can help overcome all of these hurdles. The decentralised system hugely reduces the cost of providing basic banking services and, therefore, the cost of access. It also means using the kind of simpler, older generation mobile phones common to lower income demographics in remote locations for banking services is far more secure.
Blockchain-Based Financial Services Case Studies in Other Regions
There are already several Blockchain-based banking and financial services Fintech applications bringing banking to the unbanked in other parts of the world and other emerging economies. Among the most notable are:
Kora Network: designed to help communities build ‘self-sustaining, community-owned financial services ecosystems’, the Kora Network has recently raised $3 million through a pre-ICO raise and launched a Beta test case of the app in Nigeria. The app facilitates cash-in, cash-out and fund transfer services supported by a local agent network.
Low barriers to entry are key to Kora user adoption and only very basic identity details required of participants. It also allows for access through the simplest mobile phones. A data-based trust system will provide users with additional flexibility and access to tools over time. In future, the system will also integrate with existing financial services unable to access remote, low value markets.
OmiseGo: a Blockchain-based digital wallet that enables peer-to-peer money transfers and payments. As well as being a stand-alone product, the real strength of OmiseGo is how it can integrate different digital wallet providers into one network. Digital wallets that can be held on simple mobile phones are popular in Pakistan but a fractured market means users can experience difficulties making transactions because different senders and recipients use different wallet providers.
Humaniq: this Blockchain and biometrics company allows individuals who lack formal identification documents to create digital bio-identification from a simple smartphone. The platform also allows for zero-fee money transfers and users can access remote work opportunities.
New Blockchain-based banking and financial services companies are now popping up like mushrooms. Not all will be successful but the strengths of Blockchain technology in helping further the movement towards ‘banking the unbanked’ is particularly clear. In coming years this application of Blockchain is likely to have a significant impact in Pakistan and other emerging economies in the region and globally.
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