The State Bank of Pakistan (SBP) introduced the framework for digital services in January 2022. In terms of this framework, the SBP has sought to establish a separate licensing and regulatory regime for digital banks. The set up of a digital bank will require a separate license. The intention is to create a category of banks which will provide financial solutions through digital and electronic means, with limited physical presence such that any physical channels or access points will require a prior approval from the SBP.
The framework has been designed for setting-up of new digital banks, but traditional banks (including micro finance banks) can, subject to meeting certain requirements, request a conversion of their institution to that of a digital bank.
Within the framework, the SBP has created two categories of licenses, one more limited in scope than the other – there is the Digital Retail Bank (DRB) which will provide financial solutions to retail customers, and then the Digital Full Bank (DFB) which may provide financial solutions to retail customers as well as corporate and commercial entities. As a further categorization, each of DRB and DFB can either operate as conventional digital banks or as Islamic digital banks, although conventional DRB and DFB may, with the prior approval of the SBP, offer Islamic window operations.
The digital banking regime is not however immediately effective – the application process will be followed by a no objection, an in-principle approval, demonstration of operational readiness by prospective licensees, and a pilot stage under a restricted license before the commercial operations of a digital bank will commence. Based on available news, the SBP has limited the number of entities who will be given the license to five (5) with the number of applicants exceeding forty (40), but without further clarity on whether the number of licenses is restricted within the broad categories considered above. This may therefore mean that the market for digital banking will be highly competitive, but concentrated between a few key players.
The intent behind the digital banking framework is to promote inclusion, innovation, and modernization and follows a long trail of regulatory innovations over the last few years which have included branchless banking by traditional financial institutions in participation with other market players such as telecom companies and technology service providers, the electronic money institutions i.e. non-banking entities who are authorized to issue means of payment in the form of electronic money, and a framework for digital onboarding of customers. A more recent addition to these innovations from the SBP which requires mention is RAAST, being “Pakistan’s first instant payment system that will enable end-to-end digital payments among individuals, businesses and government entities instantaneously”.
The innovative regulations implemented by the SBP are expected to make banking more accessible and convenient for both individuals and businesses.
