Telecom microfinance banking versus commercial banking: a battle in the financial services sector

Abstract

The purpose of the study is to compare the growth rate of commercial banks with microfinance banks, under the shadow of financial exclusion, and to provide a way forward for commercial banks. As we are living in the age of transformation, businesses cannot survive without evolution and necessary transformation. The Telecom sector of Pakistan suffered at the hands of Over-The-Top services, so is happening with the commercial banking. Telecom companies have chosen microfinance banking as their alternative revenue stream which is affecting commercial banks. Microfinance banks, typically mobile phone banking, are showing more growth in deposits and loans than commercial banks. Along with the analysis of industry reports, commercial banks’ managers are also interviewed to perform an accurate analysis of the situation. It has been concluded that commercial banks are suffering due to financial exclusion and their deposits and lending rates are also decreasing due to microfinance banks. It is important for commercial banks to formulate their strategies and introduce new services according to the needs and preferences of their customers and they also need to increase banking awareness of their potential customers.

Appendix

Q. What do you say about financial exclusion? Is it impacting your bank? As per your knowledge, why don’t people open bank accounts? Have microfinance banks impacted your bank?

Answers:

Respondent # 01.

Yes, we are facing losses over losses. In modern countries, people pay taxes and have insurance, but in Pakistan, people run away from both things. People do not want to pay taxes that is the main reason for financial exclusion. Lack of awareness is another reason of financial exclusion. Banks are suffering because of lack of awareness. People do not want to open bank accounts and enjoy the services we want to provide instead they would come into our bank and stand in queue for hours. If they had awareness, they would have opened a bank account and enjoyed the services we provide at fingertips. They can save their time by using Internet banking. The biggest reason for people not coming to us is the lack of awareness. If we educate people and tell them the benefits of using banking services, then they will come. Banks are facing problems due to lack of deposits. If deposits increase, banks use funds to invest in buildings and different businesses. The profits earned from these investments are then spent on bank customers and on bank employees and bank revenues increase as well. We are providing Internet services and provide mobile phone banking. We are giving ads and doing marketing through electronic media and brochures, etc., but people are not responding the way they should. I think commercial bankers should motivate people by going to their doorsteps and asking them to discuss their problem. Only then we can increase people’s awareness about the banking industry. Microfinance banks are reaching out to every potential customer. Their customer base is increasing rapidly because they provide small loans which anyone can avail easily. Expansion of microfinance banking is affecting commercial banking.

Respondent # 02.

People do not want to keep their money in their accounts because of the fear of tax deductions by the Federal Board of Revenue (FBR). Non-filers are withdrawing their money from banks because there is a rumor that FBR is asking for details of those who have bank statements of more than 500,000 rupees. It is just rumor nothing else. People are afraid of being taxed because they do not want to pay taxes. The reason of not paying taxes is distrust in the government. The very government comes with new regulations and people are afraid that the next government might charge them more taxes if they show their assets. The government needs to aware the people about the right use of taxed money. There should be some online portal that can show where the taxed money goes. The banking industry is suffering due to the withholding tax which the government imposed. If you deposit 100,000 rupees and then pay rupees 600 to withdraw your own money, then you will never come back to us and it all is happening due to the government. Internet banking is good, but commercial banks need to provide the same services as the microfinance banks are providing to stay ahead of them. Services provided by microfinance banks are attracting new customers which is not good for commercial banks. But seeing the current economic condition, I do not think that commercial banks would want to take that risk. They would want to stay within their domain.

Respondent # 03.

Banks are suffering due to financial exclusion. Those who have money are not circulating it through the formal financial system. Neither that money is showing in the balance sheet of banks nor it is showing in the balance sheet of the economy. When that money will circulate through banks, it will have an impact on the economy. Banks are earning their profits, but there is a lot more potential in the market. I think FBR and financial institutions need to aware the general public about the benefits of using banking services. Those who use our services know what we can do, those who do not use our services they never come to know real benefits of banking services like we give credit cards and we help people in car financing, etc. Lack of awareness and taxes are the reasons of financial exclusion. People are afraid of taxes, it is just rumor. The government needs to motivate people to open a bank account to increase financial inclusion. Stakeholders of the informal economy are also scaring people of government regulations. They are saying to people that if you once go to the bank, they will charge you taxes and then they will charge you taxes for the rest of your life. It should stop. Microfinance banks are doing a great job to bring people into the formal financial system. Though the activities are negatively impacting commercial banks, but they are good for financial inclusion. Especially the mobile banking services provided by microfinance banks are advanced than those provided by commercial banks. People used to come to commercial banks before, but now they prefer using mobile banking to fulfill their small needs.

Respondent # 04.

First thing is a lack of awareness. People do not know what they will gain by using banking services. This is impacting the banking industry, but banks are not feeling it yet because accounts are increasing. Bank accounts are increasing but at a slow pace. Deposits are increasing and banks think that nothing is wrong. In fact, people are preferring microfinance banks because they provide small loans. Second thing is that our economy is mostly on agriculture. Farmers need small loans that they can take from microfinance banks. They can use small loans for buying pesticides and can pay back after selling their crops. Third is that our law and order situation is not very good. People feel that keeping money at home may result in robbery, and so it is better to keep it at a bank, but people are afraid of FBR. The government has charged withholding tax which is causing a reduction in deposits. Stakeholders of an informal economy like commission agents, they also disinform people about banking services. It is only happening due to a lack of awareness. If people are fully aware, they will know the true purpose of the banking industry and they will register themselves with the FBR to avoid extra taxes. FBR gives benefits to the filers and charges extra taxes to the non-filers. Banks are growing through branchless banking, and this growth is more for microfinance banks. Their interest rates are higher, but because they give microloans, so people do not feel much burden of interest. They are giving good interest on savings too, so people are keeping their money with them. The government should increase awareness in people and should reduce/eliminate taxes because they are making negative impacts on people. It is also impacting the economy. Money laundering is being promoted by imposing taxes on people’s own money because people will find alternative ways to transfer money. The amount of investment, which is in the market, banks do not have that kind of deposits.

Respondent # 05.

Financial exclusion is affecting the banking industry. It is because of a lack of awareness. People are also afraid of taxes and think that the government will take their money if they open bank accounts. Those who are educated know that nothing like that happens. Public awareness of banking services is very low, only 20 to 30 percent of people know about banking services. People also see that if they use banking services they will be taxed. They will not benefit but will need to pay taxes. Problem is that FBR is not guiding them properly. FBR should guide people that you will not be charged with withholding tax if you become filers. We are guiding people to open bank accounts, but they are afraid of taxes and they lack awareness as well. Deposits are lifeblood of a bank. When people make deposits only, then we will be able to lend money. Our deposits are growing at a very slow pace. Finances in our market are about six to seven billion rupees, but the money which is documented by the banks is only two and a half billion rupees and the rest is cash economy. In the current scenario, microfinance banks are gaining advantage because the services proved by them are different from us. They provide short-term loans without extensive documentation as commercial banks. Microfinance banks have more customer base in recent times, but their revenue is lesser than ours.

Respondent # 06.

Financial exclusion is impacting us. We want more and more people to come inside the formal economy so that we earn revenue. Our job is to open accounts, new accounts will open, and revenue will increase. People are afraid of the Federal Board of Revenue (FBR) these days. Those who have five hundred thousand rupees in their accounts, FBR is asking for their details. Those who had accounts are moving into the informal economy. But it is just rumoring that FBR is asking for details. We never received any instructions for that. Nothing is happening, but rumors have caused enough damage already. We are suffering due to rumors. Our revenue has stopped. Customers are not coming. People are afraid of entering the tax net and face FBR. They do not want to get into anything like that. No need to get into trouble and be answerable to FBR. We people are afraid of questioning. When a small letter comes from FBR no matter what is written in it, people get scared. The basic reasons are lack of awareness and education. Entering the formal financial circle is beneficial for everyone. You will receive tax rebates and will not be charged for making withdrawals. We need to educate people. Our lawyers run their own business and the amount which should go to the government never goes to it. Lawyers take that money as their fees to save peoples income. The money which should go to the government, it goes to the lawyers. It will take time, but I am hopeful that the situation will be better in the future. We want maximum people to come into the tax system, legalize their money, pay taxes, and enjoy tax weavers. Financial exclusion is not the only thing which is impacting commercial banks. Microfinance banks also impact us, not in the shape of transaction value but in the shape on transaction numbers. People use mobile banking services provided by microfinance banks more often then those provided by commercial banks. Yes, the microfinance banks do affect us in a way.

Respondent # 07.

Three things are important; people lack awareness. Most of them do not know the benefits of using the formal financial system. For example, the government provides loans of rupees 6,000 per month to the poor and give them ATM cards to withdraw that money. People do not use those cards themselves instead they ask others to withdraw money for them. Lack of financial education. If they were educated, they would withdraw their money by themselves. The banking sector never introduced a program that could increase public awareness. No steps are taken by the banking industry to educate and aware people of banking services. Teams go to every home for population welfare, but no one visits homes for banking purposes. No seminars, no door to door campaigns. If some banks motivate people that too for their own benefit, not for people's benefit. The second things are that there are no government campaigns to promote the banking industry. The government should educate people about taxes and should ask them to become filers. A farmer does not know that he will be charged with taxes if he withdraws more than 50,000 rupees. He must be informed before he makes a transaction. The third thing is the banker’s own behavior. They do not treat all the customers equally. The rich are treated with care, but the poor are not treated alike. Banks should educate their staff to treat everyone equally. Customers do not come to us if we do not treat them with care. When we talk about microfinance banks, as its clear from the name, they provide microservices. They cannot compete with us in big transactions. Their users are increasing that because they provide small loans and people use their mobile banking services like Easypaisa and Jazz Cash. So, mobile banking is also impacting us. You do not need to go to a bank to withdraw or deposit your money. Just go to a shop in your street.

Respondent # 08.

Yes, it’s impacting banks. First thing is that they think that they do not have money so why should they go to the banks. Secondly, they think that if they even go to the banks, they won’t be able to properly utilize banking services. They think that they don’t have benefits in opening bank accounts. State bank has given targets to the banks under the National Financial Literacy program. That banks should visit those areas where financial exclusion is more. They should resolve people’s issues and resolve their issues on the spot like National Database Regulatory Authority (NADRA) verifications and open their accounts so that the issues of financial exclusion can resolve. Our bank is opening accounts on daily basis under the “Asaan Account” scheme which state bank launched. Financial exclusion is impacting in two ways; one is that people are not using our services. We are trying to bring them in the circle. Second is that those who do have an account but are not receiving loans from us. According to state bank’s reports: borrowings are very low as compared to deposits, e.g., if deposits are around rupees 52 million then lending is around rupees 7 million only. If we include them then obviously our performance will increase. Our performance will further improve. Our deposit base is not improving because of financial exclusion and our lending portfolio is also impacted. As compared to us, microfinance banks are focusing on poor class. They are bringing in those who are completely excluded. They are providing services at doorsteps. Some people are financially excluded because they are in remote areas. Mobile banking can reduce financial exclusion. Its increased ease of use impacts the overall customer base as well as a potential customer. Lack of awareness is the main reason of financial exclusion. People don’t have knowledge of banking services. They don’t know how they can use banking services. Secondly, people live in remote areas. Thirdly the poor think that if they enter a bank then the bankers won’t treat them well. People should be trained for decreasing financial exclusion. Awareness should increase. To facilitate them at their doorsteps so that their rapport with banks strengthens.