The State Bank of Pakistan (SBP) has granted in-principle approval (IPA) to five digital banks to operate in the country, aiming to promote financial inclusion and innovation through digital financial services. The five proposed digital banks are HugoBank Limited, KT Bank Pakistan Limited, Mashreq Bank Pakistan Limited, Raqami Islamic Digital Bank Limited, and Telenor Microfinance Bank Limited.
What is an IPA and why is it important?
An IPA is a non-binding pre-approval given by the SBP to a prospective bank, indicating the amount of capital that the bank is required to raise and the conditions that it needs to fulfil before launching its operations. It is valid for 12 months, during which the bank has to achieve operational readiness in various functions, such as governance, risk management, compliance, consumer protection, cybersecurity, product development, technological infrastructure, and relevant policies.
An IPA is an important milestone for the establishment of a digital bank, as it signifies that the bank has met the minimum criteria set by the SBP and can proceed to the final stage of obtaining a license. It also gives confidence to the investors and customers that the bank has a viable business plan and a sound regulatory framework.
Who are the five proposed digital banks?
The five proposed digital banks are:
- HugoBank Limited: A joint venture between Getz Bros, a pharmaceutical company; M&P Pakistan, a courier service provider; and Atlas Consolidate, which runs the Singaporean fintech Hugosave. HugoBank aims to offer a faster, more cost-effective, and efficient solution to meet the financial needs of underserved segments of society.
- KT Bank Pakistan Limited: A subsidiary of KT Corporation, a South Korean telecommunications company. KT Bank plans to leverage its expertise in digital technology and innovation to provide convenient and secure digital banking services to Pakistani customers.
- Mashreq Bank Pakistan Limited: A subsidiary of Mashreq Bank, a leading UAE-based bank. Mashreq Bank intends to use its experience and network in the Middle East and South Asia to offer a range of digital banking products and services to Pakistani customers.
- Raqami Islamic Digital Bank Limited: A joint venture between Al Baraka Banking Group, a Bahrain-based Islamic banking group; Faysal Bank Limited, a Pakistani commercial bank; and Ithmaar Holding B.S.C., a Bahrain-based investment company. Raqami Islamic Digital Bank aims to provide Shariah-compliant digital banking solutions to Pakistani customers.
- Telenor Microfinance Bank Limited: A subsidiary of Telenor Group, a Norwegian telecommunications company. Telenor Microfinance Bank is already operating as a microfinance bank in Pakistan, offering mobile financial services under the brand name Easypaisa. Telenor Microfinance Bank plans to upgrade its license to become a full-fledged digital bank.
What are the benefits of digital banking for Pakistan?
Digital banking is expected to bring several benefits for Pakistan’s financial system and economy, such as:
- Enhancing financial inclusion: Digital banking can help increase access to formal financial services for millions of unbanked and underbanked people in Pakistan, especially in rural and remote areas. By using mobile phones and other digital devices, people can open accounts, make payments, transfer money, save, borrow, invest, and insure without visiting a physical branch or an agent.
- Fostering innovation: Digital banking can foster innovation in the financial sector by introducing new products and services that cater to the diverse needs and preferences of customers. By using advanced technologies such as artificial intelligence, big data analytics, blockchain, cloud computing, biometrics, and internet of things, digital banks can offer personalized, convenient, secure, and affordable digital financial solutions.
- Boosting economic growth: Digital banking can boost economic growth by increasing financial intermediation, enhancing efficiency, reducing costs, improving transparency, and creating new business opportunities. By providing access to finance for individuals and businesses, especially small and medium enterprises (SMEs), digital banks can support entrepreneurship, productivity, employment, income generation, and poverty reduction.
What are the challenges and opportunities for digital banking in Pakistan?
Digital banking also faces some challenges and opportunities in Pakistan’s market environment, such as:
- Ensuring cybersecurity and data privacy: Digital banks must invest in robust security measures to protect against cyberattacks, cyber breaches, and fraud. They must also ensure that customer data is collected, stored, processed, and shared in accordance with the relevant laws and regulations. The SBP is currently revisiting its guidelines on information security and cybersecurity to provide more clarity and guidance for digital banks.
- Building digital literacy and customer trust: Digital banks must work towards building digital literacy among their potential customers, especially those who are not familiar with or comfortable with using digital financial services. They must also build customer trust by providing reliable service quality, fair pricing, effective grievance redressal mechanisms, and clear communication channels.
- Leveraging partnerships and collaborations: Digital banks can leverage partnerships and collaborations with other stakeholders in the digital financial ecosystem, such as telecom operators, fintech companies, e-commerce platforms, payment service providers, and regulators. By doing so, they can enhance their outreach, offer value-added services, reduce operational costs, and comply with the regulatory requirements.
How did the SBP facilitate the introduction of digital banking in Pakistan?
The SBP has been facilitating the introduction of digital banking in Pakistan by providing a conducive regulatory framework and a supportive policy environment. Some of the key initiatives taken by the SBP are:
- Issuing the Digital Bank Regulatory Framework: In December 2021, the SBP issued the Digital Bank Regulatory Framework, which provides the licensing criteria, prudential requirements, governance standards, consumer protection guidelines, and supervisory arrangements for digital banks in Pakistan. The framework also defines two types of digital banks: digital retail banks (DRBs) and digital commercial banks (DCBs), with different capital and operational requirements.
- Establishing the Innovation Office: In January 2022, the SBP established the Innovation Office, which serves as a focal point for engaging with fintech companies and other stakeholders in the digital financial ecosystem. The office also provides regulatory guidance, feedback, and support to fintech companies and facilitates their testing and scaling up of innovative solutions.
- Launching the Regulatory Sandbox: In March 2022, the SBP launched the Regulatory Sandbox, which is a controlled environment where fintech companies and other entities can test their innovative products and services under relaxed regulatory conditions and with close supervision from the SBP. The sandbox aims to foster innovation, enhance customer experience, and ensure compliance with the regulatory objectives.
