the State Bank of Pakistan (SBP) has paved the way for the dawn of a new era of banking in Pakistan in 2022, with the introduction of the licensing and regulatory framework for digital banks in line with international best practice.
This is the first step towards the introduction of a fully digital bank that will provide all banking services, from account opening to deposit and lending, through digital means and customers will not need to visit any physical bank branch. Digital banking is the culmination of the digital journey that the banking industry took off many years ago. The Digital Banking Framework being released today is the latest in a series of recent initiatives by the State Bank of Pakistan towards digitizing banking and payments solutions in the country. Other recent digitization initiatives introduced by SBP, which are gaining momentum and opening new ways to deliver innovative solutions, include, on the digital plane for customers, Roshan digital account, Anger – instant payment system, licenses of electronic money institutions, Asan mobile accounts.
The newly issued licensing and regulatory framework provides details on the establishment of digital banks as a separate and distinct category in Pakistan. A digital bank is defined as a bank that provides all kinds of financial products and services primarily through digital platforms or electronic channels rather than through physical branches. Under this framework, SBP may grant two types of digital bank licenses: 1) Digital Retail Bank (DRB); and, 2) the full digital bank (DFB). DRBs will primarily focus on retail clients while DFBs can handle retail clients as well as business and corporate entities.
The framework primarily aims to promote financial inclusion through affordable/cost-effective digital financial services, and is part of SBP’s overall efforts to enhance digital financial services in Pakistan. The framework includes guidance on licensing requirements, potential sponsors, and permissible use cases during the various phases. It also sets expectations from applicants that they have sound digital governance, robust, secure and resilient technology infrastructure, and effective data management strategy and practices. According to the framework, digital banks are required to maintain a principal place of business in Pakistan to house their management offices, staff and other support operations and act as the main hub/point of contact for various stakeholders including SBP and other regulators.
The demand for banking services is sensitive to debt as well, and there is a large market for Sharia-compliant services. Over the years, the Islamic banking industry has built a solid foundation and gained a large share in the banking industry. Therefore, licenses for DRBs and DFBs can be obtained for both conventional and Islamic variants. Moreover, conventional variants of DRBs and DFBs may also offer Islamic banking services through Islamic windows in accordance with current practices.
Establishing digital banks will also require less capital compared to the existing traditional banks, which encourages new technology-oriented entrepreneurs to enter this new field of business. The minimum capital requirement for DRBs has been set at Rs 1.5 crore during the pilot phase which will gradually increase to Rs 4 crore over a three-year transition period. After completing the transitional phase, DRBs may graduate for a DFB license, provided they meet the minimum capital requirements and complete the two-year application phase.
This framework was developed and finalized by SBP after an extensive consultative process. Earlier this year, SBP released a draft exposing the regulatory framework and launched a targeted survey to invite feedback from a wide range of local and international stakeholders. Thereafter, a number of meetings were held with all stakeholders to further enrich the consultative practice. The said framework covers all the basic guidelines and supplementary regulations for a variety of potential applicants interested in setting up a digital bank in Pakistan.
In line with international best practices and assessment of the overall banking situation in Pakistan, SBP initially decided to issue up to five licenses to digital banks, which essentially means that SBP is looking to attract high value players, strong technological infrastructure, sufficient financial strength, technical expertise and culture Effective risk management.
SBP expects a handful of digital banks to operate through 2022, and is confident of that
Digital banks will play an important role in the comprehensive and effective expansion of the financial sector
Ecosystem in Pakistan.