1. Developing Inclusive Financial Sector in Pakistan The Fourth Annual Conference on Management of the Pakistan Economy, Ensuring Stable and Inclusive Growth Lahore School of Economics, 24 April 2008 Haroon Sharif Senior Adviser (Growth and Financial Sector) Department for International Development, UK

2. Page 1 Financial Sector Success Story 80% financial sector privatised Non-performing portfolio reduced Private sector credit up by 400bn in 5 yrs SME now account 16% of total advances Rise in agriculture credit Aggregate borrower have risen from 2.2mn to 4.6mn in 2006 New housing loans of 70bn So, how inclusive is the financial sector?

3. Page 2 How Inclusive is Financial Sector? Only 5mn borrowers - 20mn depositors Credit to GDP ration is 30% (India:40%, Indonesia:50%, Thailand: 75%) 15% of population has bank accounts 171 deposit accounts per 1000 people 30 loan accounts per 1000 people (Bangladesh:479, Nepal:184, India:117) Only 1.2mn microfinance borrowers No access to formal finance in rural areas Massive regional inequalities in terms of financial access

4. Credit providers by province, PSES 2001-02

5. Page 4 Life Insurance Penetration - % of GDP Source: Swiss Re Sigma reports

6. Page 5 Pakistan: Financial Access Informal (ROSCAs, Moneylenders etc) Banks Formal other Excluded A purely speculative band based on SBP figures for financial services and the Poverty and Social Impact Assessment of Microfinance Policies (2006).

7. Page 6 Sizing the Lower End Market Centre for Research on Poverty Reduction and Income Distribution (CRPRID) & Household Income and Expenditure Survey 2000 – 2001. Estimated Adult Population NON-POOR14.5 TRANSITORY NON- POOR 25.1 TRANSITORY VULNERABLE 14.3 TRANSITORY POOR13.3 CHRONIC POOR6.6 EXTREMELY POOR0.9 20.8 52.7 27.6

8. Page 7 Financial Inclusion Targets As Is – Growth Cap 10m 5m 2000 2006 2010 Active Borrowers Savings 25% Debt 50% Equity 25% US$ 7 Billion (a) Remove Growth Cap – Yields of 30% (b) Growth Stimulus Options

9. Page 8 Growth is evenly spread across peer groups

10. Page 9

11. Page 10 Key Lessons – Time for a Policy Shift Wider outreach of finance is critical for stability, sustainable and inclusive growth; Market based solutions are sustainable; Directed credit has not worked; Subsidies do not achieve scale; Need to mobilise indigenous resources; Microfinance alone will not achieve scale; Branchless banking can reduce costs; Financial innovation should be encouraged.