Wednesday, Apr 29, 2020
Pandemics and Financial Inclusion (Part 2)
Gain insights on how financial supervisors and regulators can help to mitigate the impact of COVID-19 on the financial system and preserve the gains that have been made in financial inclusion. This episode features:
- Ceyla Pazarbasioglu – Vice President for Equitable Growth, Finance, and Institutions, World Bank Group; Toronto Centre Board Member
- Reza Baqir – Governor, State Bank of Pakistan
Full transcript
April 29, 2020
Babak Abbaszadeh:
Good morning, good afternoon, good evening. Welcome to Toronto Centre webinar on pandemics and
financial inclusion. I am Babak Abbaszadeh, President and CEO of the Toronto Centre for Global
Leadership in Financial Supervision. Since our establishment in 1998 we have trained more than 13,000
supervisors and regulators from 190 jurisdictions.
Babak Abbaszadeh:
More than 1.7 billion people worldwide remain unbanked and the majority are woman, therefore
financial inclusion is very important for the achievement of the SDGs, plus we all know that crisis
disproportionately affect the poor and we are now in the midst of one of the massive global crisis.
Babak Abbaszadeh:
In today's episode we sit down with two prominent experts to cover financial sector regulation and
supervision, as well as the financial inclusion dimensions of this challenge. We circulated their bios to
you in advance.
Babak Abbaszadeh:
Dr. Reza Baqir is the Governor of the State Bank of Pakistan and a former IMF official. Dr. Ceyla
Pazarbasioglu is World Bank's Vice President of Equitable Growth and Financial Institutions. Both Ceyla
and Governor Baqir are excellent partners of Toronto Centre. Ceyla is an energetic member of our Board
of Directors, and we have conducted seven programs in Pakistan in just the last two weeks. I'm
delighted to see both of you, welcome.
Babak Abbaszadeh:
Finally, I would like to thank our funders, Global Affairs Canada, the Swedish Sida, IMF, USAID, Jersey
Overseas Aid, and Comic Relief, without whom we could not achieve our global mission.
Babak Abbaszadeh:
Before we start, I know that many of our viewers have questions for these two experts, and we have
allotted time to deliver your answers. Please type your questions in the Q and A tab which you will find
below the video screen, and we'll try to provide ample time for the exchange.
Babak Abbaszadeh:
The first question, Governor and Ceyla, is a common question to both of you. Crisis matters. Over the
past decade or so, World Bank research has highlighted that financial crisis can throw millions into
poverty. So all the good work on financial inclusion can be basically thrown out the door over night,
there's always that danger. And we all still have fresh memories of the 2008 global financial crisis. But
this one feels different. Ceyla, may I start with you? How is this crisis different in your opinion?
Ceyla Pazarbasioglu:
Well, thank you, and it's a great pleasure to be here in this panel with the Governor and with all of you,
so thanks for joining.
Ceyla Pazarbasioglu:
These are extraordinary times, as you said, Babak. This is unparalleled simultaneous demand and supply
shocks affecting the health and financial sectors as well as the real economy. So we have a health crisis
which has turned itself to an economic crisis and I think we need to do whatever we can to make sure
that it doesn't end up in a financial crisis.
Ceyla Pazarbasioglu:
And I think the main difference in terms of this crisis and 2008, the global financial crisis, in my mind, is
that at least for emerging markets and developing economies many countries are starting this crisis at a
weaker state with record high sovereign debt, record high corporate debt, much limited fiscal and
monetary space compared to 2008, which means that initial conditions are not great, we have a huge
shock and the policy reaction function is also limited. So that combination leads to potentially much
worse outcome in [inaudible 00:04:23].
Ceyla Pazarbasioglu:
So it is a different crisis. I have not seen anything like this, I've been working many years on crisis
situations, this is unprecedented and I think it requires unprecedented responses. So I'll leave it at that,
but we'll add to it as we go on.
Babak Abbaszadeh:
Thank you Ceyla, excellent overview. Governor, let me turn to you. In your view, how is this crisis
different? I mean, you're a veteran of crisis, so I would be interested in your views on that.
Dr. Reza Baqir:
Great. So thank you for having me on this panel with Ceyla, it's good to see her again. I think this crisis is
different both in terms of its depth and its breadth, and let me explain. In terms of depth, I don't recall
in my experience before when I was at the IMF, the world economic outlook for having come out with
such a sharp contraction in global GDP growth, I think it's around 3%. It has been a long time since we
have seen such a deep contraction to the global economy.
Dr. Reza Baqir:
It echoes for what we see for Pakistan for this fiscal year, we're projecting growth at -1.5%. We have not
had this level of growth since 1951. So that's close to 70 years, and so the first point is how deep this
contraction is.
Dr. Reza Baqir:
I think the second is how broad based this contraction is for the global economy and again, the IMF put
out some statistics that more than 150 countries are supposed to have negative growth, maybe the
number is close to 160. I don't recall, again, ever a crisis before where so many countries in a
synchronized manner are having such marked reductions in growth. So that's one.
Dr. Reza Baqir:
I think second, and speaking to the point that Ceyla made regarding countries starting off from a weaker
position. Something that strikes me about this crisis is that unlike previous crisis that I have participated
in or witnessed, such as the Asian financial crisis or the global financial crisis, they had to do something
with weaknesses in the existing financial or economic framework. So for instance, the '97 Asian financial
crisis had to do with mismatches on the bank balance sheets with regards to foreign exchange exposure.
The global financial crisis people say had to do with lax regulations in the financial sector, the subprime
debt, and the sovereign bank financial linkages in Europe.
Dr. Reza Baqir:
This crisis, everything that has happened, especially for emerging markets, is purely exogenous. It's the
mother of all external shocks that you could imagine, because they were humming along and in fact
global growth was supposed to pick up and at the previous World Bank IMF meetings the mantra was
low for long, talking about interest rates, and suddenly they have been hit by something completely
exogenous. So that strikes me as a unique feature of this crisis, as well.
Babak Abbaszadeh:
Thank you, and the other thing to keep in mind is that back in 2008 the bank and financial institutions
were the culprits. Here it looks like everyone is collateral damage as this crisis just gathers steam.
Babak Abbaszadeh:
Ceyla, allow me to turn back to you. So COVID-19 pandemic created particularly challenging times for
developing economies, just to say the least, and the World Bank's mission is to work with developing
countries. How is the bank responding to this crisis to support developing countries?
Ceyla Pazarbasioglu:
So we have acted very quickly and forcefully to support countries, and initially this was of course, since
this is a health emergency, so we developed a fast track facility to help countries deal with the needed
medical emergencies. So we have this fast track facility already in place in 64 developing countries, this
was enormously quick response and we expect that this will be extended to hundreds of countries over
the coming weeks. And the idea, of course, is also working with many international organizations and to
make sure that we help countries with procurement needs since we have that expertise and can
mobilize different countries at the international level.
Ceyla Pazarbasioglu:
We have also been working, in addition to, of course, supporting countries with the health response, we
have been also working very closely to mobilize financing for social needs as well as to prepare countries
for, hopefully, the recovery phase. We have about 160 billion of financing over the next 15 months, both
for the emergency health support as well as support for social and economic implications, including
supporting jobs, which is going to be very critical as we hopefully exit the pandemic.
Ceyla Pazarbasioglu:
The 50 billion of the support is for the world's poorest countries on grant and highly concessional terms,
this is for either countries which house most of the poor. So the program is based on three pillars, as I
mentioned. One is to protect the poor and vulnerable households, so these are cash transfer programs,
social safety nets and so on. Second pillar supporting businesses to save jobs, with the emphasis on jobs.
And third is helping countries with economic resilience, so to make sure that they can recover out of this
crisis and with ability to be able to grow going forward, as Reza mentioned this is really unprecedented
in terms of the implications for many of the countries, and my concern is that if we don't act fast, we will
end up with this crisis with much more inequality between the developed world and the developing
world.
Ceyla Pazarbasioglu:
We also called both Kristalina, Managing Director of the IMF, and David, our President of the World
Bank, called for a suspension of debt service for either countries. This was welcomed by the G20 and
endorsed, so this is something that we are also hoping that will give these countries some room to deal
with the pandemic and give some breathing space to deal with the situation which is very difficult.
Ceyla Pazarbasioglu:
So those are some of the ways that we have been supporting countries. As I said, with really working
around the clock to provide financial support, technical advice to guide policy responses, and also help
countries with internationally bigger programs and initiatives to exist this crisis in a better shape.
Thanks.
Babak Abbaszadeh:
Ceyla, it's very encouraging to see IFIs like the World Bank to be mobilized so decisively and moving so
fast. And obviously a crisis is very disruptive, but also it's changing the normal. As we all know, we're
really entering a new normal now, and I would like to ask my colleague Diana to put a graphic up. In
preparation for that, Toronto Centre is also going to look at supervising the new normal. So that's a new
series of programs that will come up as time permits and the two of you, Ceyla and the Governor, have a
standing invitation to participate in this discussion later on, when the time is appropriate.
Babak Abbaszadeh:
So I just wanted to put that forward to the various countries watching, I think we have over 250
participants representing more than 50 countries watching today. So I just wanted to let you know that
this is something that's coming. Thank you.
Babak Abbaszadeh:
Now moving back to Governor, with the COVID-19 pandemic spreading globally and central banks
responding to the situation by taking different regulatory measures, thinking about Pakistan, what policy
and supervisory decisions have you taken to reduce this impact on the financial sector and businesses in
your country?
Dr. Reza Baqir:
Babak, before I answer that, let me just comment on one thing that Ceyla said, and as a policy maker in
an emerging market let me applaud the work done by the leadership at the World Bank as well as the
IMF to push through additional financing for developing countries. And whether it's additional
concession financing or it is debt relief, I think the quick pace with which the leadership at both the
World Bank and the IMF have acted is a very, very good sign and one that I think developing countries
appreciate. Certainly we appreciate in Pakistan.
Dr. Reza Baqir:
I want to answer your question, Babak, first in a general context about how COVID has struck us in our
broader economic trajectory and then specifically three measures that we took on the central bank side.
Dr. Reza Baqir:
But the broader story is, I think, very important. And this is that when COVID struck Pakistan, we, as the
economic policy makers, were in the midst of telling a story. A story to our domestic stakeholders and to
our international stakeholders. And that story, Babak, was that we are putting our economic problems
behind us. And that story was beginning to resonate. Bloomberg called Pakistan's Karachi Stock
Exchange the best performing stock market in 2019. Capital was flowing in, our reserves were
increasing, and international financial institutions like the IMF were singing our praises. And having
worked at the IMF I will tell you that it's not easy to get the IMF to sing your praises.
Dr. Reza Baqir:
So we were finally feeling that we are putting our problems behind us when COVID struck. And our first
and foremast goal, Babak, right now, is that we provide a prudent, quick, policy response while at the
same time not letting our fundamentals deteriorate too much because having participated in previous
crisis, sooner or later the outflow of capital will lead to surge to yield. Sooner over later the fear will turn
to greed. When that happens and there is surge to yield and capital comes back, we want to have our
fundamentals preserved in a reasonably good shape so that we are one of those destinations where
capital does flow in, so I wanted to share with you our overall context.
Dr. Reza Baqir:
Now, in terms of dealing with the impact of the crisis, I'd like to point out three things that the Central
Bank of Pakistan has done. First and foremost is that we have cut interest rates in a fairly aggressive
manner. Cumulative we have cut rates by 425 basis points so far, but that slightly overstates the extent
because our starting level of interest rates, 13.25 was quite high compared to other countries. So if you
look at it in proportionate terms, the cut that we have done is roughly in line with other emerging
markets.
Dr. Reza Baqir:
But these are times when interest rates by themselves may not be enough, and you have to find other
ways to inject liquidity into the system. So I want to highlight two things that we have done to that
effect. First, Babak, is a stream that we have introduced whereby if you are a company and you commit
to not lay off workers for the next three months then you get eligible to borrow through a bank, which is
re-financed by the Central Bank, at 3%. So our policy rate right now is 9%, and the market borrowing
rate is close to 12%. So you get a big discount, meaning you can borrow 3%, for the payroll for the next
three months provided you do not lay off any of your workers. So that's one scheme which we have
come up with, which has seen a very large response. The response as been less on the SME side, we can
talk more about that because banks are being very conservative and because risk rates are higher on the
SME side. There conservative approach is reflecting in less take up on that end. We can talk about this
separately.
Dr. Reza Baqir:
But the second initiative that we took, in addition to the cutting of the interest rates, to inject liquidity,
was the extension of principal payments in borrower's loan obligations by one year. So this was a
presumption, it was not an across the board extension, but borrowers have to apply to banks for
extending their principal payments by one year, but the presumption was that the banks would agree
and where they don't, they would also inform us. And sometimes there are good reasons for a bank not
to do so, if it is a solvency case as opposed to a liquidity.
Dr. Reza Baqir:
But overall, this scheme has produced a lot of injection of liquidity. And just to illustrate to you the
magnitude. In about two and a half weeks that we launched this, we have had $1.5 billion worth of
extension that has occurred, and the overlying loan value of this is about 3% of GDP. So in about two
and a half weeks, 3% of GDP worth of loans have had their principal extended by one year and this has
saved many of these borrowers from making those principal repayments that they would have had to do
otherwise. So in addition to cutting interest rates, we are also simultaneously working on the quantity
front.
Babak Abbaszadeh:
This sounds incredibly complex but also impressive, Governor. Ceyla, moving onto you, there's obviously
a direct-
Ceyla Pazarbasioglu:
Can I make an intervention on what the Governor just said?
Babak Abbaszadeh:
Sure. Go ahead. Go ahead, please. Yeah.
Ceyla Pazarbasioglu:
I think this is very important to also condition, as you said, the stimulus or the support of firms to keep
employment, to keep jobs. It's important because those are the programs that are going to give you also
tax revenues, hopefully, in the recovery phase, so I think it's really important to make sure that the
economy is in coma right now and we need to sustain the patient so that they can recover and perform
after the crisis is over.
Ceyla Pazarbasioglu:
I would though like to make a point, and that is for transparency, for many of the supervisors there will
be a lot of pressure for central banks, the supervisory agencies, and we see it. We see it, the IFRS 9 is
being delayed, even Basel III norms are being delayed, so many even at international standard setting
level as well as at individual institutions there are many programs aimed to keep every sector going so
that we don't end up with major problems in what we call T+1.
Ceyla Pazarbasioglu:
That said, I think it's very important that we don't lose all the gains we had since the global financial
crisis, so make sure that there is, like Reza said, that there is a sunset clause to these programs, that
there is monitoring for these programs, that it doesn't go to keep companies that shouldn't be kept
alive. And also, preparing the ground because I think this crisis is very different, it's an exogenous shock,
but big shock, and it will create tension on already weak firms, but more broadly, even. So it's also the
time, I think, to make sure that we have in place re-structuring mechanisms because there will be a need
to restructure firms going forward, and I think the more we have out of court settlement systems, in
solvency procedures, and other types of mechanisms, frameworks in place, easier it will be to deal with
the consequences in the next period. Thanks.
Babak Abbaszadeh:
Yeah, well, exactly that's a very important intervention, Ceyla, because as the Governor was talking
about it and I think this is something a lot of various decision makers are grappling with. I mean, that
entire question around moral hazard, for example. Or should we do too much, should we do too little,
and I think a lot of people are trying to side on the err of doing more to stabilize the patient, but at the
same time your point is very clear, and that is what you and the Governor have worked out throughout
your career. Making sure standards are there, transparency and accountability is there, as well. So
there's a time and place for all of these, but it's very good that people are consciously thinking about
this.
Babak Abbaszadeh:
So bringing it back to you, Ceyla, in another line of questioning. There's a direct link between financial
inclusion and gender equality. I know gender equality and SDGs are very important to your mandate in
your role, and this question really is about resiliency. So Ceyla, when you look at various national
experiences on gender equality and what are some of the success stories, but more importantly, what
can supervisors and policy makers do to ensure this COVID-19 destruction doesn't permanently roll back
these gains?
Ceyla Pazarbasioglu:
Yes. And this is a concern for us because women do get impacted quite a bit during this crisis, and we
can go into the details of that later. But I think what needs to be done is, and we will hear from the
Governor because there has been really good progress in Pakistan in terms of data, making sure that we
have ... at the bank we have our index that provides information, at least to understand what we are
dealing with, and then develop a strategy around the concerns or the issues that we are facing.
Ceyla Pazarbasioglu:
I'd like to also bring some sign of optimism in this crisis, is the role of digital financial services which
allows to access the remote corners of the world. And especially for women, given the security issues,
fortunately the legal barriers in front of it many women in terms of collateral, access to finance, financial
capability, and laws and norms that are really deterrent for women's access. It makes this digitizing
government personal payments, both in terms of social [inaudible 00:23:47], wages, and so on, makes it
easier for women to access credit, and I think this is a really important area to focus on and if anything
this crisis, I think, reminds us how important it is to make progress with digital financial services.
Ceyla Pazarbasioglu:
We actually have a report coming up, today, later today, which is basically on digital financial services,
countries experiences, and what are the key issues that needs to be taken into account as countries roll
out their strategies.
Ceyla Pazarbasioglu:
So we have seen three initiatives that have been particularly impactful. One is greater focus on
digitization and we will hear more, I'm sure, from the Governor on this one. Easing rules and procedures
for women in terms of account opening. And the third one is ensuring that the national strategies that
have gender as a part of it and that promote the collection of gender disaggregated data.
Ceyla Pazarbasioglu:
In terms of success stories, I think we really welcome the work that Pakistan has done in this area. I
think this was really great that the women's financial inclusion was put as a central to the national
financial inclusion strategy. I don't want to steal the thunder from the Governor, but I think it's really a
great role model for many other countries. Indonesia has done a lot in terms of increasing translation to
digital payments and including women, and especially rural women. Similarly, Rwanda has done a really
impressive gains in terms of national financial inclusion strategy, helping to increase women's
participation, and also another example is consumer protection and easing account opening restrictions
in the context of Tanzania. They were actually able to increase inclusion from 14% to 42% in 2017, so
within five, six years, really good gain.
Ceyla Pazarbasioglu:
So very good stories from many countries around the world, but I think the key is for the leadership to
determine this as a key objective and really have a plan of action that is implemented over time. Thanks.
Babak Abbaszadeh:
Thanks, Ceyla. So the more commitment there is from the leadership, the more enduring these changes
will be post-crisis situation. So, thank you for that.
Babak Abbaszadeh:
And the Governor, staying on the topic, according to World Bank Global Financial Inclusion database,
Pakistan falls behind global standards. Could you please tell us how you are addressing this issue at the
State Bank, especially as it applies to your recent gender financially inclusion strategy that you had
mentioned in Toronto Center's recent round table discussion during the IMF World Bank spring
meetings, I believe was last week? Thank you.
Dr. Reza Baqir:
I'd like to make two points. The first is about overall financial inclusion, the state affair and what we
need to do more, what are the lessons we are learning. And then talk specifically about gender and
reducing the gap that we face on financial inclusion.
Dr. Reza Baqir:
Now, let me first talk about overall level of financial inclusion. Now we, as you rightly pointed out, have
an opportunity to do a lot more. Our latest numbers that we have, and these are slightly different from
the Findex numbers because our numbers come from the supply side, which means a complete census
of all bank accounts because we get that information from the supervisory side in our Central Bank.
Dr. Reza Baqir:
And when we look at those numbers, the most recent numbers that we have are that 54% of adults,
both men and women, have an account. But there is a problem with this number because when we look
at active accounts, this number drops to half. And that to us is now a very big challenge, that while we
have been pushing and pushing to get more accounts open, we are realizing that many of these
accounts are dormant and they are open as part of a particular drive, but then people don't end up
using them.
Dr. Reza Baqir:
And what we are coming to is a realization that I think some other countries have come to, is that we
need to change our strategy. Instead of pushing to just open accounts, we need to demonstrate the use
cases of accounts. And this is where our work on digital and Fintech comes in because they are
demonstrating use cases, such as government payments, such as retail payments, such as supply chain
payments, and others. And if we can demonstrate the use case and the usefulness of having an account,
then we are hoping it's going to lead to demand being created for people to open an account because
they're going to say, hey, I have an EMI or I have a wallet and this is actually quite convenient so I want
to open one.
Dr. Reza Baqir:
So that's the first point that I want to make out, about the intersection between the work on digital
payments and financial inclusion.
Dr. Reza Baqir:
Now the second point, more specifically, is on gender. And as Ceyla mentioned, we are going to be
launching shortly a document called Banking on Equality, with a double meaning on banking on equality.
And it's a strategy to bring to the national attention the importance of making progress. And we have a
big gap right now. If you look at census data that we have based upon all accounts, 28% of women have
a bank account but once you look at unique active accounts that falls to 15%. So again, it's a very low
number that we need to increase.
Dr. Reza Baqir:
So what are the key pillars of this strategy that we will introduce? The first is to promote gender
diversity in financial institutions themselves. And right now, about 13% of all employees of financial
institutions are women. And the strategy sets a target of this number rising to 20% within three years.
So within three years, 20% of the all staff of the national institutions needs to be women.
Dr. Reza Baqir:
We have a type of account called, Branchless Banking Account, and this was an innovation that was
done on the part of Pakistan several years ago, which means that we have branchless banking agents,
which essentially are people on a motorbike that go into the villages and the rural areas and they get
people to open accounts, and all people need to do is have a visit from a branchless banking agent.
Dr. Reza Baqir:
Well, it turns out that nearly all of these branchless banking agents are men. And here is where the
social norms issues comes in, because many of the agenda on women's financial inclusion cannot
progress unless we address the issue of social norms. And one way to do this is to get more women
branchless banking agents, and one of the objectives and one of the goals in this document is that right
now there are only 1% women branchless banking agents, and we want to increase that to 10% in three
years. Hoping that that will generate a better response for women to get included.
Dr. Reza Baqir:
A second pillar of the strategy is to get banks and other financial institutions to develop products that
are more women centric. So right now the extent of banks developing women centric products is to
offer pink checkbooks, and that is not really a lot of innovation. So what we want banks to do is to
employ dedicated research to first of all understand what are the needs of say, women entrepreneurs.
Many women are doing home businesses from their houses. So what are their needs, to invest
resources in it and then come up with products that will address those needs.
Dr. Reza Baqir:
So one Fintech that we have recently licensed, for instance, is going to do merchant onboarding
remotely. And we feel that this is going to really help with women businesses because it's going to allow
many of these business women to be able to create or to obtain a point of sales machine or a QR code
set up or something, remotely, so they don't even have to visit a branch.
Dr. Reza Baqir:
And the third pillar is robust gender disaggregate data and that this is a point that Ceyla and the World
Bank have been emphasizing as well, and we have put in place a fairly comprehensive methodology by
which to collect such data. I think where we need to work more is then to figure out how is this data
going to effect or policy decisions and that's an on going conversation that we hope to have with the
World Bank in the coming weeks.
Babak Abbaszadeh:
Excellent. Governor, the next question goes to you as well, and then the next one to Ceyla, and then we
open up to the audience because we have a lot of good questions here, so I'd like to cover as many of
those as possible as well.
Babak Abbaszadeh:
So in one of your speeches, Governor, you mentioned that Pakistan is in a good position for boosting
technology enabled financial inclusion and Pakistan's start up tech and Fintech ecosystems have made
notable progress with improving their supportive networks. So that's a big achievement for the country.
If you look now from the supervisory angle, I wonder if some of that has also spilled over on the
oversight function. How are supervisors using technology to monitor financial institutions more
effectively? Some call it Suptech. And is this making a difference in broadening financial inclusion?
Dr. Reza Baqir:
Okay, let me make two points on the intersection between technology and financial inclusion. First,
specifically on how supervisors are using technology. We've had two initiatives recently, one is an
electronic credit bureau that was set up a few years ago, which allows for data to be submitted on a
portal directly by banks, and then allows banks access to this portal as well, so they can obtain
information electronically about the credit worthiness of potential clients that they are considering
lending to.
Dr. Reza Baqir:
So for us, what this has done is it has made it very, very easier for supervisors to quickly access data
from this credit bureau, and allowed us to exercise a supervisory function better. Second, we had a
paper quarterly chart of accounts and that has also been completely automated and now is again,
uploaded at our portal and then subsets of that data are automatically sent to our various teams. For
instance those working on capital advocacy get those metrics, those working on liquidity get those
metrics directly, and we are very quickly able to do analytics to answer the questions that we are
interested in.
Dr. Reza Baqir:
And finally at this time of COVID when we have only 15% of our staff reporting to the office, and the rest
working at home, having these electronic and technology has allowed the work to continue and they're
able to access these portals remotely. So that's some examples, Babak, of how we are using technology
on the supervisory side.
Dr. Reza Baqir:
And one the Fintech and financial inclusion side, more specifically, I just wanted to mention a couple of
things that the World Bank has been helping us developing an action payment strategy and the World
Bank President came to Pakistan recently, to State Bank, and Ceyla was there as well, and we launched
this strategy, and one key pillar of this strategy is a faster payment system. Just like UK has one called
the UK Faster Payments, just like Singapore has one called the Fast System, and this is literally a system
that is going to enable payments within seconds across all types of platforms.
Dr. Reza Baqir:
The reason this is a very important part of our digitization journey, is again, to the end use issue. Once
people see that they are able to make payments within seconds across platforms, across a type of
people that they deal with, they will see the end uses.
Dr. Reza Baqir:
And I want to mention maybe one other thing in addition to this fast payment system which we call
MGP, Micro Payments Gateway. I want to give an example of an EMI that has recently been licensed, so
since we've been working on the [inaudible 00:37:30] space we recently licensed six EMIs. One of these
is a company called Finja, and Finja is going to digitize the payrolls of SMEs. And the way it makes money
is that essentially it creates these accounts for all the employees of SMEs and it earns the float, which it
parks with the banks and invests in treasury bills. But what Finja is doing is again illustrating to the
employees of an SME the end use. And essentially through these mobile wallets, the employees are
going to be able to make a whole host of payments that they normally need to do, such as paying bills
for utilities or schools or other payments.
Dr. Reza Baqir:
And so this is something that we think once it's launched will again increase the demand on the part of
people to get more included in the financial sector. One thing Finja's going to do, once it gets all these
spending patterns of people, is it's going to be able to give a credit score to these people. And then it's
going to be able to use a lending affiliate to be able to target specific lending related products. So you
can see how the linkages work once you get people in, once people see the demand for these things,
and once they get data, the inclusion proliferates and credit constraints then begin to be used.
Babak Abbaszadeh:
Ceyla, the Governor said some very interesting and important things. It's probably a good set up for the
question I'm going to ask you, which is what has the World Bank been doing to improve the safety,
reliability, and efficiency of payment systems and financial market infrastructures in the context of
COVID this question takes a much more important undertone. So are these, in your view, helpful in
responding to the COVID crisis?
Ceyla Pazarbasioglu:
Before I answer that, I just want to go back to what the Governor was saying on this really impressive
digitizing SME payments and that this would then help with credit scoring and allow access to finance.
And I think this is where this becomes really important, because not only transactions but also it leads to
different savings behavior, different credit access, but usually we forget about insurance, which is very
critical, especially for countries with rural workers and rural sector, informal sector, and so on.
Ceyla Pazarbasioglu:
And because it really reduces transaction costs and monitoring costs, that's what the digitization or
technology really brings, it makes insurance much more affordable. So micro insurance products
becomes much more feasible for those that really need that type of cushion because unfortunately
because of the informal sector workers they don't have access to other safety nets that other formal
sector workers have. So I think there's really a very important pathway from transactions to credit to
savings, and insurance, which are really critical for many that have been excluded from the financial
sector. So I just wanted to make that point because I think there is much more room to make progress
on the micro insurance side.
Ceyla Pazarbasioglu:
On our work with payment access, and this was really great to be able to be there and see the launch in
Pakistan. We have worked in over 100 countries over the last decade to strengthen oversight and
corporate arrangements and create the environment of adoption of new technologies without
negatively impacting the safety and soundness of the financial system, which is critical. So we support
countries with regulatory changes, to allow for new business models and non-bank institutions in the
payments market, some of which you just heard about, implement simplified customer due diligence
requirements for account opening, for onboarding agents and for merchants, which is critical to have
the system work. Interoperability, which is really critical in the payment services in the market to make
sure that we have efficient competition, and also supervisory framework for payment services so that
supporting shift to digital large volume payments streams, like remittances, government to person
payments, public and private salary payments and bill payments. So those are all areas that we have
been working with countries.
Ceyla Pazarbasioglu:
There are prerequisites for digital payments to work, and that's why we have at the bank a program
which is cross cutting, which includes, of course, the connectivity. You need the infrastructure, the
digital infrastructure that needs to be in place. That you need the ID infrastructure, so that's really
critical, we have a big program called ID4D which supports countries as they make progress. And of
course, efficient functioning of the remittance markets. Last year, for the first time, the volume of
remittances surpassed the volume for indirect investment, and of course unfortunately in this crisis
remittances are also being hit and it underscores something the Governor raised in another Toronto
Centre event about how support through mobile payments or digital payments so that the remittance
receivers can transmit them to their home country. And finally, the shift of government benefit
transfers to digital means. So all that really helps bring in increase the efficiency of digital financial
services.
Babak Abbaszadeh:
Great. Thank you very much. This has been an excellent discussion so far, and let me just recap for one
second.
Babak Abbaszadeh:
So the IMF research suggests that risk to financial stability increase when access to credit is expanded
without proper regulation and supervision. Therefore investing in high quality supervision can pay big
dividends as financial inclusion expands. So that's why we're having these discussions and these
sessions, and that's why we're bringing in experts who can talk about that, and this dovetails well with
the mission of Toronto Centre. That's our interest in this discussion.
Babak Abbaszadeh:
Now, let me go to the questions, we have a lot of questions and I will try to pick as many as I can. And so
I would encourage the speakers to be complete but be concise if you can, so it's an interesting exercise
so we can get through the various questions.
Babak Abbaszadeh:
So this is a question from a major insurance supervisory authority in South America, and they're asking
in your opinion ... I guess this question can go to you, Ceyla, could a micro insurance program help the
state in combating effects of the pandemic by alleviating its impact for the most vulnerable populations?
Ceyla Pazarbasioglu:
Yes, and as I mentioned, I think it's really critical. These systems, especially if we can have e-insurance,
micro insurance is very important in making sure that the risks are also taken into account. It's a huge
opportunity for the rural sector, for livestock sector, and we have really great examples from the world
in terms of how these micro insurance and e-insurance systems work in Africa, in Asia, and so on. And I
think the supervisor's role is critical because it's important to make sure that the users understand the
potential risks that they are taking on, and that they have the capability to understand the contracts that
they are going into.
Ceyla Pazarbasioglu:
So there's an important role of customer learning and making sure that they are not subject to cyber risk
or other types of risks which really can hurt the users.
Ceyla Pazarbasioglu:
But I do think the pandemic in particular, be it health insurance, be it [inaudible 00:46:22] related
insurance or keeping the assets less impacted throughout this crisis, is very much critical and relates to
the point I brought earlier. We have a lot of emphasis on banking, on credit, on new financial Fintechs
and so on, and we don't put enough emphasis usually on insurance, which is really critical for those that
are excluded. Thanks.
Babak Abbaszadeh:
Thank you for that. And Governor, do you have any views on this question yourself?
Dr. Reza Baqir:
Not so much on insurance per se, but I do have some views on micro finance and micro credit because
that's a sector which we are seeing is going to experience a lot of stress. And there is a certain element
of this which falls in-between the cracks between the Central Bank and the SCCP, the securities
regulator, and the data that we have because the interest rates usually are much higher on such micro
loans. The extent of re-structuring that we are seeing in that segment is very large, and so I think that
sector needs some careful attention and something that we are working on our end.
Babak Abbaszadeh:
Okay, thank you. And Governor, the next question goes to you as well-
Ceyla Pazarbasioglu:
So Babak, can I quickly comment on that one?
Babak Abbaszadeh:
Sure. Go ahead, go ahead.
Ceyla Pazarbasioglu:
Because micro finance intuitions is really a big concern for us as well, and we have been developing a
program with IFC and CGAP. You know, micro finance institutions reach 140 million people, it's really
small loans but it's really critical. So I fully agree with what the Governor has said, and we are putting
together a program where we could have some sort of a [inaudible 00:48:17] guarantee by IFIs, or IFC in
our case, or even the bank, that would support micro credit institutions, because I think they will be
really critical in this crisis especially for SMEs to be able to serve.
Dr. Reza Baqir:
And if I can just add on that, Babak, just to jump in, sorry. You know, I was talking to you about our
scheme that allowed for principal extension but it had to be done through an application and it had to
be a request to the bank and then the bank had to approve it, most of the requests that have come have
actually come from small borrowers. So there is that fact already, maybe 90% by number of the requests
have been by small borrowers. So in a way it's good because their principal has been deferred, but it's
only a deferment, and then if the problem is brewing, it's something that we're going to need to
address.
Babak Abbaszadeh:
Excellent. So that was a very productive question, generated multiple answers and sub answers.
Governor, the next question's for you. The EBA, [inaudible 00:49:28] and other organizations have
issued guidance notes on default for [inaudible 00:49:32] and IFRS 9. How effective are these guidance
notes given that this pandemic seems that it would be around for awhile? So it's a question about the
endurability of the crisis and guidance notes that are being produced around that.
Dr. Reza Baqir:
So I mean, the guidance that has been produced by them has been useful. There is a lot of work being
done by FSB about other country experiences that we've been looking at, that has been very useful.
There is a policy tracker, I believe, on the IMF's website that we've been consulting. Essentially, I'll tell
you, Babak, our approach right now has been since this pandemic has been so swift in its destruction of
economic activity, that we've had to act very fast and we've had to see what some other jurisdictions
are doing. We've had to apply our own judgment, and I'll share with you one or two things that we've
done.
Dr. Reza Baqir:
One is that with regards to forbearance. We have doubled the purview that a lender has to reschedule a
loan of a borrower. Normally it's 90 days, and if the payment is delayed beyond 90 days then it is already
subject to classification and provisioning. And once it is provisioned or classified, the interest of the bank
to restructure, it suddenly diminishes because it's already taken the charge on its income statement. So
we've doubled the period from 90 to 100 and in 80 days, which allowed a longer period for the lender
and the borrower to try to come to an agreement for the rescheduling of their obligation. As you can
imagine, this is going to be applied in those cases where it's not very clear on the part of the bank
whether it's a liquidity issue or a solvency issue.
Dr. Reza Baqir:
In this period, if a rescheduling is achieved, it will not be subject to reporting to the credit bureau. The
borrower will not get classified as somebody who has problems with repayment, so there's an incentive.
Similarly, the principal extension scheme, whoever participates in that does not get reported to the
credit bureau either. So these are some forbearance which has been time bound that we have provided.
But more than anything in terms of numbers of policy, I'll tell you one or two things we're doing at an
institutional level, which I think are going to be a lot more useful.
Dr. Reza Baqir:
Since this started, I have asked the head of our banking supervision group to do a weekly Zoom or
WebEx call with all the corporate heads of all the major banks to get very real time, high frequency
information on the developments of their credit portfolios. We're getting very valuable information
through this forum about what is happening on the portfolios on the bank side. And in fact, the initiative
that we launched to protect employment by offering three months payroll came about from one of
these discussions.
Dr. Reza Baqir:
Another thing that we have done is something internal. We have created a committee of senior officers
that are on a daily basis reviewing the decisions of all other countries and constantly coming up, feeding
the senior management of the Central Bank with ideas, possible measures that we can keep in our back
pocket in case things deteriorate.
Dr. Reza Baqir:
But one of the key issues right now is going to be to see how much deterioration occurs in the bank's
asset quality as a result of everything that is going on. You said it, Babak, that these days are such that
it's better to err on the side of being more expansive. The risks are higher on the other side, so that's
what we're doing but we are keeping a very close eye on the developments on credit portfolios.
Babak Abbaszadeh:
Great. Thank you, Governor. And Ceyla, again, keeping an eye on the ball and enabling flow of credit and
et cetera, there's another interesting question here. All these questions are great. Actually, this is from
one of our long time program leaders, Ceyla. Will the effect of pandemic on the financial health of banks
and other financial institutions affect the willingness of supervisors and financial institutions to remove
barriers to financial inclusion? Particularly those created by AML CFD requirements?
Ceyla Pazarbasioglu:
So, yes, I think it's a very important question. I think we need to make progress and this is one of the key
work streams of FSB as well in terms of payments, especially cross border payment systems and making
sure that there's proportional AML, CFD requirements that do not lead to exclusion, especially for
remittances and other types of small transfers that are very important for financial inclusion.
Ceyla Pazarbasioglu:
So I think it will help with more transparency, but also making sure that there are, as I mentioned
before, customer due diligence rules and regulations that are electronic and that are based on a live
system of updating, if you like, with digital ID and so on. I think this will really help us as we go through
the work with ensuring AMF CFD rules are also complied with.
Babak Abbaszadeh:
Thank you very much. And there's a comment, I don't think it's a question, I think it's important to read.
It says, efficient regulatory and supervision of Fintech services is key, and consumers must be safe
guarded from exploitation and abuse. I think both of you would agree with that, so I'll take that as a
friendly but important comment.
Babak Abbaszadeh:
Next question is for you, Governor. The questioner is thanking you for all the good work that you're
doing at the State Bank and says they would like to find out how the State Bank is addressing the issue
of ownership of SIM cards during the COVID pandemic to facilitate opening up mobile accounts by
women? Mobile accounts are one of the easiest ways to promote opening up accounts by women, but
because of cultural norms in Pakistan my understanding is ownership of SIM cards by women is not
widespread, particularly in rural areas. Do you have any views on that question?
Dr. Reza Baqir:
It's an excellent question, Babak, and I think it points to the issue of social norms that I spoke about
earlier, and was part of helpful feedback that we got from the World Bank, as well. So our approach is
still evolving on this, and some of the ideas that we have is to partner with strong CSOs, strong
community organizations, and particularly men. Because men have to play a critical role here, which is
to come out and say that women having SIM cards does not threaten their manhood, or does not
threaten their perceived sense of whatever they think is right or wrong.
Dr. Reza Baqir:
So one part of our strategy, and this is being developed, it will be part of the banking on equality
document, is to partner with other leading CSO type organizations, community organizations, and then
particularly looking for both men and women role models in the country, who can promote the use of
SIMs. And the use of SIMs is critical because the Faster Payment System that I spoke to you about
earlier, the micro payments gateway that's going to be launched in a few months, is a system where
payments are made through your telephone numbers. That is the identifier. And therefore, it is critical
upon us to ensure that there is more take up.
Dr. Reza Baqir:
So community organizations is one. Second is telcos. I think there is a lot of opportunity for partnership
with telcos. We know that they are keen as well, and that's a space that we are exploring as well as how
to most effectively partner with them to reach out, particularly to the rural areas.
Babak Abbaszadeh:
Excellent, thank you. And Ceyla, we're coming to the end, so I'm going to give this last question to you
and then if you could please take about a minute or so to answer it. It's pretty important, but see if you
can encapsulate it.
Babak Abbaszadeh:
The questioner really thanks you both and says I would like your views on the impact of this crisis on
informal sector in developing countries, and in general on financial inclusion. I think it's a good way to
sort of bring our session to a wrap.
Ceyla Pazarbasioglu:
Yes. Unfortunately, this crisis has huge implications on the informal sector because of the social
distancing rules and many other necessary measures that are needed to deal with the pandemic and
therefore really thinking hard as to how to support the informal sectors through mainly the types of
work that we do with households, because I think it's important to keep people alive rather than the
little store alive. For those that can, after the crisis, rebuild their assets and start ... I think in my view, it's
more important to provide that sort of social transfers and cash transfers to make sure that we keep
families and households alive, but not necessarily the informal sector work that they are doing, because
they can easily pick it up after the crisis.
Ceyla Pazarbasioglu:
But I do want to also say that formal sector, in many of the countries, the [inaudible 00:59:39]
economies that we work in, and usually that's where you have tax revenues from, usually that's where
you have the jobs and growth prospects, and I worry sometimes that if the attention is really on the
large corporates and also not protect this layer of the corporate sector which will come back after the
crisis and help with jobs and growth, I think we will really not do justice.
Ceyla Pazarbasioglu:
So I appreciate that some of the initiatives that the Governor talked about to make sure also to keep the
SMEs, the good SMEs, the viable SMEs functioning to get back to the recovery phase. And perhaps one
way to think about what are viable or good SMEs is to look at all the medium sized enterprises is to look
at their tax contributions from past year.
Ceyla Pazarbasioglu:
And I will end with this. The first question you asked is how is this crisis different and I'm thinking of all
the crisis I've worked on, and usually you come to a crisis, you have a sense of what went wrong and
what was the reason, and you do a triage, you do a diagnostic, you deal with what you have to deal
with. In this crisis, solvency, liquidity, everything is unclear, so it's very difficult to have a good diagnostic
right now as we go through, as we don't know the depth and breadth of this crisis is.
Ceyla Pazarbasioglu:
So that is to end with saying we will have to learn as we go along, and learn from different country
experiences and think hard as to how we can address this extraordinary crisis and perhaps if it ends up
taking much longer, either because it takes time to deal with the health crisis or it takes time to get back
to normalcy because people's patterns will change, behaviors will change, I think we will also need to
think about what bigger initiatives can we come up with to help, especially the developing economies.
And I thank you for this great discussion.
Dr. Reza Baqir:
Babak, if I can jump in just very, very quickly on the point that Ceyla made. This point about SMEs is
critically important, and as I mentioned we are finding that the take up, banks that would like to lend to
them through our new schemes is limited there. So one way in which we are thinking of this is to think
of it in two ways. The credit risk, we are thinking the way to address that is through fiscal support. And
the liquidity function is something that the Central Bank can do on its own. And to illustrate this, and
because of this SME problem, we worked with the government within a week to come up with a partial
guarantee scheme whereby 40% of the lost on a first lost basis is going to be covered by the
government. And based upon feedback from the banks, through the group that I mentioned to you
earlier between the corporate heads, we got feedback that something like this will give a big jump start
to the provision of credit to the SME sector. And also protect the banking sector and the Central Bank
from taking on the credit risk.
Dr. Reza Baqir:
Unfortunately at this time, somebody has to put in a jolt to do something about the credit risk and we
are trying to think in terms of separation to the extent possible between credit issues and liquidity
issues.
Babak Abbaszadeh:
Thank you very much Governor and Ceyla. This was an excellent conversation. You really, really raised
the bar. So I'm hoping that you didn't scare the future speakers who are going to come to this webinar.
Everything was totally substantive.
Babak Abbaszadeh:
I'd also like to thank the people behind the scenes, Diana, [inaudible 01:03:36] and [inaudible 01:03:38]
who's been really working very hard to pull these series together. And also, our audience. Your
questions were excellent. I mean, one of the big problems that I have as a moderator is I can't get
through all of your questions, and I apologize for that but we will keep track of your questions, we will
use them for our future training programs or publications or other things as they were extremely
stimulating.
Babak Abbaszadeh:
And once again, to the speakers, you really kicked ass. Thank you so much, and we hope to have you
back again on our program as we evolve this series.
Babak Abbaszadeh:
Thanks, bye-bye.
Dr. Reza Baqir:
Thank you, Babak. Bye-bye. Thank you everybody for attending.