Mini loans for major change

MOST emerging markets suffer from financial exclusion. Pakistan is no exception. In a country of 220 million people, we only have 10m active loan customers. Commercial banks lend to less than 2m people. This appalling situation does not end. For a customer new to the industry, they usually take one month to provide a credit card or a personal loan.

The potential market for consumer credit — nano (under Rs5,000) — is estimated to be 50m. The irony is that our commercial banks could surpass this number in under five years, but the curse of risk-free investments (Treasury Bills and Pakistan Investment Bonds) with a lack of vision by both the board and management of banks and regulations preclude them by doing so.

Digital lending refers to using the past data of existing customers to predict the credit behaviour of new customers using artificial intelligence. Three main steps by our industry would allow us to materially change the number of active loan customers.

Commercial banks have more than 20 years of performance data on their consumer loan customers. A basic algorithm can identify the behaviour of good and bad customers. There are also about 40m payments cards in the industry. All the banks have to do is to use the unique identifier available i.e. the Computerized National Identity Card number and add the bank account transaction history to the credit history. Most banks with a consumer loan portfolio should be able to come with an underwriting algorithm with above 95 per cent accuracy.

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