Pakistan’s financial sector has an important role in play in both national economic sustainability and in national development through financial inclusion. The financial sector’s importance is so great that one could argue that Pakistan already is a ‘banker’s economy’, and this ‘banker’s economy’ bears a significant portion of the national responsibility to foster and promote greater financial inclusion. Although it is true that Pakistan’s financial sector has recognised the importance of financial inclusion over the past 20 years, thanks to the emphasis of the State Bank and Ministry of Finance, there is still considerable room for improvement, even in specific comparison to South Asian neighbours. On that front, although discussions of financial inclusion have centred on digital banking, there is a complementary element in the future path of financial inclusion, seldom heard in economic circles here, which is the space economy.
The space economy refers here to the usage of space technology in the service of the economy at large, and more precisely, the argument here is that the usage of space technology for financial inclusion purposes by Pakistan’s financial sector that might make certain innovative contributions with respect to both the ‘backbone’ (infrastructure, tools) and ‘reach’ (consumer access, service quality, oversight) elements of the space economy’s value proposition. There are at least seven interesting ways in which this might occur:
- Better connectivity infrastructure in remote areas
- Better data management and service delivery by banks
- Stronger network resilience for cybersecurity
- Better risk assessment for the insurance industry
- Better risk assessment for portfolio managers
- Better income support oversight
- Better poverty/inequality detection and prediction
First, space technology can strengthen the banking sector’s core infrastructure by providing reliable, high-speed connectivity to the country’s more remote and underserved areas. Digital banking requires a dependable infrastructure of mobile connectivity, which is (for the moment) confined to larger and more urbanised geographies within Pakistan. As one extends outwards into mountainous, desert, or simply rural areas, one finds that mobile connectivity increasingly becomes an issue, and one that is particularly severe for the sorts of stable-internet transactions that banking requires.[1] This creates a structural bottleneck for financial inclusion since significant populations living outside well-connected conurbations cannot use e-banking effectively.[2] The space economy involves satellite provision for economic activities over a certain geography, and space technology can certainly extend the connectivity grid out to more remote regions, thus bolstering the possibilities of greater financial inclusion.
Second, and as the converse of the previous point, space technology can strengthen the data management and service delivery capabilities of banks too. In other words, while the previous point spoke to the consumer’s side of the equation in terms of connectivity, the point here is that banks themselves benefit from that broadened and improved space-based connectivity for data management and service delivery purposes. Online banking transactions require layers of security,[3] as well as real-time data transfers, even as large banks in Pakistan already handle large volumes of data. All three factors magnify the need for stable internet provision, and thus, from a bank’s perspective, the space economy allows for both data management and service delivery along real-time lines that is simultaneously more secure and more efficient, even during network outages or other disruptions.[4] In terms of financial inclusion, this improved data management and service delivery helps ensure better banking provision in those less-connected environs of the country.
Third, the space economy helps bolster the network resilience of the financial sector from a cybersecurity perspective, which is necessary for establishing trust between consumers and banks, particularly in less connected or poorly connected regions of the country. As is well documented and well known, cybersecurity threats against the financial sector are growing with time, both in terms of frequency and sophistication. Space technology allow for an additional level of network resilience through secure satellite-based communication systems that have dedicated encrypted channels for banking transactions. Such added cybersecurity can offer partial safeguards that can help build consumer trust in digital banking services.[5] This trust element is even more important in regions of the country where financial inclusion is low.[6]
Fourth, the space economy can strengthen the insurance business of the financial sector in a manner that may encourage financial inclusion. Insurance is a business steeped in risk, and risk factors determine various moving parts of the insurance industry, including the underwriting process, the premiums, actuarial calculations, and insurer’s interest. Space technology can help insurers with risk assessment in ways that might otherwise be too cost prohibitive, including in more remote or rural areas where ‘inclusive insurance’ has remained wanting. Insurers have typically avoided such areas because of the lack of reliable data, erratic weather patterns, and a lack of formal credit history, among other factors. Yet the space economy can assist with detailed, accurate, and continual (real-time) risk assessment in such areas for insurance purposes, particularly with regards to insurance for activities in the primary sector such as agriculture or mining. Such extension of insurance interest to these key economic sectors would boost financial inclusion and complexity while also improving access and reducing information asymmetry among the insuring and insured parties.
Fifth, and in a similar vein to the insurance industry, portfolio management (asset management) would benefit from the space economy through detailed, accurate, and continual (real-time) risk assessment. Like insurance, portfolio management is a sector that depends on risk assessments and a risk-reward calculus, with information asymmetries limiting the portfolio manager’s investment decision-making wherewithal. Insofar as satellites offer informational benefits to portfolio managers with respect to investment decisions, these managers will be more likely to make investments that may indirectly improve financial inclusion, particularly in the smallcap and microcap categories of investments that often have lesser access to both debt and equity financing.
Sixth, and arguably the most fascinating in terms of financial inclusion, is in the space economy combination of satellite imagery and machine learning for poverty prediction. Studies have shown that there are interesting ways in which machine learning and satellite imagery can be combined to give a remarkably illuminating[7] picture of economic poverty and inequality that covers actual conditions and also ventures predictions of future inequality & impoverishment trends. This is a fascinating use case for public value creation through the space economy, since public managers in the financial sector can use this data to direct the financial sector towards at-risk areas in terms of credit/lending, depository, and capital deployment functions that address exacerbating inequality or poverty conditions. Public managers could thus, by way of example, direct financial institutions to cater with urgency to the needs of expanding semi-permanent sprawls or ghettoized areas in a manner that reduces their economic plight.
Seventh, and closely related to the foregoing issue of poverty prediction, is the oversight of income support programmes. The space economy’s tools can help better direct public income support programmes (e.g. BISP) towards genuine needs, making them more targeted and accurate.[8] It has been something of a scandal that our major income support programmes have had undeserving people (who are too well-off) on the recipient list. Yet manually (or even digitally) overseeing every single recipient is cost-prohibitive for any welfare programme (an adverse selection problem), and sometimes Type-2 errors slip through the cracks.[9] Satellite imagery, when combined with machine learning, can offer a fascinating approach to oversight of welfare recipients in a non-intrusive manner, ensuring the reduction of Type-2 errors and thus making the programmes fairer, more inclusive, and more reliable as a poverty-mitigation tool.
In sum, there is no shortage of interesting areas where the space economy can support the financial sector in realising the pressing objective of greater financial inclusion in Pakistan. Although financial inclusion has been a major priority for successive governments over the past 20 years, the comparators with other South Asian countries demonstrate that much can still be done. The space economy offers a support role to the banking (especially e-banking) sector, the insurance & portfolio management sectors, the financial oversight authorities, and the income support overseers, at a bare minimum.
So, can we bank on the space economy for our banks?
Not entirely, since the space economy is not a complete substitute for the sort of overarching structural reforms that are envisaged under the auspices of, by way of example, the most recent IMF programme. Many countries addressed such financial inclusion issues before the advent of contemporary space technology, and as can be seen in the parallels between barriers to both traditional and digital finance in keen comparison, space technologies are not a catch-all remedy and nor was digital banking. Instead, the role of the space economy is to either facilitate or bolster larger efforts by the public and private forces that drive greater national financial inclusion. In that sense, only through the spirited execution of our existing financial inclusion strategy, complemented by the new tools of the space economy, can we achieve the fullest state of financial inclusion.
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[1] Assessments of internet banking apps suggest that they do not have stellar performance even in the largest metropolitan conurbations.
[2] There are other factors involved here too, such as literacy rates, electricity provision (charging), cultural barriers to women’s access to finance.
[3] This is among the (legitimate) reasons why, given the strong security measures that top banks use in Pakistan, e-banking apps appear to be clunky and cumbersome.
[4] The argument here is not that satellites are a substitute for terrestrial banking systems, but rather a complement that adds the requisite redundancy to the system in case of disruptions.
[5] That said, the range of cybersecurity threat vectors is substantial, and satellites (or space technology more broadly) are only part of the solution. Indeed, cybersecurity is a complex and nebulous challenge where: the greater the options for cybersecurity that exist, the lower the risk becomes, even if the risk is always non-zero.
[6] One may also surmise that these are areas where cybersecurity awareness is lower.
[7] It is truly ‘illuminating’ because it depends upon night-time lighting as one of the main indicators
[8] This would cohere with a longstanding IMF demand that the BISP be increased but also be made more targeted and accurate
[9] Sometimes, the Type-2 error may involve 143,000 government employees slipping through the cracks.
Dr Usman W. Chohan is Advisor (Economic Affairs and National Development) at the Centre for Aerospace & Security Studies, Islamabad, Pakistan. He can be reached at cass.thinkers@casstt.com.
