Pakistani startups explore opportunities in Covid-19: SBP

Based on an analysis of the data compiled by Invest2Innovate (i2i), a total of eight Pakistani startups announced having raised funds from foreign investors during July-September 2021, worth over $150 million, the central bank added.

Further, these investments have been growing consistently since the Covid-19 outbreak in the second quarter of 2020.

Meanwhile, the sectoral breakdown shows that the transport sector accounted for the largest share of the announced investments, though this was due to a large-value transaction for one firm; in terms of number of firms attracting foreign investment, the fintech segment dominated; followed by e-commerce.

Multiple factors have played a role in increasing the announced investments in the startups in Pakistan.

The Pakistan-based startups are tackling shortcomings across retail, transport and logistics segments. Startups that have so far received the greatest amount of foreign interest in Pakistan are mainly offering digital solutions to bring efficiency to the retail shopping experience.

The firms in this space can be broadly categorised into two groups: those that offer grocery delivery services directly to the consumers; and others that offer digital platforms to facilitate business-to-business (B2B) connections and transactions. The second group appears to have more firms involved.

These firms offer a wide range of services, including connecting small retailers with multiple suppliers (including SMEs) on one platform (instead of the traditional model of arranging inventory from different suppliers); providing warehousing facilities; and providing digital book- and record-keeping products. Some of these firms also arrange delivery services for the products ordered via their platforms.

Closely linked with this space is the transport and logistics segment. Recent investments have been announced by a firm offering freight services that connect manufacturing and industrial firms – such as FMCGs, cement and textile firms – with fleets of truck operators.

The fintech firms are in the spotlight, as they have attracted the second-highest interest from foreign investors. These firms are at the early stages of plugging sizeable gaps across the country’s banking landscape.

Multiple startups have begun to offer short-term advance (loan) services to the customers via digital platforms, in the form of buy now-pay later and early wage access.

Meanwhile, a couple of fintech firms that have attracted foreign investment are offering electronic money (e-money) wallet services to the consumers, as well as businesses after obtaining the Electronic Money Institution (EMI) licence from the State Bank of Pakistan.

Other similar firms that have also announced successful fundraising rounds from foreign investors are at the initial development stages, having obtained either, in principle, approval to commence pilot projects.

These firms have developed digital platforms from where the consumers can receive and transfer money and make a wide range of payments.

Some of these fintech firms are also offering credit to the consumers, including via early wage access facilities.

The central bank said that one of the major outcomes of the Covid-19 outbreak and the resultant social distancing and containment measures is the acceleration in the trend of digitalisation.

According to a study, an estimated 70 million additional people became digital consumers only in the Southeast Asian region after the beginning of the pandemic. While e-commerce and distant learning platforms were among the major avenues for internet usage, the pandemic also stimulated a drive to digitalise a wide range of other services, including financial technology (fintech) and logistics companies.

Many of these services attempt to address structural imbalances in developing countries, in areas like financial inclusion, gender disparity in financial access and efficiency-lags in the retail sector and in logistical connectivity.

As such, the firms offering digital solutions in these areas have become highly sought-after by global investors, and have managed to raise significant amount of external financing. Investments are flowing into startups at varying stages of development, including those at the initial stages, to those with established customer bases and revenues.

Globally, a major reason for the higher investments into alternative assets, including startups, is the substantial monetary easing in the advanced economies, which has led to liquid global capital markets.

The venture capital arms of large asset management firms are pouring investments into the technology sector, whereas specialised and tech-focused venture capital firms are now diversifying into new markets and across different sectors.

In the finance space, large commercial banks are buying fintech firms outright, instead of pursuing large-scale in-house efforts to come up with the digital products.

Regulatory changes to facilitate local IT firms, including startups and freelancers

With a view to diversify the sources of the country’s foreign exchange earnings and to facilitate the ongoing digitalisation drive, the SBP has made multiple changes to foreign exchange regulations.

The regulatory change would help Pakistan-based startups to attract investment from foreign investors. Further, the central bank streamlined regulations for Pakistani businesses so they could acquire the services of major global tech firms to provide seamless services to their clients.