21st MAP Convention
Speech by Deputy Governor, SBP on
"Monetary Policy and Digitization of Payment Systems"
28 August 2019
ميحرلا نمحرلا الله مسب
Mr. Amir Jamil Abbasi, President MAP
Distinguished Speakers
Ladies and Gentlemen!
Assalam o Alaikum and a very Good Morning!
It is a privilege for me to be here to deliver a keynote address on "Monetary
These areas are the key policy
Policy and Digitization of Payment Systems".
pillars of every forward-looking Central Bank in the world today and has
therefore attracted a lot of interest of the academia, business community and
the public in our country as well.
In my talk today, I would first like to draw your attention to the challenges our
economy is facing and how the recent structural and policy changes by SBP,
especially through monetary policy, will help stabilize it. Then, I will share my
thoughts on the issue of digitization and technological developments, which
is massively changing the payment and banking industry around the globe
as well as in Pakistan. Finally, I will talk about the strategy of SBP on
digitization and use of technology to not only bring efficiency in the payment
but help in documentation of economy while also supporting our efforts of
financial inclusion.
Ladies and Gentlemen!
be aware that Pakistan's economy is passing through
1. As most of you may
a stabilization phase, as structural deficiencies have accentuated the
twin deficits during FY17 and FY18. The situation was further
complicated by the uncertainty prevalent in the global economy mostly
due to trade disputes among major economies. These trade wars are
unsettling the capital and commodities markets and affecting the export
performance of emerging markets.
2. To effectively tackle domestic structural bottlenecks and enhance our
economy's resilience
in line with the evolving global dynamics, Pakistan
has made some tough but necessary adjustments in the monetary and
exchange rate policies. These measures have already helped contain
domestic demand pressures and led to a progressive improvement in the
country's external account. Supported by a healthy growth in workers'
remittances and external financing from multilateral and bilateral
sources, the country's foreign
exchange reserves have now stabilized.
3. Encouragingly, the current account deficit decreased by a substantial 32.1
percent during FY19 and the July 2019 figures of a 72.8 percent decline
are also encouraging. However, inflation has been on an upward
trajectory mainly due to the pass-through of the exchange rate
depreciation and adjustment in energy prices. Cognizant of the building
up of inflationary pressures, SBP has been pursuing a tight monetary
policy stance since early 2018. However, the impact of this tightening is
going to reflect in the headline inflation with a certain lag.
4. At present, barring any sudden shock, the Monetary Policy Committee
(MPC) of SBP is of the view, as stated in the last monetary policy
statement, that the adjustment related to interest rate and the exchange
rate from previously accumulated imbalances has already taken place.
The recent monetary policy statement has explicitly stated that the MPC
decision has inbuilt the impact of following 3 important developments:

First, the outlook for external financing has further strengthened with
the disbursement of the first tranche associated with the IMF
Extended Fund Facility, activation of the Saudi oil facility, and other
commitments of support from multilateral and bilateral partners;

Second, the Government of Pakistan has passed FY20 budget that
seeks to improve fiscal sustainability by focusing on revenue
measures to widen the tax base. The government has also committed
to cease borrowing from the SBP that would qualitatively improve the
inflation outlook;

Finally, on the international front, the sentiment towards emerging
markets has improved as expectations of further policy rate cut in the
United States have grown stronger and with all the conducive policies
Pakistan has the capacity to attract foreign investment.
5. As we know, the effectiveness of monetary policy critically depends on the
level of financial sector development, including financial access.
Therefore, countries with low financial inclusion and financial
development may have a weaker monetary policy transmission
mechanism as opposed to countries with higher financial inclusion and
developed financial markets. Globally, financial inclusion is considered
an effective tool for achieving sustainable and inclusive economic
growth, as it is a prerequisite for equitable distribution of the economic
opportunities, poverty reduction, and financial stability. Pakistan is
committed towards broadening access to financial services and
implementing development finance reforms and policies that can
empower individuals and firms to access a well-functioning financial
system, which cultivates opportunities for enhanced socio-economic
outcomes, improved livelihoods and protection against economic shocks.
The stated vision for financial inclusion in Pakistan is to improve the
access and usage of quality financial services among individuals and
firms, with dignity and fairness.
6. With this vision, and being cognizant of high financial exclusion in the
country, SBP in 2015 launched the first National Financial Inclusion
Strategy. This strategy sets the vision and outlines an action plan for
achieving certain targets like ensuring that at least 50% of adults have a
bank account in Pakistan by 2020. The NFIS has progressed well, and I
am happy to share that as of June 2018, SBP's data shows that unique
account ownership in Pakistan has reached to 63.9 million, representing
more than 50% of adults having a bank account in the country well before
the deadline of Year 2020.
7. Since we reached the headline targets well before our deadline of 2020,
the Government adopted an enhanced NFIS, which sets the vision to
improve financial inclusion through further access to finance & deposit
base, promotion of small & medium enterprises, easy & affordable
access to finance to farmers, facilitation in low cost housing finance and
provision of Shariah compliant banking solutions. Accordingly, the GoP
has set the following headline targets to be achieved by 2023:

Enhancing the usage of Digital Payments to 65 million active digital
transaction accounts, with gender segregation of 20 million accounts
by Women

Enhancement of Deposit to GDP ratio to 55%

Promotion of SME Finance by extending finance to 700,000 SMEs
which is 17% of the private sector credit

Increase in Agricultural Finance by serve 6 million farmers through
digitalized solutions and extending annual disbursements to Rs.1.8
trillion

And finally enhancing the share of Islamic Banking assets and its
number of branches to 25 percent and 30 percent of the banking
industry respectively
8. The NFIS action plan expects to contribute in achieving sustainable
development through creation of 3 million new jobs, generate additional
exports of US$ 5 billion and enhance banks' deposits to GDP ratio to
55% by 2023 through measures adopted under NFIS-2023. I must
mention that the NFIS strategy also includes digitization of payment
systems and adoption of technology as an effective method to improve
financial access and inclusion. This leads me to my next topic which is
digitization of payment systems and
the SBP's policy on it.
9. Throughout history, technological innovations and advancements in
payment methods have continually reshaped monetary systems.
However, since the last decade we have witnessed the emergence of a
plethora of exciting innovations especially in the areas of banking and
payments, which has resulted in enabling open business models based
on entirely new and disruptive ideas. I would like to briefly mention some
of the most prevalent trends:

First is the rise of open platforms, such as e-commerce marketplaces,
which allows anyone to buy, sell, and share in real time without
considerable investments in infrastructure;

Second: cloud based hosting enables quick deployment of complex
systems using tools that are open source and easily available to
anyone;

Third is the pervasive adoption of mobile devices where everyone
regardless of their social or financial stature owns a mobile phone;

Fourth: advancements in big data analytics that provides deep
insights about customer behavior, needs and wants;

Fifth: advancements in artificial intelligence using big data and
complex algorithms are being put to use in ways that were
unimaginable a few years ago;

Finally, the emergence of distributed ledger technologies like the
Block Chain is set to transform entire industries by removing the need
for intermediaries.
10. These technologies are now threatening to disrupt the financial sector by
creating new forms of money and removing the need to intermediate,
which has traditionally been the forte of banks. Since this has implications
for central banks especially with regard to monetary policy execution and
transmission, SBP has adopted a comprehensive strategy to further its
agenda of digitizing payments in the country. This includes promoting
and developing interoperable payments Infrastructure, issuing enabling
regulations especially for retail payment providers, ensuring the trust and
security of digital payment channels in the country and finally promoting
and experimenting with new fintechs players.
Let me now talk about each of these areas one by one:
11. As most of you may be aware that payment systems are usually
categorized as wholesale and retail payment systems. Like the rest of
the world, SBP upgraded its wholesale payments infrastructure to a Real
Time Gross Settlement system, over a decade ago. The RTGS system
has made our monetary policy operations more effective and efficient.
12. Now with the emergence of new enabling technologies, the retail
"faster
payment systems are being transformed into the so-called
payments" that enables the public to pay and receive money in almost
real time. Consumers accustomed to instant communication via email
and social media expect to be able to make payments instantly.
Therefore it is not surprising that these faster payments are rapidly
gaining acceptance and popularity.
13. To remain abreast with these trends, SBP has already started work on
the implementation of a Micro Payment Gateway in partnership with Bill
& Melinda Gates Foundation and its representatives in Pakistan. This
Gateway will offer faster retail payments with advanced Application
Programming Interfaces and directory services, which will simplify the
requesting, receiving and sending of payments in the country.
14. SBP is also closely working on digitizing government collections and
payments, which includes digitization of government salaries, pensions
and government collections. Recently, SBP, FBR and the provincial
revenue authority of Punjab have successfully completed the project for
digital collection of taxes and duties using alternate delivery channels.
15. On the regulatory front, realizing the emerging and critical role of non-
banks in digitization and payments, SBP, back in 2007 issued
Regulations for Branchless Banking that disrupted the retail payments
space by introducing agent based banking and payments services. Then
in 2014, SBP issued the Rules for Payment System Operators and
Service Providers. These Rules garnered significant interest in the
payments industry and signaled a changed direction in SBP's policy
towards payments and digitization. Further, these Rules not only enabled
SBP to regulate the payment systems operators in the market but also
helped us in interacting with the new tech-oriented service providers and
understand their needs and requirements.
16. In April this year, SBP issued the Regulations for Electronic Money
Institutions that signify the resolve of SBP to promote digitization and
innovative solutions for payments in the country. Since the initiation of
the licensing process, we have received very exciting applications from
a variety of service providers who intend to offer innovative, user-friendly
and cost-effective low value digital payment products in the country. We
expect that with the potential to innovate, these non-banking entities can
play a critical role in digitizing different types of payments in the country.
17. For ensuring trust and security of digital payments, SBP being cognizant
of the risks inherent in digital payment is strengthening the oversight
frameworks and capability. Let me say that enhancing cyber resilience is
our number one priority and our recent regulatory instructions and
enforcements are just first steps in that direction. I must mention that we
have already issued various guidelines encompassing frameworks for
Enterprise Technology Governance and Risk Management, Payment
Systems'
Designation, Security of Internet Banking and card based
transactions, guidelines for prevention against cyber-attack, Risk
Management in Outsourcing Arrangements by Financial Institutions, etc.
Ladies and Gentlemen!
18. During the past few years, SBP has adopted an open door policy for
Fintechs innovators by facilitating and encouraging dialogue and
discussions. Our teams from the policy group meet perspective providers
especially from payments, remittances and banking and help them asses
the appropriateness of their proposals against the existing regulations.
19. To promote Fintechs and nurture innovative ideas, SBP has already
established an Innovative Challenge Fund facility, which provides
funding facility to companies and Start-ups for innovative products and
services in the area of digital payments. Further, we are contemplating
the development of a fintechs facilitation mechanism that would enable
smaller fintechs to work with SBP in assessing the feasibility of their ideas
in a controlled environment while at the same time giving SBP an
opportunity to identify and address potential risks.
20. To sum it up, while central banks seem to be primarily concerned with
the formulation and implementation of monetary policy, their domain has
now expanded towards increasing the financial inclusion as well. This is
necessary not only from financial deepening purposes but also from the
perspective of poverty reduction. Enhanced financial inclusion ensures
economic efficiency, maximum participation of its population in the overall
economic process and thus maximizing growth and development.
Technology on the other hand is rapidly enabling the policy makers to
take effective action and leapfrog economies into new progressive eras.
SBP is not only aware of the importance of these trends but is also
continuously adapting itself in all areas of policymaking including
monetary policy, financial inclusion and adoption of new technologies. I
am sure that Insha'Allah; together we will overcome our problems and
drive our country on the path of progress and development.
21. In the end, I would like to thank the Management Association of Pakistan
for inviting me to deliver this Keynote Address.
Thank you for your attention. ******