08/15/2022

State Bank Introduces Licensing Framework for Digital Banks in Pakistan

January 5, 2022 – The State Bank of Pakistan (SBP) on January 3, announced “a new era for banking,” and has introduced a framework for licensing and regulation of digital banks in Pakistan that are in compliance with international best practices. The purpose is to operate a fully digital bank where one will not need to physically visit the bank; from account opening to deposit and lending, everything will be online.

The framework creates a separate category for Digital Banks in Pakistan. SBP, in its announcement, mentioned that applicants can apply for licenses till March 31, 2022, by emailing requests along with required documents at digitalbanksapplications@sbp.org.pk.

The central bank will be issuing two types of licenses: Digital Retail Bank (DRB) and Digital Full Bank (DFB). DRBs will focus on retail customers, while DFBs will deal with both retail customers and corporations. The minimum capital requirement for DRBs is set to be 1.5 billion PKR which is to increase to 4 billion PKR over three years.

The State Bank of Pakistan is taking the first steps towards developing a fully digitized banking system in the country and expects that this framework will support the financial ecosystem. Creating digital banks will not only pave avenues for technology entrepreneurs but will also be cost-effective, lowering costs for both consumers and providers. It will also provide a greater digital footprint allowing for more accountability and reducing fraudulent practices. In addition to this, research tells that digital finance gives higher tax revenues, which in turn adds to the national revenue.  Given the wide range of benefits, the SBP is taking the country in the direction of the sitting government’s vision of Digital Pakistan; and digital finance is an important tool for achieving sustainable development and creating a technology-savvy nation.

The move comes at a time when consumers of the banking industry are required to visit physical branches of the banks for even the basic tasks like issuing bank statements or having the address changed. The move towards digital banking will enable consumers to not be restricted by mobility in order to hold a bank account. In a market already reluctant to move to digital payments methods and rely heavily on cash transactions owing to the tedious processes of conventional banking, digital banking may even encourage them to attempt to move to cashless transactions and banking.

Digital Banking, as per Forbes Advisor, is a combination of online banking and mobile banking services. It allows account holders to avail a number of services such as checking account balances, transferring funds, paying utility bills, etc. over the internet. Online banking became popular in the US in the 1990s. According to an estimate, 80 percent of US banks offered online services at the beginning of the 21st century.

Pakistan, witnessed the era of online banking considerably late, and the SBP has been a key enabler in incorporating technology and banking services. Branchless banking in Pakistan has seen exponential growth in recent years. SBP recorded 79.45 million e-banking transactions in the year 2013, which grew further amidst the COVID-19 pandemic as the transmission of the virus through banknotes became a concern. Despite this increase, cash-based transactions remain a preference for most consumers.

Mishaal is a Project Coordinator at Media Matters for Democracy. She is a Public Policy graduate with past experience as content strategist and research writer. Her main areas of interest are political science, world history, and public policy.

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