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Roshan Solutions for Innovation – Journal


WHEN the State Bank of Pakistan launched the Roshan Digital Account Initiative for Overseas Pakistanis in September 2020, it had at its core a main premise and a proposition. The premise was that overseas Pakistanis want to save and invest in Pakistan but are hampered by three key obstacles created by our banking system: difficulties in opening an account, including physical presence requirements and extensive and varied documentaries; regulatory restrictions prohibiting them from withdrawing their investments from Pakistan at will without the need for regulatory approvals; and the anxiety posed by an unpredictable tax regime on income from investments brought into Pakistan.

The proposition was that if the regulator recognizes and resolves these obstacles, Overseas Pakistanis will come forward and send their savings to Pakistan for investment and other purposes. This central idea proved critical to Roshan’s eventual success where previous initiatives aimed at mobilizing diaspora savings, such as the Pakistan Banao Certificates, had failed.

Now is the time to apply the same fundamental ideas that were behind SBP’s Roshan Initiative to another key group that needs to be better supported by our banking system: Pakistani innovators and especially those working in technology-related fields. This group includes start-ups, companies offering IT services and IT-based services (ITeS), including software exports, and freelancers. Their frustrations with our banking system are similar to those experienced by overseas Pakistanis until Roshan’s initiative: difficulties in opening a bank account and accessing major banking services, inability to easily repatriate foreign currency they might bring into the country by selling their services abroad or raising foreign capital and fear of unpredictable taxes on income from funds they might bring in from abroad.

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Take start-ups for example. According to media accounts, they raised more than $350 million in 2021, helped in part by SBP’s relaxations of the foreign exchange regulatory framework in early 2021 to raise foreign funds. However, most start-ups do not bring the funds they have raised abroad to Pakistan. As a rule, they provide only the minimum amounts necessary for local expenses. Similarly, software exporters and freelancers earn foreign exchange by exporting their services, but keep profits offshore as much as possible. As a result, Pakistan is deprived of badly needed foreign currency, especially at present. More importantly, our innovators risk missing out on opportunities to grow and compete effectively in the international marketplace for the services they provide because the financial system – instead of supporting them – hinders them.

Now is the time to apply the fundamental ideas of the Roshan initiative to another key group.

How could the key principles of the Roshan Initiative be applied to the banking system to better support Pakistani innovators? First, all key public sector stakeholders should buy into the goal that this constituency should be supported. The area that has traditionally appalled a regulator is repatriability: anything you bring in from outside is free for you to take back with any profit made on the investment. On the one hand, that would seem logical. On the other hand, our history is full of well-intentioned devious initiatives. The same concerns surfaced when Roshan was launched. The solution was to design safeguards into the process to limit abuse. The same approach is needed in this case, as the benefits of such flexibility would far outweigh the risks. Besides, if we don’t try, how would we know?

Second, it would be important for the initiative to be owned and driven by the central bank. This is to assure the intended beneficiaries that the policy would not change in the event of a change of government. Similar concerns arose with Roshan during the recent change of government. Rumors began circulating on social media that the political change could mean Roshan’s shutdown. SBP had to step in to reiterate that Roshan was a central bank initiative. Investors and currency holders need to be confident that the policy regime under which they can bring their currency is not tied to the policy.

Once ownership is established, it would be simple to create the banking system framework to help innovators. Lessons learned by SBP from the Roshan launch would help get this off the ground quickly. The first step would be to open a digital account through a streamlined customer journey with standardized requirements. Early in the launch of Roshan, SBP leaders had to sit down with banks’ IT teams and challenge them to rethink their customer journeys to achieve the goal of customer facilitation. The same approach may be needed here. As part of customer due diligence, there should be a mechanism to ensure that the beneficiary of the account is a start-up, an IT or ITeS company, or a freelancer. A simple approach would require proof of proper registration with the SECP or the Pakistan Software Exports Board; other solutions would also be possible.

The second element of the framework would be the repatriability of funds brought in from abroad and attractive returns on foreign currency held in Pakistan, as was done for Roshan. To avoid arbitrage opportunities, it may be easier to offer the same terms as through Roshan. And last but not least, the framework would need a simple and comprehensive tax regime on the profits made on these funds brought in from outside, as was done for Roshan.

Supporting our nascent innovation sector is key to sustaining growth and a diverse economic structure. Our main industries as well as our export structure are largely the same as ten years ago. Fast-growing emerging markets encourage innovation and competition to disrupt existing structures and introduce new products, services and brands. The global space for housing innovators is also becoming competitive. We do not want to lose Pakistani innovators to neighboring jurisdictions simply because we are unable to proactively meet their needs. For innovation to flourish in Pakistan, our financial system must step forward to offer Roshan solutions to our innovators.

The writer is the former Governor of State Bank of Pakistan.
Twitter: @rezabaqir

Posted in Dawn, July 3, 2022