Fintech a bright spot in Pakistan’s breakout year

Pakistani startups are having their moment in the sun.

Last year, a combination of investor exuberance, pandemic-induced digital adoption, an improving regulatory climate for startups, and the involvement of foreign funds drove VC funding in the country to a record high of US$350 million. That’s more than 5x the amount raised in 2020 and more than the previous six years combined.

Karachi, Pakistan / Photo credit: 123rf

2021 also saw bigwigs in the investment scene – including Tiger Global and Kleiner Perkins – flock to the country for the first time. Many closed deals at an unprecedented speed. “I’ve seen, on average, deals close in two weeks compared to months that we saw before,” notes Kalsoom Lakhani, co-founder of Pakistan-focused early-stage VC fund i2i Ventures.

With 25 deals inked last year, the fintech sector saw the highest number of deals made in the country, though it was ecommerce firms that took the crown in total value of funds raised, at US$211 million.

Four out of 10 of i2i Ventures’ portfolio companies are fintech firms, including CreditBook, earned wage access firm Abhi, and female-first finance platform Oraan.

Historically, financial inclusion in Pakistan has been an issue. According to the World Bank, 402 of every 1,000 people have bank accounts, which is less than half that of Bangladesh, another emerging economy. But here lies the opportunity.

For years, the high costs of getting a license and the opaque regulations around operating financial services gave incumbent banks a free pass. “When it comes to their job of intermediation or assessing private sector risks… [these banks] don’t have the infrastructure to do that, particularly for small and medium-sized enterprises,” Ozair Ali, co-founder and former COO of emerging market-focused VC firm Alter Global, tells Tech in Asia.

The number one question I get asked from outside investors is how to get my money out of the country?

But this is gradually changing. In 2019, the introduction of an electronic money institutions regulation gave rise to e-payment firms, and more recently, the creation of a digital banking framework allowed tech startups to offer a full range of banking services from payments, lending, and investments.

As is the case in all countries, the Covid-19 pandemic has driven up digital adoption in Pakistan at an unprecedented rate. Last year alone, cellular subscribers increased by an additional 16 million. Among Gen Z, more (36%) had mobile wallets than bank accounts (27%), another Thunes study found.

New rules that allow Pakistani tax residents to set up holding companies abroad have also made it easier for local founders to raise funds through offshore entities in jurisdictions like Singapore, the United Arab Emirates, and the US, while giving investors added assurance that their funds can be easily accessed.

“That was massive – the number one question I get asked from outside investors is how to get my money out of the country?” Lakhani says.

The last digital frontier

A “high-friction” market