April 08 2024

Fintech sector in Pakistan faces mounting challenges

Despite having significant promise for fintech investment, with one of the world’s largest unbanked populations, Pakistan’s digital finance sector faces mounting challenges as the broader startup ecosystem is finding it hard to attract funding. In the 2023 fiscal year, fintech funding in Pakistan fell 80% to just US$20 million while the number of deals decreased 44% to just eight.

One factor unique to Pakistan adversely affecting fintechs is the sharp depreciation of the Pakistan rupee (PKR) against the U.S. dollar, which has complicated firms’ operations, especially those that frequently transact internationally. On August 24, 2023, the PKR ended at a record closing low of 300.2, breaching a psychological barrier of 300 to the greenback. By the end of 2023, the PKR had weakened about 20% against the dollar and was Asia’s worst performing currency.

Meanwhile, remittances, one of the fastest growing fintech segments globally, have lost momentum in the Pakistani market. In FY2023, remittances sent home by Pakistanis working abroad fell to US$27 billion compared to US$31 billion a year earlier, according to the country’s central bank. This makes Pakistan an outlier among large emerging markets in APAC. Indeed, India’s remittances jumped to US$125 billion last year, while the Philippines’ rose to US$40 billion. Overall, remittances increased 7.2% to South Asia and 3% to East Asia and the Pacific in 2023, according to the World Bank.

Pakistani newspaper The News on Sunday noted in a March report that certain Pakistani fintechs have collapsed in recent years. They include PayMax, Careem Pay, Checkout and YAP, which had “high hopes” to operate as electronic money institutions, “but found the journey fraught with obstacles, leading to the surrender of their licenses and applications.”

It is worth assessing to what extent the Pakistani fintech sector’s travails could affect the trajectory of the country’s five digital banks approved in September 2023: Easy Paisa DB, Hugo Bank, KT Bank, UAE-backed Mashreq Bank and Kuwait-backed Raqami Islamic Digital Bank. Since they were granted in-principle approval by the State Bank of Pakistan, there have not been many updates on the operational status of the five digibanks.

Raqami, however, announced in February that it had selected banking solutions provider Codebase Technologies to power the launch of its Shariah-compliant digital banking services. Under the agreement, the online lender he agreement will use the UAE-based vendor’s Digibanc platform as its new technology stack, including core banking.

We remain cautiously optimistic about Pakistan’s fintech sector in the long term. Provided the country can stabilize its finances and economic situation, the fundamentals are strong. Incumbents have limited reach, especially when it comes to digital finance, and the addressable market is huge, with up to 110 million unbanked people. Additionally, both internet and mobile banking users continue to grow, rising  15.5% and 30.2% in 2023, respectively.