SBP heralds a new era for banking with a licensing and regulatory framework for digital banks (03-01-2022)

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Foreign Relations department

ERD / M & PRD / PR / 01 / 2021-152

January 03, 2022

SBP heralds a new era for banking with a digital licensing and regulatory framework

Banks

With the start of 2022, the State Bank of Pakistan paved the way for the dawn of a new banking era in Pakistan with the introduction of a regulatory and licensing framework for digital banks in line with best practices. international. This is the first step towards the introduction of a fully digital bank that will provide all banking services from account opening to depositing and lending through digital means and customers will not need to physically go to a bank branch. Digital banks are the culmination of the digital journey that the banking industry embarked on many years ago. The Framework for Digital Banks issued today is the latest in a series of recent initiatives by the State Bank of Pakistan to digitize banking and payments solutions in the country. Other recent digitization initiatives introduced by SBP, which are gaining traction and opening up new avenues for the introduction of innovative solutions, include digital customers baording,Roshan Digital Account, Raast – Instant payment system, Electronic Money Institutions Licenses, Asaan mobile accounts.

The new regulatory and licensing framework provides details on the establishment of digital banks as a separate and distinct category in Pakistan. Digital banking is defined as a bank that offers all kinds of financial products and services mainly through digital platforms or electronic channels instead of physical branches. In this context, SBP can grant two types of digital banking licenses: 1) Digital Retail Bank (DRB); and, 2) Complete Digital Bank (DFB). DRBs will primarily focus on retail clients, while DFBs can deal with retail clients as well as businesses and corporations.

The framework primarily aims to improve financial inclusion through affordable and cost-effective digital financial services and is part of SBP’s overall efforts to promote digital financial services in Pakistan. The framework includes guidance regarding licensing requirements, potential sponsors, and permitted use cases during the different phases. It also defines candidate expectations for strong digital governance, a robust, secure and resilient technology infrastructure, as well as an effective data management strategy and practices. As per the framework, digital banks are required to maintain a primary establishment in Pakistan to house the offices of its management, staff and other support operations and serve as the primary hub / point of contact for various stakeholders, including SBP and other regulators.

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 solid foundation and gained a significant share of the banking industry. Therefore, licenses for DRBs and DFBs can be obtained for both conventional and Islamic variants. In addition, conventional variants of DRBs and DFBs can also offer Islamic banking services through Islamic ATMs, in line with existing practice.

Setting up digital banks will also require less capital compared to existing traditional banks, encouraging new technology-oriented entrepreneurs to enter this new area of ​​business. The minimum capital required for DRBs is set at 1.5 billion rupees during the pilot phase, which will gradually increase to Rs. 4 billion over a three-year transition period. After the end of the transition

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Foreign Relations department

phase, DRBs can be graduated to be licensed from a DFB, subject to meeting the minimum capital requirement and completing a two-year progression phase.

SBP developed and finalized this framework after an extensive consultation process. Earlier this year, SBP released a regulatory framework exposure draftand a targeted survey was launched to solicit comments from a wide range of local and international stakeholders. Subsequently, a number of meetings were also held with all stakeholders to further enrich the consultation exercise. The said framework covers all essential guidance and additional regulations for a wide range of potential candidates interested in establishing a digital bank in Pakistan.

In line with international best practices and the assessment of the overall banking situation in Pakistan, SBP decided to initially issue up to five (5) digital banking licenses, which essentially means that SBP is looking to attract players with a strong value proposition, a strong technological infrastructure, sufficient financial strength, technical expertise and an effective risk management culture. Applications, in this regard, will be accepted until March 31, 2022 and applicants intending to apply for a digital banking license in this regard can submit their applications along with all required documents to [email protected]However, before submitting their digital banking license application, if necessary, interested applicants can contact SBP for any clarification at [email protected]For more information on SBP’s digital banking framework, see https://www.sbp.org.pk/dfs/Digital-Bank-Regulatory.html

SBP expects a few digital banks to be operational during 2022 and is confident that digital banks will play an important role in an inclusive and efficient expansion of the financial ecosystem in Pakistan.

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