Making Telenor Bank the change agent for microfinance and e-commerce

AYESHA SHAIKH: How has the bank evolved from when it was established as Tameer Microfinance to where it is today?
SHAHID MUSTAFA: Tameer Microfinance Bank was founded in 2005 with a specific intent. At the time, microfinance banking was primarily transacted by two institutions, Khushali Bank and the First Microfinance Bank – and a few smaller players. The only product offered was group lending and the practice of ‘banking light’ was followed (as in, there were no cheque books or ATMs). The idea behind Tameer was to move beyond providing loans worth Rs 10,000, simply because the people who need microfinance also require access to financial tools for savings and making payments. When Tameer started, we did not get into group lending (it was introduced later), instead, we opted for individual lending. By 2007, it was clear to us that the traditional branch-banking model is difficult to scale up. If today we have 600,000 borrowers managed by 177 branches and financial centres, to handle six million customers, we would need up to1,700 branches and this is not feasible. We started talking to Telenor about a collaboration in 2008 and this led to the launch of Easypaisa in November 2009; ever since, Easypaisa has remained the market leader.

AS: What role can Fintech play in speeding up financial inclusion?
SM: Pakistan is one of the most under-banked markets in the world. Furthermore, our level of national savings is low, cash in the market is high and there are extensive macroeconomic inefficiencies that need to be addressed before the economy can grow. It is important to understand what financial access means. People tend to think that currency and money are the same things and they are not. Currency is a representation of the money in the system and is far greater than the money that is printed. If you are not in the system, your only access to money is through currency. If you don’t have a bank account, you will not have any electronic IOUs through which you can conduct transactions. Financially-excluded people are restricted to cash-only transactions and have no credit history against which to get loans. Financial inclusion involves breaking this cycle of currency and adopting an electronic, bank-based system, which allows an individual to leverage the amount deposited with the bank many times over – this is called the multiplier effect. According to a Karandaaz study, 17 to 20% adults have a bank account in Pakistan. If you add the 5.5 million microfinance customers to this number, the number of people who are a part of the formal finance and banking economy will probably be 6.5 million, which implies that only three to four percent of the adult population are using formal banking channels.So, there is huge scope in expanding the user base. However, the traditional process of opening a bank account is tedious and requires extensive paperwork and documentation. Fintech provides people with an m-wallet which gives easy access to electronic money. There are different levels of accounts; the lowest levels have very low throughputs and the KYC (Know Your Customer) process is simple. The problem is that despite the fact that there are 34 to 35 operational banks with 13,000 to 14,000 branches, none have been successful in increasing financial access. The idea behind Easypaisa was to partner with a telecom network (Telenor) that had almost 35 million subscribers to whom financial services could be offered in a simplified way.

AS: What will be the impact of Ant’s $185 million investment in Telenor Bank?
SM: Ant Financial Services Group are a subsidiary of the Alibaba Group. As they needed a payment network for their e-commerce channels, they chose Telenor Bank as their local payment partner and are in the process of acquiring a 45% stake. They valued the bank at approximately $410 billion, which is about 8.7 times the book value and many questions were raised. There are two ways of assigning a dollar value to a business enterprise. The Book Value method is a historical approach. Ant seems to have opted for a forward-looking approach, taking into account the scope for growth and future revenue; this resulted in a higher valuation. By taking advantage of their SOPs, technology and systems, Telenor Bank will become a dependable player in e-commerce. Currently, Pakistan’s e-commerce volumes are not even one percent of what India generates, which points to a huge, untapped market. As we gear up to become a major payments player in the market, Ant’s involvement will affect all areas of our business – from HR, IT platforms to risk management systems, as we look to a substantial increase in volume.

"According to a Karandaaz study, 17 to 20% adults have a bank account in Pakistan. If you add the 5.5 million microfinance customers to this number, the number of people who are a part of the formal finance and banking economy will probably be 6.5 million, which implies that only three to four percent of the adult population are using formal banking channels.So, there is huge scope in expanding the user base."

AS: Despite the State Bank of Pakistan’s (SBP) efforts to increase financial services penetration in agriculture, larger banks have limited loan disbursements in the category. Why did Telenor Bank venture into agri loans in partnership with Nestlé?
SM: Most large-scale conventional banks prefer lending to the state or to top-tier local or international corporates through T-Bills and Pakistan Development Bonds as they are safe and involve less risk; so, lending to SMEs or the agri sector has never been a priority for them. As a microfinance bank, our target is the grassroots market. In the microfinance sector, there has been huge growth in agricultural lending, led by Khushhali Microfinance and National Rural Support Programme (NRSP). Our goal too was to grow in this category, which is why we introduced very structured lending through Nestlé’s pilot programme. In the programme, we offered loans to dairy farmers at the Nestlé milk collection points and if they took a loan, the amount was credited to their m-wallet from which withdrawals could be made from any agent location. The repayment method was simple. The farmer would sell the milk to Nestlé, but instead of paying the farmer directly, Nestlé handed the amount to Telenor Bank, which deducted the loan instalment and gave the balance to the farmer. Milk is a relatively safe agri product to lend to because unlike conventional crops, it is harvested almost daily.

"The real opportunity does not lie in the macro – it lies in the micro. With help from our Chinese partners, Telenor Bank will become the most innovative and forward-looking change agent in microfinance and e-commerce platforms. The infrastructure and regulations for microfinance and Fintech to take off are in place."

AS: Insurance penetration in Pakistan is also low. Can digital solutions help improve this?
SM: Definitely. We sell mainly life and health insurance products at our branches and there is tremendous scope for insurance products to be available through our m-wallet platforms. The aim of offering insurance through mobile apps is to target the bottom of the pyramid because this section has the highest need for it. Accidental life and health insurance is ideal for daily wage earners and their families, as having no income due to injury or death of the family provider is disastrous. Mobile platforms open up a new market that would not be accessible to insurance companies through regular banks or their sales force.

AS: Where are the opportunities for the microfinance sector and what challenges have to be overcome to realise the sector’s potential?
SM: It is an underserved market and the scope is huge. Fintech is a new name coined to encapsulate all alternative methods of completing transactions – from mobile banking, Blockchain to cryptocurrencies. Yet, despite the opportunity, many Fintechs have not been very successful, mainly due to lack of trust and awareness. This is why most now work in collaboration with banks. However, conventional banks are not agile (they are bound up in regulations which slow down their processes); the advantage of microfinance is that it is far more responsive and the needs of the target market are basic. The real opportunity does not lie in the macro – it lies in the micro. With help from our Chinese partners, Telenor Bank will become the most innovative and forward-looking change agent in microfinance and e-commerce platforms. The infrastructure and regulations for microfinance and Fintech to take off are in place. SBP is planning to launch a digital banking licence and this poses the question that if international banks acquire this licence, how will it impact the business of local commercial banks operating in this category? Although SBP regulations are progressive, the rate of change is even faster, so there is no time to sit idle.

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