Last month, the World Bank released Pakistan’s first ever Consumer Protection and Financial Literacy (CPFL) Diagnostic Review  along with convening a workshop where 200 financial sector professionals discussed the recommendations, a first such deliberation on consumer protection and financial literacy in the country.
The assessment compares Pakistan’s performance standards , covering four segments of the financial sector - banking, microfinance, insurance, and securities markets. This approach brought out cross-cutting findings and a comprehensive set of recommendations. The overall objective of the review is to foster a responsible financial system that offers (a) transparency, (b) appropriate choices, (c) redress mechanisms, and (d) privacy of consumer information.
Financial exclusion in Pakistan is high – 56% of the population currently uses no formal or informal financial products – but decreasing. The past decade has seen rapid growth in household lending in Pakistan, leading to many taking on risks and obligations they do not fully understand. This growth underscores the need for CPFL to prevent unfair practices, and improve transparency and efficiency by reaching potential customers to increase their understanding of financial services.
Overall, the report identifies certain gaps and overlaps in the legal, institutional, and regulatory framework for consumer protection in Pakistan and finds that there is a need for some consolidation and much more coordination amongst a fragmented range of consumer protection institutions, including regulators, industry associations and ombudsman offices. Key stakeholders agree that a consolidated approach to regulating market conduct is necessary. One critical area is the microfinance sector which serves close to 3 million active borrowers and 6 million savers. Many of these clients have limited access to consumer protection institutions or information, leaving them vulnerable to consumer rights malpractices. In this sector, microfinance banks (MFBs) are regulated by the State Bank of Pakistan, but other non-deposit taking microfinance institutions (MFIs) are unregulated. In a number of geographical areas, both MFBs and MFIs are serving the same clientele, but there is a difference in market conduct regulations on consumer protection. For example, a microfinance bank is mandated by the prudential regulations  of the State Bank of Pakistan to disclose annualized lending and deposit rates in the contract signed with their clients, and to also have an officer read out these terms to their clients. In contrast, a non-deposit taking institution is not subject to these regulations and has the discretion of quoting, say, rupee amounts that might not be representative or comparable.
The key finding on transparency and disclosure is that although financial regulators have strengthened disclosure requirements, there is a lack of standardized, comparable pricing information on financial products. As a result, consumers do not always have simplified, adequate, and comparable information about the prices, terms and conditions, and inherent risks of financial products and services. Regulators, market participants, and other stakeholders agreed with the recommendation on introducing a standard Key Facts Statement sheet, but also stressed the need for some demand-driven research on what information would be most beneficial to Pakistani consumers and what would be most effective way of communicating this information.
On sales practices, the report recommends more appropriate training and certification of market intermediaries, particularly for more complex financial products and services (e.g. bank assurance, securities investments, and Islamic financial products). Participants also deliberated over the need to decouple training providers and testing/certification bodies to add to consumer confidence.
Effective and speedy alternative dispute resolution mechanisms are particularly important in Pakistan, where courts do not provide timely, affordable, and predictable redress to consumers. There are generally sound grievance and redress mechanisms in place for banking customers, but virtually no systems exist for microfinance customers, and there is almost no oversight of internal dispute resolution systems which are handling securities and insurance customers.
There was considerable discussion at the workshop over whether one institution should look at client protection issues for the entire financial sector (e.g. a financial sector ombudsman), or whether the ambit of current institutions should be extended to cover gaps (e.g. banking ombudsman to cover microfinance institutions), or whether new institutions should be established to cover gaps (e.g. a microfinance sector ombudsman). Regardless of whichever institutional structure is implemented, the most critical aspect is widespread awareness of the mechanism, and adequate capacity to deliver effective resolutions to consumer protection issues.
Privacy and data protection of client information seems to be well regulated and enforced in the banking sector, including the rapidly growing branchless banking sub-sector. However, all of the other segments – microfinance, insurance, and securities markets – do not have or do not properly enforce guidelines regarding minimum acceptable levels of privacy, confidentiality, data integrity, and data protection for consumers.
Finally, there is significant work needed to improve financial literacy in Pakistan. In a recent survey, only 3% understood what was meant by mobile and phone banking. Combined with the low level of overall literacy (54%) and the low levels of financial inclusion, this is a fairly long term challenge.
While this report has looked at the institutional and regulatory framework, we need to now better understand what consumers want to know about financial services. A full-fledged financial capability survey can achieve this, which can form the basis for an integrated financial education strategy. This strategy can be used as a component in the broader financial inclusion vision for Pakistan, but would entail bringing in a lot more stakeholders than are currently involved in this area (e.g. Ministry of Education, private sector participants). An interesting learning opportunity could be the comparison with telecom literacy in Pakistan which has been primarily driven by the private sector itself.
Pakistan’s financial regulators have taken important steps to strengthen consumer protection and financial education in recent years. The way forward is to keep up with market trends in order to proactively protect consumer rights and improve financial literacy. This forms an integral reform agenda while pursuing improvements in both financial inclusion and financial sector stability.
Photo: Market in the Walled City, Lahore. Asad Zaidi / World Bank