FINANCIAL INSTITUTIONS AND MARKETS

ASSIGNMENT NO.2
FINANCIAL INCLUSION IN SAARC COUNTRIES
SUBMITTED BY ROLL NUMBER
ADNAN ANWAR FA-15/BAF-002
SHERAN HAMID FA-15/BAF-012
AHSAN NAWAZ FA-15/BAF-016
MAHNOOR SHARIF FA-15/BAF-041
SUMMAIYA MUGHAL FA-15/BAF-049

SUBMITTED TO
MAAM SABEEN KHURRAM KHAN
DATED
28-APRIL-2017
 Define Financial Inclusion and discuss it with reference to SAARC
Countries.

SAARC
The South Asian Association for Regional Cooperation (SAARC) is the regional
intergovernmental organization and geopolitical union of nations in South Asia. Its
member states include Afghanistan, Bangladesh, Bhutan, India, Nepal, the
Maldives, Pakistan and Sri Lanka.

SAARC was founded in Dhaka on 8th December, 1985. Its secretariat is based in
Kathmandu, Nepal. The organization promotes development of economic and
regional integration. It launched the South Asian Free Trade Area in 2006. SAARC
maintains permanent diplomatic relations at the United Nations as an observer
and has developed links with multilateral entities, including the European Union.

FINANCIAL INCLUSION
Financial inclusion refers to a process that ensures the ease of access, availability
and usage of the formal financial system for all members of an economy.
Policymakers view this as a mechanism to improve peoples livelihoods, lower
poverty, and advance economic development. An inclusive financial system has
several merits. It facilitates efficient allocation of productive resources and thus
can potentially reduce the cost of capital. In addition, access to appropriate
financial services can significantly improve the day-to-day management of
finances. An inclusive financial system can help in reducing the growth of informal
sources of credit, which are often found to be exploitative.

It is generally agreed that financial inclusion need to cover four types of financial
servicessavings, payment, credit, and insurance. Financial Inclusion in SAARC
countries are explained briefly as followed;
PAKISTAN
Pakistan is host to over 191 million people living in geographically diverse areas where the
majority (60 %) of the population resides in fundamentally financially underserved rural
regions. Endowed with critical strategic potential, Pakistan is a pivotal south Asian economy
with a vast market of diverse resources and economic potential. Financial inclusion is a core
component of SBPs financial sector development strategy. It envisages transforming the
financial market into an equitable system with efficient market-based financial services to
the otherwise excluded poor and marginalized population including women and young
people.

Financial Inclusion plays a pivotal role in promoting inclusive economic growth through
enhancing Livelihoods and enterprise activities. Given its significance, SBP is striving to
create an inclusive financial System that offers access to basic financial services for all in
the country. In pursuit of this objective,
SBP has been driving Financial Inclusion as a strategic goal through a three pronged
approach, which
Includes Creating an enabling legal & regulatory framework based on proportionality
between competing objectives of Inclusion, Stability, Integrity and Protection, allowing
innovative alternatives for promotion of financial inclusion through microfinance and
branchless banking, agriculture finance, Islamic banking, Secondly Implementing policy
initiatives to enhance credit, market information and infrastructure to promote financial
inclusion on sustainable basis, and Building partnerships and alliances for capacity building
and advocacy of financial inclusion agenda.

SBPs efforts for promotion of financial inclusion have been yielding significant results. The
Access to Finance Survey (A2FS) 2015, which is a nationally representative demand side
survey, indicates that access to formal financial services has increased from 12% in 2008 to
23% in 2015 and adult population with a bank account has increased from 11% in 2008 to
16% in 2015. Particularly, womens access to financial services has expanded considerably,
as 11% now have access to a bank account, compared with merely 4% in 2008.

Today, Pakistan is considered as one of the fastest growing markets for branchless banking
due its innovative policy approach which has helped catalyze business model and
technological innovations to build banking channels for low income households. Pakistans
efforts have been recognized internationally. International development agencies and media
have now been highlighting Pakistan for its market and institutional environment for
 branchless banking. In 2011 and 2012, Pakistans microfinance regulations were ranked
best in the world by the Global Microscope report, and recently Pakistan was ranked
number 5 amongst 55 countries in the Global Index on Financial Inclusion

Despite these sustained efforts, the level of financial inclusion remains very low. Just 16%
of Pakistani adults have access to a bank account, well below both the South Asian average
of 46% and the average for all developing countries of 54%. While SBP has been very
proactive in promoting an inclusive financial sector, many of the issues that need to be
addressed fall outside of its regulatory mandate.

Progress on Financial Inclusion Indicators

Area Indicators of Access to Credit Jun-11 Jun-12 Jun-13 Jun-14 Jun-15

Microfinance Gross Loan Portfolio (PKR 28 34 47 61 81

billion)
No. of borrowers (in 2,030 2,232 2,635 3,144 3,507
thousands)
SME Outstanding SME Finance (PKR 271 258 234 253 261
Finance billion)
No. of SME Borrowers (in 157 149 144 134 158
thousands)
Agricultural Agricultural credit disbursement (PKR 263 294 336 391 516
Finance billion)
No. of Agriculture 1,445 1,960 1,990 2,151 2,185
borrowers (in thousands)
Islamic Total Assets (PKR 560 711 903 1,089 1,495
Finance billion)
Deposits 452 603 771 932 1,281
(PKR billion)
Housing Outstanding Housing Finance (PKR 62 57 52 53 59
Finance billion)
No. of borrowers (in 95,553 87,059 79,478 74,894 70,498
thousands)
SRI LANKA

In Sri Lanka, about 80 percent of the population lives in rural areas. Agriculture is the main
source of income for these people and many of them work at the smallholder level. Loans
are necessary for farmers to adequately invest in seeds, fertilizers, tools, and other
productive inputs. Loans can also prove instrumental in compensating for the occasional
inadequate harvest. Yet, the proportion of people who have taken out loans in Sri Lanka in
the past year is a dismal 9 percent. Only 22 percent of the population in the past year has
saved in a financial institution.

Sri Lanka has the highest level of financial inclusion in South Asia with easy access to
finance, according to a recently published Asian Development Bank Institute (ADBI) working
paper. In South Asia, only 33 percent of adults have an account at a formal financial
institution
In Sri Lanka, 68 percent of adults have an account in a financial institution, compared to 38
percent in Bangladesh and 35 percent in India. In the aspect of borrowing, Bangladesh led
with around 23 percent of adults while Sri Lanka came in second with over 16 percent.33
licensed commercial banks and license specialized banks operated in Sri Lanka at the end
of 2012 with 6,487 bank branches and 2,538 ATMs.

In 2006, 82.5 percent of the households in Sri Lanka were accessing either these formal
financial institutions or semi-formal ones such as micro-financing institutions (MFIs), while
98 percent of the households had access to these I institutions by 2009. 38 percent of the
households had access to both forms of institutions in 2006, which increased to 64 percent
in 2009, while 84 percent of the households were accessing multiple financial institutions for
their borrowing or saving needs, an increase from an already high 60.2 percent.

On average, households were accessing 3 financial institutions in 2009, compared to 1.9 in

2006.The access was not limited to higher income levels, with around 68 percent of
households in the bottom income quintile having had accessed multiple financial institutions,
compared with more than 90 percent in the top- income quintile. While these data suggest a
higher level of financial inclusion, the report cites an increase of household debt among
those that borrow from multiple financial institutions.

Although debt levels are still at moderate levels, given the increasingly high level of multiple
borrowing in the microfinance sector, careful monitoring of multiple borrowing and
repayment capacity of borrowers is needed to minimize any adverse effects on borrowers
as well as on institutions, it said. The paper highlighted the reason for this financial
inclusion being mainly due to the availability of a range of services for various segments of
society, such as different savings products, loan facilities, pawning, insurance and money
transfer systems as well as good infrastructure, small size, population density, high literacy
and low levels of poverty.

Recent measures, such as the provision for 10 percent credit for agriculture, opening of
more rural banking branches, having the post office conduct financial services, events,
mobile banking units, and technology have also contributed to financial inclusion. Despite
the inclusion of so many avenues for management of finances, people have not been
making maximum utility, leaving a banking system with underutilized infrastructure.

Use of debit and credit cards, phone banking, and e-banking are still at a relatively low level
in Sri Lanka, the report stressed. It asked for further development financial literacy at a
policy level, so that people would make use of these services and manage their finances to
gain the maximum benefit, and concurrently introduce measures such as SMS banking in
native languages to further promote banking in rural areas and reduce transaction costs.
The report also asked for the transfer of non-formal methods such as the seettu system
and several MFIs to the formal sector as well as for the registration of MFIs with the Credit
Information Bureau.

( % of households)
100 %
MFI(s)
80 % + Formal FI(s )

60 % Formal FI(s)
only
40 %
MFI(s) only
20 %
None
0%
2006/07 Year 2009/10
FI = financial institution, MFI = microfinance institution.
BHUTAN
The ancient Kingdom of Bhutan has moved towards increased socio-economic
development and democracy over the past 50 years. The Bhutan Development
Bank Limited (BDBL) has contributed to the countrys progress, providing financial
services to the rural poor since 1988. The Micro Lead project, Expanding Access to
Savings-Led Financial Services in Bhutan, has served as a catalyst for increasing
financial inclusion in Bhutan from project inception through 2013.

BDBL has increased the number of depositors to more than 85,000 and doubled
the number of borrowers to more than 38,000. Through a combination of
factorsthe right kind of external financing, appropriate technical assistance, and
the receptiveness of BDBL staff and managementthis project demonstrates that
positive change is possible even in challenging circumstances.

The financial inclusion policy aimed to foster the development of an inclusive

financial system that would contribute to poverty alleviation through sustainable
and equitable regional development. It targeted those sections of the population
that do not have access to the mainstream financial system, in particular those
living in rural areas and those with low income levels and is expected to enable
access to a suite of basic and appropriate financial services such as savings,
insurance, payment and remittance facilities, and credit by various financial
service providers such as banks, NBFIs, MFIs, co-operatives, NGOs and non-banks
such as MNOs.
AFGHANISTAN
With the lowest Gross Domestic Product (in current USD) among the FDIP
countries in South Asia, as well as limited banking infrastructure and a legacy of
political instability, Afghanistan faces a number of challenges in its efforts to
promote financial inclusion. These factors contributed to Afghanistans placement
as the lowest-scoring FDIP country in Asia on the 2016 scorecard. With that said,
Afghanistans fairly robust level of mobile capacity, which earned the third-
highest score among all the FDIP countries, is helping to lay the groundwork for
enhanced adoption of digital financial services.

Moreover, the country has increasingly engaged in efforts to raise awareness and
adoption of digital financial services, including by participating in an electronic
money summit in October 2015 and launching a public awareness campaign in
February 2016 regarding mobile financial services. As part of this interest in
expanding the availability and usage of digital services, government agencies in
Afghanistan have been directed to deploy electronic payments where possible.

Moving forward, developing a national financial inclusion strategy could help

solidify the countrys financial inclusion commitments, identify key priorities, and
establish a framework for coordinating the implementation of Afghanistans
national financial inclusion objectives. Additionally, instituting agent banking
regulations could help foster greater regulatory clarity and facilitate the
expansion of the countrys financial services network into underserved areas.
INDIA

In the Indian context, the term financial inclusion was used for the first time in
April 2005 in the Annual Policy Statement presented by Y.Venugopal Reddy,the
Governor, Reserve Bank of India. Later on, this concept gained ground and came
to be widely used in India and abroad. Even after 70 years of independence, a
large section of Indian population still remains unbanked. This malaise has led
generation of financial instability and pauperism among the lower income group
who do not have access to financial products and services.

IMPORTANCE OF FINANCIAL INCLUSION IN INDIA

Financial inclusion is a critical issue for developing countries and represents a
significant challenge for India. In a country where more than 265 million people
(21% of its population) live on less than 1.9 dollars a day, poverty reduction and
economic equality are one of the most important social goals. In this context,
financial inclusion is a fundamental way of achieving this target. Without access to
basic financial services, poor people and small businesses have to depend on their
savings or other informal sources of resources to invest in education, set up a firm
or deal with any accidents or losses.

In macroeconomic terms, financial inclusion increases savings, promotes

investment and the consumption of durables, ultimately boosting economic
growth. However, in the recent years the government and Reserve Bank of India
has been pushing the concept and idea of financial inclusion. The policy makers
have been focusing on financial inclusion of Indian rural and semi-rural areas
primarily for three most important pressing needs:

Creating a platform for inculcating the habit to save money

Providing formal credit avenues
Plug gaps and leaks in public subsidies and welfare programs

The table below shows the data of financial inclusion in India for the past five years:
 Per Capita Deposits and Credit in Rural and Urban India (Rs)

Rural Rural Urban Urban

Fiscal Year Deposits Credit Deposits Credit

200910 5,088 4,662 113,747 81,313

201011 5,924 4,713 131,303 98,772
201112 6,830 5,269 144,138 114,185
201213 7,923 6,197 162,145 127,854
201314 9,244 6,161 178,942 143,718

Number of Branches of Banks in Rural and Urban Centers (per 100,000

population)

Fiscal Year Rural Urban

200910 3.93 14.49
201011 4.08 15.28
201112 4.35 16.22
201213 4.70 16.99
201314 5.25 17.91

ATM Penetration in Various Rural and Urban Centers (per 100,000 population)

Time Rural Urban

December 2013 2.1 30.9

December 2014 3.3 36.1
March 2015 3.7 36.5

Today, India has several strategic assets providing favorable conditions for
change-leveraging technology. A strong banking network of 115,000 branches
linked to ekuber is spreading into rural areas that lack banks. Indian Post, with
155,000 outlets, has a payment-banking license, and point-of-sale networks and
ATMs facilitate cash transactions across the country. Indias vibrant network of
almost 1 billion mobile connections, covering 75% of the population, can facilitate
the spread of banking services through the business correspondent model and
also enable funds transfer over mobile phones.

NEPAL
In Nepal, a number of financial outreach-related policy initiatives are underway
together with a long-term development strategy under the formulation process
with priority accorded to helping the country to graduate from a least developed
country status by 2022 as well to attain the UN Sustainable Development Goals
and become a middle-income country by 2030.4 Financial inclusion seems
appropriate to address this objective as it provides the opportunity for the
country to effectively collaborate with its bilateral and multilateral partners to
make its 2030 vision a reality.

With regard to the players in the financial sector, there are four classes of
financial institutions licensed by the NRB, namely commercial banks (A class),
development banks (B class), finance companies (C class) and MFIs (D class). The
number of commercial banks, development banks, finance companies and MFIs
aggregated 28, 67, 41 and 42 respectively at mid-July 2016.
BANGLADESH
The Bangladesh authorities have taken a number of measures to enhance access to
financial services to those excluded from the mainstream financial sector. These measures
have supported a rapid expansion of financial inclusion over the past decade.
1. Financial Inclusion (FI) is defined as the degree of access to and use of formal financial
services by households and firms.
2. Greater FI allows for financially marginalized groups to increase their income, reduce its
volatility, and build assets, thereby providing resilience to economic shocks and helping
create jobs and promote business activities.
FI is measured in three dimensions access, usage, and quality of financial services and
products. The Bangladesh authorities have implemented several policies targeting groups
that had previously little or no access to financial services. FI is not new to Bangladesh:
since the 1970s microcredit has aimed to provide financial services to sections of society
where the reach of formal finance was limited. However, in more recent times, FI has
become a high-priority goal of the government and deliberate FI policies have been ramped
up. The various policies target specific sectors (agriculture and related sectors), firms (small
and medium enterprises, SME) and population segments (marginal farmers, landless
laborers, urban slum dwellers, senior citizens, and women). FI policies address both access
and usage. Policies include the introduction of mobile financial services; the requirement
that banks open at least fifty percent of their branches in rural areas; the introduction of
agent based banking to provide banking services in the remotest areas; floors on credit to
the agricultural and rural sectors backed by credit refinancing lines on concessional terms;
support to SMEs and women entrepreneurs; schemes aimed at rehabilitating slum dwellers
to the rural areas; and no frill accounts, including the Taka 10 accounts
The Maldives:
The Maldives ranks 36th out of 51 upper-middle income economies for ease of
getting credit, according to the World Bank Ease of Doing Business Survey. To
improve access to finance, it will be important to strengthen the banking system.
That said, the countrys challenging geography has been an impediment to
establishing bank branches in the atolls. While the use of information and
communications technologies in innovative approaches to mobile banking has the
potential to ease accessibility, the necessary institutional and regulatory
framework encompassing guidelines on consumer protection has yet to be
established. The government could consider giving high priority to adopting an
appropriate legal and regulatory framework to help facilitate branchless banking
transactions on a more secure basis.

The Maldives Monetary Authority has already introduced major reforms in the
finance sector, including the establishment of the Credit Information Bureau.
Further support systems are also needed, such as credit guarantee mechanisms,
insurance products, a liquidity pool, and additional business development
services, which can help reduce the cost of financing for both MSMEs and
financial institutions