The Influence of Digital Financial Services on Credit Practices in Unbanked Rural economy of Pakistan

Abstract

With the growing adoption of digital financial services (DFS) particularly in developing economies, it has really helped in improving financial inclusion in regions where traditional banking is limited. In Pakistan where over 100 million people are unbanked, DFS platforms like Jazz Cash and Easy paisa have become a necessity to scale these financial services, being such savings, credit and remittance solutions. Then, this study looks at the impact of DFS on the credit practices in these unbanked rural areas and whether DFS can be a viable alternative to informal moneylenders, and key barriers in adoption. Research using secondary data from government reports, financial institutions, and scholarly studies is applied to apply the statistical methods which include regression analysis comparative financial analysis and descriptive statistics. Interestingly, the findings show the strength of an internet access in predicting the DFS adoption, the more correlated to internet access is digital credit usage. Moreover, DFS users tend to have more positive credit terms compared to the informal borrowers, I.e., lower interest rates, structured repayment plans, and greater transparency. All of these advantages have so far slowed DFS adoption in rural Pakistan however, as low digital literacy coupled with a less than zero level of trust in the use of mobile banking and poor digital infrastructure continue to create barriers. DFS opens up access to credit, but doesn’t have much of an impact on actual financial well-being, depending on other economic factors, such as income growth, financial literacy and business development opportunities. Policy recommendations conclude the study on broadband expansion, digital literacy programs, regulatory improvements and targeted microfinance among others aimed at increasing DFS adoption in rural communities.