Category Archives: Insight article

The Securities and Exchange Commission of Pakistan (SECP) has re-issued the SECP Regulatory Sandbox Guidelines, 2019 (Regulatory Sandbox) under the Companies Act, 2017. With amendments to the Companies Act, 2017, in December 2021, now incorporating provisions on measures for greater ease of doing business under the companies law which includes the facilitation of innovation and use of technology in conducting business, there is now a firm statutory basis for the Regulatory Sandbox which was lacking when the Regulatory Sandbox was first introduced in 2019.

The intention behind the Regulatory Sandbox when it was first issued in December 2019 was novel in Pakistan as a tailored regulatory environment for conducting limited scale, live tests of innovative products, services, processes, and/ or business models in a controlled environment. This Regulatory Sandbox was available for testing of new products, business models, and services, across all sectors regulated by the SECP including insurance, capital markets, and non-banking financial services. 

Since its introduction, there have been two cohorts under the Regulatory Sandbox which saw various innovative products and businesses being approved for live testing: the first in the year 2020 and the second in the year 2021. Each cohort is a complete lifecycle of the regulatory sandbox implementation for a specified time to test the proposed products’ innovation.

In a little over two years since its inception, the Regulatory Sandbox is already promising some success. The results of the first cohort were released in February 2022, based on tests which focused on whether the proposed product can operate in the existing regulatory framework, requires amendments in existing framework, or otherwise requires an altogether new amended regulatory framework. This first cohort has seen SECP grant approval for the testing and experimentation of a Peer-to-Peer (P2P) platform, an innovative alternative digital platform to connect borrowers with individual lenders. In March 2022, the SECP notified draft amendments to the regulations for the non-banking financial services sector which if approved will for the first time set out the regulatory framework where NBFCs wish to provide P2P services or undertake business as a P2P service provider. It is expected that a P2P platform will particularly increase the access of small and medium sized enterprises to lenders for their short-term borrowing requirements.

In addition to the P2P platform, another key take away from testing under the Regulatory Sandbox has been in respect of micro and digital only insurers with the SECP having issued the position paper on registration regime for digital-only insurer in July 2021 which is expected to amend the Insurance Rules, 2017.

Currently, the SECP is hoping to invite applications for the third cohort in April-May, 2022. Under the Regulatory Sandbox, applications can be sent by (1) companies registered with the SECP (whether or not licensed); (2) unregistered start-ups intending to register if the testing is successful; (3) internationally recognized companies; and (4) any other persons deemed appropriate by the SECP. Participation can be sought in areas including those relating to digital assets, alternative financial intermediation platforms, insurance policy servicing, and artificial intelligence, among others.

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.