ISLAMABAD: The State Bank of Pakistan’s latest initiative to introduce a licensing and regulatory framework to set up digital banks is a good step to promote digital financial services in Pakistan, WealthPK reported on Wednesday quoting economic experts.
“If implemented in letter and spirit, the measure can significantly improve financial inclusion in Pakistan,” Dr Sajid Amin Javed, a senior research fellow at the Sustainable Development Policy Institute (SDPI), told WealthPK while commenting on the central bank’s initiative.
Talking to WealthPK, he suggested that digital banks should focus on financial instruments and services for the financially excluded and underserved populations and businesses such as micro, small, and medium enterprises (MSMEs) in the informal sector.
The SBP has set the stage for the dawn of a new era for banking in Pakistan with the introduction of a licensing and regulatory framework for digital banks in line with the international best practices, the central bank said in a statement following launch of the initiative.
A digital bank is defined as a bank that offers all kinds of financial products and services primarily through digital platforms or electronic channels instead of physical branches.
The central bank stated that this is the first step towards introducing a completely digital bank that will provide all the banking services, from account opening to deposit and lending, through digital means, and the customers will not need to visit any bank branch physically, WealthPK reported.
The framework for digital banking being issued is the latest in a series of recent initiatives taken by the SBP towards digitalisation of the banking sector and payments solutions in the country.
The framework mainly aims to enhance financial inclusion through affordable and cost-effective digital financial services and is part of SBP’s comprehensive efforts to promote digital financial services in Pakistan.
The framework covers all the essential guidance and supplementary regulations for a diverse range of possible applicants interested in setting up digital banks in Pakistan.
Under this framework, SBP will grant two types of digital bank licences, including digital retail bank (DRB) and digital full bank (DFB).
DRBs will primarily focus on retail customers while DFBs can deal with retail customers as well as business and corporate entities.
In line with the international best practices and assessment of the overall banking situation in Pakistan, SBP has decided to initially issue up to five digital banks’ licences, which essentially means that SBP is looking to attract players with a strong value proposition, a robust technological infrastructure, sufficient financial strength, technical expertise and effective risk-management culture.
SBP expects that a few digital banks will be operational in the year 2022 and is confident that digital banks will play an important role in an inclusive and efficient expansion of the financial ecosystem in Pakistan.
An opportunity for entrepreneurs
According to the SBP, setting up of digital banks will also require less capital as opposed to the brick-and-mortar banks currently in existence, thus encouraging new technology-oriented entrepreneurs to enter this new realm of business.
The demand for banking services is also faith-sensitive and there is a large market for Sharia-compliant services. Over the years, the Islamic banking industry has established a strong footing and gained a sizable share of the banking industry.
Therefore, licences for DRBs and DFBs may be obtained for both conventional and Islamic variants, according to the SBP. Further, conventional variants of DRBs and DFBs may also offer Islamic banking services through Islamic windows as per existing practice.
The minimum capital requirement for DRBs is set at Rs1.5 billion during the pilot phase that will gradually increase to Rs4 billion over a transition period of three years. Subsequent to completion of the transition phase, DRBs may graduate to receive licence of a DFB subject to fulfilment of minimum capital requirement and completion of a two-year progression phase.
Benefits
Currently, SBP is implementing multiple initiatives to promote digital financial inclusion to maximise economic gains for the country. These innovative solutions include customers’ digital on-boarding, Roshan Digital Account, Raast – Instant Payment System, Electronic Money Institutions licences and Asaan Mobile Accounts.
Financial inclusion is usually referred to as providing equal opportunities for individuals and businesses to access suitable, affordable and timely financial services. It also leads to the documentation of the economy and brings the informal economy into the tax net, thus shrinking the shadow economy.
Dr Sajid Amin of SDPI believes that financial inclusion also helps reduce poverty by increasing access to bank deposits that enable individuals to accumulate savings in a safe and secure environment.
“Pakistan is far behind in digital financial inclusion, particularly in digital payments, because the share of payment in cash is very large in the economy. So, steps must be taken to boost digital financial inclusion because digitalisation of any system itself improves the chances of an increase in tax revenue and enhances the capacity and capability of track and trace system, and ultimately boosts tax revenue and the base,” stressed Dr Amin. -INP
