A report exploring the opportunities and barriers in growing the take-up of digital payments among small businesses in the relatively cash-dependent nation of Pakistan has been published containing a series of recommendations to policymakers.
‘Realizing the promise of responsible digital payments for merchants in Pakistan’ has been produced by the Better Than Cash Alliance and offers recommendations aimed to helping both the public and private sector to take up digital payments.
The government of the South Asian nation – whose growing population of about 241 million makes it the fifth largest in the world by population – joined the United Nations (UN)-based Better Than Cash Alliance eight years ago with a commitment to ‘bring millions more Pakistanis into the economy’ by digitising payments.
‘The fates of small businesses and national economies are intertwined. If one thrives, so does the other. Pakistan’s micro, small and medium enterprises (MSMEs) account for 90 per cent of enterprise in the country and nearly half of GDP. Their growth remains perpetually hamstrung by a dependence on cash. This tether to cash means that transactions – and horizons – are inevitably limited,’ the Better Than Cash Alliance report warns.
‘The adoption of responsible digital payments for merchants, with their proven ability to boost women’s economic participation and deliver the UN’s Sustainable Development Goals (SDGs), represents a tremendous pocket of potential growth. Digital payments can be a pathway to solve some of the major economic challenges the country faces,’ it states.
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MSMEs ‘ubiquitous but undocumented’
The 68-page report’s recommendations focus on what it describes as a ‘big opportunity for Pakistan resid[ing] in ushering its micro, small and medium enterprises (MSMEs) into the digital age’. It is based on field research including more than 350 merchant interviews in focus groups across rural and urban areas, covering formal and informal businesses.
MSMEs in Pakistan are ‘ubiquitous but undocumented’, the report outlines, adding that their needs and ‘ways of working’ are ‘poorly understood’. It also emphasises the gender dimension: women-led MSMEs are ‘marginalised, unrepresented in policy forums and hindered by societal norms that make it harder for them to travel or conduct business.’
Just one fifth of Pakistan’s population accesses formal banking systems, the report estimates. MSMEs are, it states, ‘not catered for by the financial sector or by policymakers’. Exorbitant interest rates, topping 30 per cent, ‘cripple the few financial products offered to MSMEs’, it continues, while ‘political instability undermines well-intended efforts to modernise the payments ecosystem and erodes trust in business owners. Consequently, there is no great demand among MSMEs for the digital dividend.’
It goes on to state that ‘too often, despite specific accommodations, MSMEs falsely equate formalisation and digitisation with exposure to taxation.’
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Raast requires ‘scalable use cases’
The State Bank of Pakistan launched an instant payments system, ‘Raast’, almost two years ago. The central bank at the time described it as providing ‘digital, easy-to-use, efficient and cost-effective payment options’, saying it is ‘expected to be a catalyst for providing sustainable opportunities to small businesses and individuals’.
The scheme – developed in collaboration with US-headquartered philanthropic organisation the Bill & Melinda Gates Foundation (BMGF) and Karandaaz, a non-profit company that receives funding from the UK’s Foreign, Commonwealth and Development Office (FCDO) and the BMGF – has its origins in Pakistan’s ‘National Payments Systems Strategy’, which was unveiled almost four years ago. The strategy highlighted the cash-dominated nature of the country’s economy, noting that most salaries are paid with cash and that cheques remain widely used to make government and commercial payments. It described the financial digital ecosystem as ‘severely underdeveloped, both on the issuance and acceptance side’.
Better Than Cash Alliance managing director Dr Ruth Goodwin-Groen writes in the new publication’s foreword that Raast ‘holds the potential to be a watershed moment after many years in the making’, adding that ‘it is imperative that the promised benefits of faster payments are delivered to all segments of the economy, especially the traditionally underserviced, MSMEs and those led by women.’
The report’s executive summary states that Raast ‘will prove vital in driving widespread adoptions of digital financial services’ but that it ‘requires scalable use cases to generate awareness, trust and momentum.’
It states that ‘with sufficient political will… there are easy wins to be had.’ By digitising government-to-person (G2P) and person-to-government (P2G) payments, Pakistan’s government can boost digital inclusion and ‘augment demand and supply for digital liquidity, while previously unbanked MSMEs will be given the opportunity to thrive in a modernised economy,’ according to the report.
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Raast’s communications challenge
“There are so many opportunities for improvement in Pakistan, but to do so, the public and private sector must work together to solve the challenges,” State Bank of Pakistan digital financial services group joint-director Muhammad Imaduddin is quoted in the report as saying. “We are already plotting our own journey to digitise the Pakistani landscape through Raast and other innovative solutions that provide the necessary rails to all entities enabling them to offer efficient payment solutions to the masses.”
Highlighting that fear of taxation is a ‘significant impediment’ to payment systems digitisation, the report makes a crossover point with the launch and promotion Raast.
‘There is a strong perception in MSMEs that digitisation will lead to documentation of their businesses and eventually taxation,’ the report outlines, adding that this notion was ‘further reinforced by the statement from the government at the launch of Raast that the platform aims to increase financial inclusion, leading to documentation of economy and therefore reducing tax evasion.
‘There is an industry-wide fiction that transaction-level monitoring and data exchange occurs between banks and tax authorities,’ it continues. ‘Such mechanisms, though provisioned in law, are inhibited by banking privacy statutes, legal precedents on reducing audit stress, and a lack of technical facility within the tax authorities. Tax audit policy, Federal Board of Revenue technical constraints and banking privacy provisions prevent a fluid exchange of data that may be used for picking audit cases at the SME level.’
“Merchants are not ready to file tax returns and feel digital payment acceptance reduces the deliberate financial opacity that they instrumentalise to protect their margins. This is largely due to the complexity in filing returns, high rate of taxation and exploitation by junior cadre tax officials,” a ‘taxation expert’ is quoted in the report as saying.
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Recommendations and ‘unique advantages’
The report makes six overarching recommendations, which it labels as belonging to six different areas.
Those areas are: ‘engagement, inclusion and representation’; ‘building trust in responsible digital payments following the UN Principles for Responsible Digital Payments’; financially including more women merchants; accelerating adoption of digitisation of payments through scaled use-cases; ‘financial viability of digital payments’ – it states that merchants ‘operate on thin margins and high cost of transactions is restricting the adoption of digital payments’; and ‘disarming the spectre of taxation’.
Recommendations are prioritised according to ease of implementation and likely short-to-medium term impact, with specific calls to action to named organisations. As an example, in the first area, it calls on the Small and Medium Enterprise Development Authority (SMEDA) to redefine the term ‘MSME’ to explicitly classify micro, small and women-led businesses as distinct from medium-sized businesses, ‘to better cater to their unique needs and realities’; and on the Securities & Exchange Commission of Pakistan to simplify business registration for sole proprietorships and small businesses ‘while tying registration as a pre-requisite to access of government services and support programmes’.
The report notes that ‘obstacles present in Pakistan today have been experienced by other countries’, adding that ‘none of the challenges are new, which means they can be overcome’.
It also states that Pakistan has ‘unique advantages’, describing SMEDA as ‘well-established’, and stating that ‘further empowerment will enable it to drive transformative policymaking’. It adds that a national financial literacy programme is ‘well-conceived and demands full implementation’ and a data protection bill ‘has the potential to make strides towards securing user trust in digital payments’.
‘Accelerate financial equality for women merchants’
“We commend the State Bank of Pakistan for its bold leadership in driving responsible payment digitisation for merchants, especially women merchants. Across Asia, digitising merchant payments has led to rapid MSME growth and, as businesses grow, so do economies. We agree – now is the time to accelerate financial equality for women merchants in Pakistan, and look forward to our continued partnership,” said Goodwin-Groen.
The SBP’s Imaduddin is listed in the report as one of four central bank representatives interviewed, with the others being Umair Ahmad, Faiqa Naseem and Shoukat Bizenjo. Musarrat Jabeen, the long-serving head of policy, regulation and development department at the Securities & Exchange Commission of Pakistan, was among the other public sector professionals interviewed.
The Better Than Cash Alliance, which is hosted by the United Nations Capital Development Fund (UNCDF), brings together governments, development organisations and private companies on a mission to encourage the use of digital payments to help achieve the SDGs.
Other recent outputs include a 12-page case study-style report, ‘From 1% to 30%: The key drivers behind the Philippines’ acceleration towards responsible digital payment systems’, published in May. The Better Than Cash Alliance also inputted into Bangladesh’s ‘National Digital Payments Roadmap 2022-2025’, presented 18 months ago.