Bankers’ Perceptions of the Role of Technology in Addressing Financial Exclusion by Syed Sohail Javaad A thesis presented to the University of Waterloo in fulfillment of the thesis requirement for the degree of Master in Applied Science in Management Sciences Waterloo, Ontario, Canada, 2012 ©Syed Sohail Javaad 2012 AUTHOR'S DECLARATION I hereby declare that I am the sole author of this thesis. This is a true copy of the thesis, including any required final revisions, as accepted by my examiners. I understand that my thesis may be made electronically available to the public. ii Abstract Financial inclusion is a measure of the ability of a population to make use of financial services. High rates of financial inclusion in a country are empirically correlated with high levels of economic development in that country; low rates of financial inclusion are correlated with low levels of development. Thus, policy makers are generally agreed that one method to increase economic development is to increase the level of financial inclusion. Not all attempts to increase financial inclusion are successful. Initiatives to improve financial inclusion can fail when policy makers or financial service providers have incorrect perceptions about financial inclusion. They may have incorrect perceptions about the purposes and beneficiaries of financial inclusion, or incorrect perceptions about how technology can encourage financial inclusion. This thesis investigates the perceptions of Pakistani bankers about financial inclusion in Pakistan. A survey of 125 Pakistani bankers was conducted. The results of the survey show that while bankers want to improve financial inclusion, they have perceptions that limit their effectiveness in reaching this goal. First, bankers’ perceptions of the actual financial inclusion levels in the country are higher than generally accepted empirical measures. Second, their perceptions about the reasons for financial exclusion are limited to socio-economic factors like low income and education of people. Finally, they have limited appreciation of the role that technology can play in elevating the level of financial inclusion. Bankers show more interest in customer-facing technology than in back-end technical infrastructure, thus limiting the scalability and interoperability of their systems. Our guidance to policy makers is to address these perceptual problems through education and through government-backed technical infrastructure programs, thus better enabling the banking industry to improve financial inclusion in Pakistan. iii Acknowledgements The work in this thesis would not have been possible without the enormous guidance, encouragement and support of my supervisor, Dr. Darrell Raymond. He encouraged me to initiate work on a very difficult topic and then went on to guide me on every aspect of researching and writing this thesis. His insights in research methods, technology and banking and detailed and continuous revisions of the manuscript not only helped me develop the topic of research but also made this thesis readable. I would also like to thank my co-supervisor, Professor Frank Safayeni, Chairman Department of Management Science at University of Waterloo whose encouragement, understanding and support helped me write this thesis in limited time. Thanks are also due to my readers, Professors Paul Guild and Rob Duimering who kindly and meticulously reviewed this work and provided extremely useful and critical suggestions for improvement. I would especially like to acknowledge and thank Mr. Yaseen Anwer, Governor, State Bank of Pakistan whose insights into the banking business and the importance and impact of payments system gave me the initiative to start work on this difficult topic. I also owe a debt of gratitude to my colleagues at the State Bank of Pakistan: Shahid Rabbani, Senior Joint Director, Zamir Afzal Khan, Joint Director and Faisal Maqsood, Additional Director who meticulously followed up with the survey respondents for timely completion of the questionnaire. Thanks are also due to Mr. Hanif Akhai of United Bank Limited, Mr. M. U. Usmani, Mr. Anjum Amin Siddiqui of KASB Bank, Mr. Faraz Haider of NIB Bank, Syed Asim Ali of MCB Bank and many other professionals in Pakistan banking industry who identified potential respondents for this survey and followed up with them for its timely completion. I would also like to acknowledge Shahid Rabbani, Zamir Afzal Khan and Faisal Maqsood from State Bank of Pakistan, Syed Asim Ali from MCB Bank and Mr. M. U. Usmani for their great insights on the research topic. Thanks are due to my friends and co-students at the University of Waterloo: Syed Muhammad Kaleem, Muhammad Umair Shah, Wei-Hua, Danny Lam, Newton Silva, Klayson Moraes and Noman Hai who not only found out time to listen to my ideas about my research but more importantly iv encouraged me to keep on working and improving my work. I also owe a big thank you to Dr. Rashid Ahmed of PROPEL Center for Population Health Impact for his help with the statistical analysis. And finally, this thesis was only possible because of the enormous support, love and prayers of our families. My mother’s love and prayers were always with us in times of difficulty. My wife Afreen took care of the family and home while I was busy working long hours; this thesis is as much hers as mine. The love of our sons Yardan, Waqi and Mahd gave me the strength in times of weakness (and frustration). I thank you all! v Table of Contents AUTHOR'S DECLARATION ...................................................................................................................... ii Abstract ......................................................................................................................................................... iii Acknowledgements ....................................................................................................................................... iv Table of Contents .......................................................................................................................................... vi List of Figures ................................................................................................................................................ x List of Tables ............................................................................................................................................... xii Chapter 1 Financial Inclusion ........................................................................................................................ 1 1.1 Introduction ......................................................................................................................................... 1 1.2 Management Science and Financial Inclusion ..................................................................................... 2 1.3 Organization of the Thesis ................................................................................................................... 3 1.4 The Problem of Financial Inclusion..................................................................................................... 3 1.5 Formal and Informal Financial Inclusion ............................................................................................ 4 1.6 Measuring Financial Inclusion ............................................................................................................ 6 1.7 The Account is Not Enough ................................................................................................................ 8 1.8 Reasons for Financial Exclusion........................................................................................................ 12 1.9 Correlations ....................................................................................................................................... 16 1.9.1 Poverty, literacy and Gross National Income ............................................................................. 16 1.9.2 Selected infrastructure variables ................................................................................................. 19 1.10 Microfinance Institutions ................................................................................................................. 23 1.11 Role of Technological Innovation in Improving Financial Access ................................................. 24 1.12 Discussion ........................................................................................................................................ 25 Chapter 2 Banking and Payments Technology ............................................................................................ 26 2.1 Introduction ....................................................................................................................................... 26 2.2 Banking and Payments ...................................................................................................................... 26 2.3 The Evolution and Impact of Technology on Banking ...................................................................... 28 2.3.1 Innovations in banking and banking technology ........................................................................ 28 2.3.2 Development of payments clearing systems ............................................................................... 30 2.3.3 Impact of technology on the banking business ........................................................................... 32 2.4 Economics