Access to Finance Study (A2FS) Fatimah Afzal Project Coordinator Good morning everyone! I am Fatimah Afzal, Project Coordinator, responsible for managing the Access to Finance Study, and based in the PMN. My presentation will tell you what all the A2FS is about, and in particular its value to financial service providers such as yourselves. Before I go into the details of the objectives and modalities of this study in Pakistan, I would like to tell you a little bit about the background and genesis of this study. The structure of my presentation is as follows

Access to Finance Study (A2FS) Presentation Structure Background - Why Interest in access to finance? - Key players Objectives and A2FS set-up in Pakistan Value of the information and how it can help The Access Indicators Information at work – examples from Africa Who are the key players not just in Pakistan, but internationally who are steering and driving this agenda and

Background But Consequently Access to finance  economic growth  poverty alleviation Interest among international agencies GoP committed to private sector solutions for economic growth and poverty reduction But Limited comprehensive data to guide policy formulators and financial services providers More supply side and less demand side information Lack of standardized tools to for measuring access Consequently Internationally, research and experience indicate that broader and deeper financial markets generate economic growth which in turn helps address poverty. In Pakistan too since the last few years, there is increasing attention on using private sector as a vehicle of growth and poverty alleviation. Case studies, impact assessments try to document impact of financial access on the poor and Microfinance outreach provides only part of the picture on access of the poor to financial services,More comprehensive data is needed to validate, verify, quantify and define the policy implications as well as business opportunities on access to finance is lacking, particularly from the consumers perspective. Financial service providers are often discouraged to venture the more non traditional markets due to the lack of market intelligence. Can help identify underserved segments, and adapt their operations to serve those segments accordingly. Given the interest among the interl agencies and governments, monitoring and measuring levels of access to formal financial services can therefore contribute to achieving goals of growth and poverty alleviation in addition to helping policy makers, practitioners researchers and the private sector more fully understand the current and potential supply and demand for financial services, more comparative data will also serve to provide lesson on enhancing access and motivate countries to reform their financial systems to encourage greater access. Such measurements has to date been limited by scarcity of data as well as the lack of standardized tools for measurement. Data collection to date does not permit comparability, there are variations on quality and comprehensiveness and the different approaches in measuring access. Consequently, some of the leading development agencies, most notably WB, DFID, UN Measures of access fall into 2 broad categories. Recent data collection efforts on the financial access at the hh level undertaken by the WB, DFID and FinMark Trust illustrated the difficulties of comparability due to the lack of a standardized approach. A joint working group was therefore established to prepare proposals for international standardization of core measurements. Solutions need to come from the market, not a blue print imported from somewhere else and for this information is the key. Information asymmetery at the heart of poorly functioning markets World Bank/IMF acknowledge supply side data does not provide sufficient data for FSD policy Data currently collected focus on supply side: What is offered by those regulated, in what volumes and at what price ….. Demand side will compliment the information for FSD tells you about who is using what, from what providers, for what reasons and what are the characteristics of users, what are needs Policy makers and providers increasingly want to know who has access to what services. Case studies, impact assessments try to document impact of financial access on the poor Microfinance outreach provides only part of the picture on access of the poor to financial services More comprehensive data is needed to validate, verify, quantify and define the policy implications as well as business opportunities “Measuring Financial Access: Outlining the Scope of Current Data Collection Efforts”, World Bank, 2005 Financial Access Indicators Stock take”, DFID 2005 Efforts by WB, DFID, UNCDF to collect better data on financial access – FinScope is key to this Internationally collaborative efforts to harmonize financial access surveys WB, DFID, UNCDF, CGAP and FinMark (some of the major players harmonizing research efforts)

FinMark Trust FinScope Established in 2002 in South Africa Agenda to make financial markets work for poor Several programmatic interventions, including FinScope FinScope A survey tool (a questionnaire) developed in 2002 Provides insights into the financial behavior of individuals and SMEs Supports process of changing financial markets so that individuals and SMEs have better access to financial services A resource for countries in Africa and elsewhere South Africa – FinScope developed here in 2002 Lesotho, Swaziland Zambia, Tanzania Kenya, Uganda Nigeria, Egypt And now Gana & Pakistan - Test cases for WB & FinScope FinMark is an organization that was established in 2002 by development agencies and its working to improve the financial sector for the benefit of the poor and relatively disadvantaged people. It has several financial market development programs but perhaps one of its most noteworthy accomplishment is that it has pioneered financial access surveys that are called FinScope in South Africa. FinScope is basically a questionnaire, a very well thought out and comprehensive questionnaire that provides insights into the financial behavior of individuals and smes. The idea of collecting this data is not just to get a snapshot of how things are but more importantly to understand the reasons for financial behaviors. And help understand the gaps and address them so that ultimtely more people can have access to the kind of services they are looking for. Inspired by its success in SA, FinScope is now being carried out in a range of other African countries. The case of Pakistan and Ghana are very important because here for the first time FinScope questionnaire is being harmonized with WB research interests. The idea is for FinMark and WB to use one questionnaire to meet their information and data needs. So these countries represent the test case scenarios, and drawing from lessons in these two countries harmonized efforts will be taken up in other countries as well. Gathers information that can support process of changing financial markets so that individuals and small businesses have better access to financial services and surveys are either being planned or underway in the following countries. Various countries have adopted the finscope methodology and

A2FS Stakeholders - Pakistan Department for International Development (DFID) World Bank (WB) Swiss Agency for Development & Cooperation (SDC) Government of Pakistan (MoF) - The Client - Close Coordination with SBP Pakistan Microfinance Network (PMN) The Implementing Agency FinMark Trust/FinScope Technical Experts Potential Users of Survey Data AC Nielsen Pakistan Limited The Market Research Company Leading funding agency for the study in Pakistan is DFID, and other two partners being the WB and SDC. In addition to funding, WB is also providing technical support in refining the questionnaire. (Get Project budget) The project is housed in PMN which is providing administrative support and that is where I am based. FinMark Trust through its FinScope consultants is providing very interactive guidance and support to PMN to manage the design and implementation of this survey in Pakistan. Nielsen has been appointed as the research firm that will actually conduct this survey in Pakistan. FBS will provide the sample design for this survey. And of course the end users of this survey are the GoP, FBS and other development project and interested stakeholders to whom the questionnaire along with a brief write up on the A2FS has been circulated for their information and record. Some of the important implementation mechanisms are as follows. Government of Pakistan MoF, SBP Financial Service Providers Federal Bureau of Statistics (FBS) (Sample Design Supplier) Development agencies & researchers

A2FS Implementation Approach - Pakistan Questionnaire development Adapting WB-FinScope questionnaire to Pakistan Inputs from stakeholders Rigorous concept testing & pilot testing February 2006 Sample Design FBS to provide sample design Robust random probability sampling Actual Field Work AC Nielsen Intensive orientation and training of enumerators Strict guidelines for respondent selection and substitution Close monitoring and quality checks June, 2007 Data Dissemination and Application Assistance in mining data and its application Post June 2007 In terms of the implementation approach and where we are in the entire process, Currently the harmonized WB - FinScope questionnaire is being adapted to suit the socio-economic realities of Pakistan. This process is very intensive involves inputs from the In terms of implementing the study in Pakistan, Including bankers, insurance companies and leasing companies

A2FS Sample Coverage - Pakistan the value proposition…. Market Continuum 10,500 respondents – rich & poor Women and men Urban & rural areas (four provinces & AJK) Area based sampling

Consumers, Consumers, Consumers, Consumers, Consumers What A2FS Offers the value proposition…. Consumers, Consumers, Consumers, Consumers, Consumers Reflection of consumers demand & use for financial products and services Who is engaging with financial services sector & how? Why people are not using financial services? Inclusion of psychographics – exploring beyond the traditional reasons for non-access A Segmentation Model – which is not just income based Its value proposition lies in the fact that it’s the first survey that is focusing on demand side. Cost, needs, physical and legal access What are the drivers that influence consumers decision making, financial literacy, knowledge, attitude to life, aspirations, connectedness to community – cultural, social and economic environment how do these shape the person’s decision making. A bit like marriage. Couples may come from the same socio-economic backgrounds but if they don’t understand each other and Segmentation model segments consumers according to their usage, access, financial sophistication, and their quality of life allows banks to understand fully how consumers interact with the financial sector industry. Because FinScope uses area based sampling method, it is possible to represent the population by FSM geographically practically down to street level, providing the bases for very accurate and strategic level marketing.

A2FS – Data Priorities Questionnaire focuses on…. Informal & Formal Financial Products & Services Demographics Socio Economic Lifestyle Characteristics Household and Individual Respondent’s Income Financial Behavior of a Household and Individual Savings (including National Saving Scheme Products) Loans, Credit and Insurance Payment and Receipts All other categories of financial products & services Financial Services Provider Differentiators Technology Financial literacy Psychographics/Attitudes

A2FS’s Value Proposition…. Documentation of barriers Development of policy lessons Benchmarking and tracking change Mobilization of support for policy change Product development & targeting new segments Cross country comparisons Identification of areas for further research & analysis

Access Strand of Financial Services - SA This is an example of the kind of graphical representation of the access strand that will be available through the A2FS. Developmental frontier (45%) Formally served (55%) Banked Financially excluded Black Female 30 – 44 years Tribal land LSM 1- 4 Black and colored 16 – 29 years Tribal, rural and urban informal LSM 1 - 6

Functionality Measures – Landscape of Access Landscape of access Botswana and Namibia 51 21 33 43 25 50 75 100 Transactions Savings Credit/loans Insurance % of the respondents (%of adult pop) FinScope 2004 41 23 Botswana Namibia

% who are formally included among the poor Sub-Indicators may be constructed, such as… % receiving savings or credit through informal providers % who are formally included among the poor % saving in certain financial instruments Due to the complexity of defining concepts of access that differ from usage it is proposed that current users provide the basis for defining the core indicators of access but defined with the objective of identifying and tracking the boundaries of exclusion. Again to If a single headline indicator is to be selected from this group

Exposed information gaps Previously unidentified segments Information - Deepening and broadening financial markets Financial Service Providers innovate and develop new products and explore new markets Governments create improved policy and regulatory environment International Development Agencies assist creation of inclusive markets which cater to financial services needs of poor Researchers and others Stakeholders identifying areas of deeper inquiry New partnerships More communications Exposed information gaps Previously unidentified segments & niches Changed paradigms Systemic change New partnerships, communications, more information around the gaps in the market the outcomes that are expected are

2005 syndicate members In South Africa the Survey is completely paid for by a syndicate of a dozen financial organizations and this includes the South African National Treasury.

The Survey at Work - Examples from Africa Bank Windhoek, Namibia – Serving the Bottom of the Pyramid ABSA Bank, South Africa – Understanding segments within the poor Insurance industry and Banks, SA - Understanding Financial Literacy requirements Botswana – helping to improve the policy environment South Africa’s National Treasury – reaching a trade off between financial stability and financial access So in terms of bringing about changed paradigms and new ways of communication and information sharing what has been the experience of access of finance surveys in Africa? Certainly very encouraging and let’s look at a few examples. Case studies on experiences of banks using IT is capitablized on the Joberg stock exchange. Headline earnings of 5.5 billion rand in 2005. Barclays acquired it and it is now Africa’s preeminent financial service groups. Also co-signatory to Financail Services Charter under which banks have commited to racial transformation and to extending access to financial services to the poor. The banking industry aims to ensure that 80% of the low segments have effective access to bank accounts by 2008. The banks need to comply with the charter and the growing recognition that this part of the market is an econom opportunity has created the urgent need to understand the underserved better and Finscope is supporting this process. Used Finscope segmentation model to look at poor not as a globulous mass of poor but to understand the nuances of the formal and informal activities of the mass market which may have limited incomes but have a range of unmet financial needs. FinScope Bank Windhoek is Namibia’s leading bank with over 43 branches and 61 ATMs across the country, profits were 27 million in 2005. Using a DFID grant the bank expanded branches and used FinScope to design two new products for the poor in the far flung areas far North and south of the country. Their desire to engage in Finscope was to understand the needs and the market potentail of serving those were traditionally excluded from Namibia’s formal banking system. Size of the problem, For example only 34% of the South African’s knew the right word to describe annual price increase and that the lack of financial sophistication reached high up the income curve. And FinScope was also able to point out where geographically, financial sophistication was the weakest. able to identify consumer financial needs and valuable information available to others for their consumer financial education program. Particularly the insurance industry benefited since they found out the low short term insurance penetration in the lower market segments thus needed to find out more about the marekt and to educate them about insurance products. Namibia’s leading bank EasySave: Within 5 months more than 20K savers & US$1million saving EasyCredit: Being piloted and already 80 loans takenup Financial Literacy Size of the problem defined ABSA South Africa’s largest retail bank Segmentation Model helping to understand segments within poor In Botswaana 57% of the population is unbanked and banks earning an exceptionally high return on equity by even international standards so there is an opportunity for banks to reinvest some of that earning to extend banking services to the unbanked. FinScope was able to guide the merger of two private banks one of which has a 35% market share in rural areas. FinScope information assisted in ensuring that in the merger the bank’s role in serving the lower markets is not overlooked. SA govt is faced with the challenge of supporting sustained economic growth while eliminating SA’s historical imbalances. SANt will use Finscope data over the years to benchmark and monitor financial sector development review impact of stauturory and legal reforms and define policies to support financial sector development without compromising stablity.

What A2FS is Not “Sit-on-the-shelf ” research! A specific product/market potential sizing research An answer to everything – it’s a macro study that should inform other studies FinScope is one tool in the “Information toolkit” – but vital as a foundation This is macro level information – not specific product/market potential sizing, nor feature planning Its extremely powerful and should inform other studies e.g. service excellence, customer orientation, communication checks, brand awareness studies …. Use of non-bank other and informal can be misinterpreted – actual levels will be higher because many bank people will also have informal or non-bank products Should be complemented with other analysis

Thank You!

The Financial Access Indicators Challenges in constructing the indicators Access and usage Unit of response – individual or household? Measuring Access: Institutions, services or products? Degree of Access

Are the Lower Markets Profitable? The Prahalad view – a fortune at the bottom of the pyramid? May not be obvious at first – the ICICI experience A source of incremental profit where traditional markets are mature Where the low unit cost: high volume economics can be made to work Where the cost of the R&D has already taken place – leveraging/replicating know-how Where infrastructure improvements bring a market within reach Where the long term reward is sufficiently exciting to merit sub-optimal profits in the short term Where are the incentives for business? Is pro-poor bad – clearly sometimes yes but sometimes it isn’t bad for business. Citigroup in India – first to offer a savings product allowing people to save $25 – they had 150,000 in twelve months Absa/Barclays