DRIVEN By A New Generation Of The Young Talented People, The Fintech Sector Is Growing Rapidly In Pakistan.

By Narendra Aggarwal

DRIVEN By A New Generation Of Young Talented People, The Fintech Sector Is Growing Rapidly In Pakistan, breathing fresh air into its economy as professionals now leading the finance ministry and the country’s central bank seek to give new impetus to the economy. New players entering the promising sector are behind the fast evolving fintech scene in Pakistan even as the existing players are widening and deepening their interest, thanks to official support and encouragement.

“We have seen more than a dozen companies getting in-principle approval from the central bank across various financial services – from e-commerce gateway to bill payments. Payments, bills and funds transfers are some of the areas where there is major activity, along with a growing shift towards mobile and Internet banking,” says Mutaher Khan, a young IT expert who is a keen observer of the evolving fintech sector.

Mr Khan does not have a technical background as such with his education having been in economics and finance, but over the past three years he has been covering local startups and writing about the technology landscape. His journey began with a column called “Tech Talk” for Dawn, the leading English language daily newspaper in Pakistan. Last October, he joined a fintech, Mettis Global, which is a financial data portal covering all asset classes.

At the same time, Mr Khan is building a directory for the local tech sector, named DataDarbaar.com, where one can easily find all the required information related to startups and emerging technologies. Asked to name some of the key players in the evolving fintech sector in Pakistan and their growth and future plans, Mr Khan says that in his country fintech is often used interchangeably with simple payments or opening a digital account for customers.

“Much of the growth on this front is being led by telco-backed apps, namely JazzCash and Easypaisa. Each has amassed a sizable customer base through its agent-based network that made inroads even into the most remote parts of the country. Now, the same over-the-counter transactions are being digitised. On the other hand, we have banks which, amid a fear of missing out and a push from the regulators, are increasingly focused on building a better online presence and increasing the host of services they offer,” says Mr Khan.

Lastly, and perhaps most importantly, there are young startups interested in offering mobile wallets to Pakistanis – a majority of whom are unbanked. In fact, seven fintech companies are currently in the process of obtaining the EMI licence with five already piloting their operations. EMI or equated monthly instalment, as the name suggests, is used to pay off both interest and principal each month so that over a specified number of years the loan is paid off in full. It is a common payment system in South Asia.

Historically, major reasons for the relatively slow growth of fintech companies in Pakistan were conservative regulations, slow approvals, and complex procedures for bank integrations, etc. Most of these challenges have been overcome over the last year and the coming year will be crucial from the perspective of scale, says Mr Khan. “To understand the kind of shift that has already been undergone since the Covid-19 pandemic started, you can look at the interbank funds transfer, which surged in volume by 309.6 per cent to 70.77 million and in value by 160 per cent to Rs1.95 trillion during the July-October 2020 period, compared to the corresponding months of the previous financial year,” he adds.

Significantly, there has been a landmark shift in the regulatory environment to promote fintech as a growth sector in the economy. Both the relevant authorities – the State Bank of Pakistan and the Securities and Exchange Commission of Pakistan (SECP) – have been in the forefront. Since 2014, the former has introduced two separate sets of rules meant for fintech – Payment System Operator/Provider and the Electronic Money Institution; the latter permitted non-banking companies to offer distribution of electronic money. This is on top of a National Payment Systems Strategy and the launch of a micro-payment gateway called Raast, similar to India’s UPI.

Meanwhile, the SECP has amended the Companies Act to facilitate startups and it has introduced a regulatory sandbox. There has also been liberalisation of the international investment regime which had previously barred tax-resident Pakistani founders to be on the cap table of a foreign holding company, while legal recognition has been accorded to employee stock options.

Looking at the larger tech sector, there is a revival of interest in technology stocks in the public markets. “There are no more than a handful of listed IT companies because until recently they were not valued in line with the industry dynamics. But that trend is changing now as their P/E multiples are diverging from, say, textiles or cement etc. That said, these companies are still undervalued compared to their regional peers, thus providing a great opportunity for potential value investors to consider them,” says Mr Khan.

Significantly, the IT sector is recording a big increase in new company incorporation. Says Mr Khan: “IT has recently become the second biggest driver of new companies’ incorporation and if we add the e-commerce entities to that number, it actually becomes the largest.” There are several reasons that are driving this growth in his view. “Firstly, the world of technology is becoming huge and it is practically impossible for any aspiring entrepreneur to miss that. Secondly, as Pakistan’s younger generation — which grew up in a digital age – is becoming part of the workforce, it is generally more interested in IT and recognises the opportunities there. The globalised nature of the industry and the potential to export and earn foreign exchange are some of the other factors.”

Another significant development is that there is growing foreign interest in the highly promising IT sector in Pakistan. As far as public stocks are concerned, Pakistan has actually seen a foreign outflow – triggered post Covid-19 across the emerging markets – even as the benchmark KSE 100 is recovering spectacularly. But in the private markets, foreigners play an outsized role, especially within venture capital investments. “For example, out of the 50 deals recorded by Data Darbaar in 2020, at least 27 had a foreign financier, were mostly institutional, and are worth around US$53 million out of the US$66 million in total. Overseas Pakistanis, across the Middle East, North America and Europe, are also taking interest and many are involved in the angel rounds,” Mr Khan says.

Further, transport and logistics within tech are easily the most attractive sectors in Pakistan right now as far as funding is concerned. It started with the entry of Careem – led by a Pakistani founder and CEO, which built its engineering hub as well as other key departments in Karachi and Lahore. Then came Bykea, a completely home-grown startup, trying to build a hyperlocal marketplace around its bike-taxis – similar to Gojek, and has so far raised around US$19 million, including from the famous Prosus Ventures, an asset division of Naspers Group. T&L has led in terms of raking in investment, as it accounted for 71 per cent of the total amount in 2019 and 38 per cent in 2020.

“If we look at the broader transport infrastructure it makes a lot of sense. Despite messy urban landscapes, we do not have a properly developed mass transit network and this is an opportunity that startups have cashed in on and will continue doing so,” Mr Khan points out. Overall, the local startup scene is still in the very early stages but changing rapidly. “I would say everyone is playing a part in building the ecosystem – the techies by providing the rank and file for the industry to build on, and the entrepreneurs in taking the risk. There is also a growing interest from overseas Pakistanis who are returning in greater numbers to either start something new or lead efforts along with the existing startups,” says Mr Khan. Rapidly growing fintech a bright spot.

This news was originally published at Business Times.