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The world is changing with every passing minute, and the same holds true for all the industries as well. Financial Services are considered to be among the most important industries of Pakistan. They are not only bringing employment and revenue generation to the world but also playing an important role in creating financial inclusion across the globe, especially in developing and underdeveloped countries.

Pakistan is one of the prime markets for the financial services industry, and a lot is happening in this sector. New products and services are coming for facilitating cashless transactions. A lot of investors are jumping in this area, and as stated above. The area of financial services has much more to do than solely bringing an opportunity of employment in our country.

With the development of the financial services sector in Pakistan, the most required financial ecosystem will also be created which will help to increase the financial inclusion in the country. Thus, helping a country in many ways, including, poverty elevation, documentation of the economy, expanding the tax net and ultimately assisting to increase the social embodiment as well.

With such an enormous potential of this segment, it is imperative that the regulatory bodies and other stakeholders help to build a supportive environment for this industry which will play a significant role in the overall development of the country.

Highly Unsupportive role of FBR

However, yet again, all players are facing severe disappointment owing to FBR’s policies which are made by the tax officials sitting in their self-created silos without taking real input from the stakeholders. They are perceived to have either NO or very less information about this evolving industry; and, it is very much evident from the policies they are designing.

A recent tax implemented by FBR in 2015-16 fiscal year, on all financial transactions, has been in the news for being one of the most controversial taxes implemented by FBR ever. The regulator implemented it on all the transactions of cash movement from or to a bank account which compelled people to transact in cash rather than electronically.

On one side the entire world is working hard to becoming cashless economies, whereas, on the other hand, Pakistan’s government is unfairly taxing people and forcing them to keep their money out of electronic systems.

Under the tax, 0.3% or 0.6% of the transaction amount is charged to banking customer based on his/her status of being a filler or non-filler of tax returns.

It means if I have to cash out rupees one hundred thousand (1 lac) from my account a fee of up to PKR 600 is deducted from my account.

The banking sector has faced a deficit of Billions of rupees in just six months after the implementation of this tax; intimating that people preferred physical cash based modes over the cheques or any other electronic mode of transactions.

The government of Pakistan seriously deserves a note of appreciation for walking against the wind.

Hilariously, the worst part of this tax is that FBR has included even the branchless banking industry which is enough for killing this nascent industry that offers hope for massive growth.

The way branchless banking sector works, this tax will be deducted thrice on a single transaction making it a non-profitable business for the Agents in totality.

Understanding the tax

The process goes like this; the Master Agent (Commonly termed as Franchise) has to deposit cash in his account which he usually operates with any conventional bank. He then transfers these funds to the bank for which he is acting as an Agent using IBFT facility or any other service provided by his bank. Once the funds are transferred to the relevant bank, where they land in the core banking account (CBA), he has to pull these funds into his Branchless Banking Account (BBA).

For example, if I am a Master Agent of Upaisa, and I maintain my main account in UBL (it could be any other bank), I will deposit cash in my UBL account. From UBL account, I will transfer these funds electronically to UBank by either using Inter Bank Fund Transfer (IBFT) service of 1-Link or any other service offered by my bank. The funds will land in my CBA of UBank and then I will have to pull these funds into my BBA which is maintained on the Branchless Banking platform of Upaisa, and also called my account of Upaisa.

Once I have the funds in my Upaisa Account, being a Master Agent I will then transfer these funds to my child Agents who are the actual retail Agents who do the transactions on the ground and deal with the public.

The following picture shows you the step by step transactions and tax deduction cycle on various stages. Let’s assume that I need to transfer 100,000 rupees to any of my sub-Agent:

Financial Services Tax Deduction

Now, to better understand the impact of this tax, we must calculate the income of an Agent against the same 100,000 rupees which he has invested in this business and paid a tax of 1,800 rupees against this investment.

Total Amount Invested in Financial Services

A loss of PKR 1,356 on every PKR 100,000 of investment in a market of 700 Million Rupee on a daily basis is severely hampering this industry.

Somehow, industry players are absorbing this loss by offering direct or indirect rebates to the Agents in the form of promos, etc. however, that is hurting their bottom line, and it is not going to be a sustainable situation for a long.

FBR and Government of Pakistan have to support the efforts of SBP and other stakeholders in strengthening this sector by reviewing this policy and at least giving a waiver of this tax against internal transfers from one account to another account belonging to the same individual.

State Bank of Pakistan, The Real Supporter of Financial Services

For evaluating the role of other stakeholders in the development of this sector, it is crucial to mention that Pakistan’s Financial Services industry is working under a bank-led model. It is regulated directly by the State Bank of Pakistan, and undoubtedly the regulator has been very progressive towards facilitation of this industry; and, playing a significant role in steadily working for bringing regular changes to the regulatory framework which support the industry.

The first regulations, specifically for tapping the unbanked segment via Branchless Banking, commonly called as Mobile Financial Services as well, were published back in 2007 with the name of “Policy Paper on Regulatory Framework for Mobile Banking in Pakistan.”

The terms “Mobile Banking” and “Branchless Banking” are alternatively used by SBP and have the same meaning. These regulations are still considered to be one of the best frameworks for regulating branchless banking industry across the globe. However, the seriousness of State Bank of Pakistan towards this sector can be noticed by a fact that even though they had issued such a comprehensive regulation, still they have been holding up sessions, regularly, with all the stakeholders for bringing in advancements to these rules which are required in the market.

In the preceding months, seminars were conducted, round table conferences were arranged, advisors from across the world were invited to put in their expert opinion, and resultantly many favorable policies have been issued since then.

A major one of those was opening up of mobile wallet against a biometric verification, which has revolutionized the Pakistani market altogether and a lot of countries across the world are trying to follow the footsteps of Pakistan.

State Bank of Pakistan is not only working for the improvement of the regulatory framework, but it is also keenly taking the interest in coordination with all the other stakeholders of this industry for providing an enabling environment.

For example, the role of State Bank of Pakistan in striking a deal with NADRA for a low-cost biometric verification against Mobile Wallet Opening has been marked as a significant achievement in the history of the mobile banking industry. SBP has issued a revised version of these regulations on June 20, 2011, with the name of “Branchless Banking Regulations.”

Since the past three years, State Bank of Pakistan has also been in talks with Pakistan Telecom Authority (PTA) to bring all the telecom operators on a common platform. SBP was working on the formulation of a new policy for TPSP i.e. Third Party Service Provider, which was announced recently, these regulations are yet another step towards creating a favorable environment for all the existing and new entrants in this market.

PTA was primarily assisting SBP in providing the input of all telecom operators in Pakistan against the proposed draft of regulations and many versions of the initial draft were produced meanwhile.

Both the regulators have been very progressive in this area for engaging the representatives of telecom operators, Financial Institutions, NADRA, and other stakeholders by arranging multiple conferences and seminars on this subject.

Previously, SBP issued a PSP/PSO regulation i.e. termed as Payment Service Provider/Payment Service Operator license which does cover some major aspects of TPSP regulations.

PSP/PSO license is a significant step towards bringing the interoperability in this country and enabling small players to play a major role in creating the ecosystem. PSP/PSO is mandated to build interoperability amongst different Financial Institutions, Telecom Operators and technology service providers of Financial Services Industry. It can serve as a facilitator for Financial Institution, who intends to launch Branchless Banking in Pakistan by extending the state of the art and SBP approved one window solution for Branchless Banking platform.

Moreover, PSP/PSO becomes further important by having the mandate to create interoperability amongst the Retail Agents of different Financial Services Providers. It enables them to have an agent network associated with them which can be utilized for multiple transactions initiated via various member institutions of a particular PSP/PSO.

SBP has given such a massive opportunity to PSP/PSO that they can even work as a real Fin-tech and develop products which can be offered further to all the members.

All eyes are on the upcoming PSP/PSO players in the market as they are expected to raise the bar in a very short span of time.

Just a few days back SBP also issued new regulations for prepaid cards providing a limit of prepaid cards for up to PKR 500,000 which will be available from Agents. These regulations are yet another indicator of the level of engagement at SBP.

To fully capitalize on the opportunity in hand, all the regulatory bodies shall be focusing on creating a favorable environment for the stakeholders of Financial Services industry which can enable them bringing a revolution in our beloved country, Pakistan.

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