The State Bank of Pakistan (SBP) has progressed towards establishing Digital Banks in Pakistan, and its first step was to develop a draft regulatory framework for the Digital Banks for public consultation.
The proposed framework entails guidelines for licensing and supplementary regulations for Digital Banks. It sets out different types of digital bank licenses, constitution models, minimum eligibility criteria, and competencies for sponsors, directors, and CEOs.
This indigenous regulatory framework is designed to enable the industry to exploit the market demand and opportunities without compromising the safety and soundness of the financial system. Moreover, it also provides for investor-friendly, first-of-its-kind, flexible requirements in Pakistan.
Digital Banks
A digital bank serves customers primarily through digital/electronic channels without having brick and mortar branches like traditional banks. A Digital Retail Bank (DRB), which may deal with retail customer segments, includes all the customer segments permissible for commercial banks in general, except the corporate and commercial segments.
The term mainly comprises individuals, SMEs, micro and agriculture entities, as defined in these regulations.
A Digital Full Bank (DFB) may deal with corporate, commercial and retail customer segments.
The key features of the proposed framework include two types of digital banks:
Digital Retail Bank (DRB) — a uniquely designed category for retail customer segments
Digital Full Bank (DFB) — minimum three years transition period for DRB from commercial launch with certain business conditions and a minimum two years progression for DFBs from the granting of a DFB license.
The SBP’s goal is to provide an appropriate framework for the operation of Digital Banks in Pakistan. This initiative is part of its comprehensive efforts to promote digital financial services in Pakistan, including the Roshan Digital Accounts (RDA).
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Digital financial services in Pakistan are undergoing a progressive transformation journey, propelled by deep-rooted reforms and other enabling adjustments instituted by the SBP. The recent initiatives in this regard entail the introduction of Electronic Money Institutions (EMIs), the National Payment System Strategy (NPSS), an instant payment system (RAAST), and RDAs, etc.
The SBP initiated working on the introduction of a separate framework for digital banks along the lines of regional regulatory trends with the key objectives to explore further avenues for financial inclusion, credit access to the unserved and underserved, better customer experience, innovation in banking, and an inclusive digital eco-system.
Paid-up Capital Requirement for Digital Banks
The initial Minimum Capital Requirement (MCR) for a DRB is Rs. 1.5 billion for the pilot stage and Rs. 2.0 billion at the commercial launch whereas the total MCR is Rs. 4.0 billion, with the remaining Rs. 2.0 billion to be met gradually over the transition period.
The proposed framework encourages sponsors to pursue a collaborative investment model to promote a complementing set of non-bank innovative players. It also provides the option for an EMI to transform into a DRB.
For customers, access points are primarily digital and electronic channels. However, a Digital Bank may use sales and service centers, branchless banking agents, other banks’ branches for branding, customer complaints, cash transactions, etc.
A survey of the SBP-regulated entities was conducted to seek institutional views broadly around digital bank models, the scope of activities, ownership structures, capital implications, eco-system collaborations, technologies, and governance considerations.
Three purpose-driven industry working groups were also constituted that have been instrumental in sharing industry perspectives and providing feedback on various elements of this framework.
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Potential Digital Banks
A traditional bank having a minimum of one year of delivering Digital Financial Solutions (DFS) in the retail customer segments may apply either individually or with other equity participants. However, the SBP may advise for an extended period of experience if it does not consider the traditional bank’s performance to be satisfactory.
An international bank or international DFS entity with a successful track record of a minimum of three years of delivering DFS in the retail customer segments may apply either individually or with other equity participants.
An EMI seeking conversion into a DRB must have a minimum of one year of delivering DFS in the retail customer segments, but the SBP may advise an extended period of experience if the EMI’s performance is unsatisfactory.
Those holding a majority stake in or exercising control over a microfinance bank, EMI, international bank or international DFS entity having a successful track record of a minimum of three years of delivering DFS in the retail customer segments may apply either individually or with other equity participants.
Any other person or entity having a minimum of three years of experience in the financial services, financial technology, telecommunication, e-commerce, ICT, or other pertinent digital or innovative financial and non-financial domains, when applying to form a DRB with a minimum of five percent equity in the proposed DRB, and at least one of the individuals or entities, as the case may be, listed in sub-clause (a), (b) and (d) being a minimum five percent equity participant in the proposed DRB.
The proposed framework has been shared with the industry, is included on the SBP’s website, and is available here for feedback.
The draft is the outcome of an extensive study of international regulatory and industry best practices across several key themes in over 15 countries where digital banks or similar institutions operate in some form.
The SBP invites feedback on this Exposure Draft within 30 days (by 25 April 2021). Feedback should be sent to the email address [email protected].
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