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May 27, 2021

SBP evaluates industry’s feedback on digital bank rules

KARACHI: The State Bank of Pakistan (SBP) is carrying out a review of stakeholders’ feedback on the proposed rules that would guide set up and operations of digital banks, the central bank’s official said, as the banking regulator boosts technology-enabled financial services in Pakistan.

In March, the SBP released the draft of the digital bank regulatory framework to hear from a wide-range of stakeholders. The framework offers insights into guidelines for licensing, and supplementary regulations for digital banks.

"The consultative process on “Digital Bank Regulatory Framework- Exposure Draft” stands completed and stakeholders’ feedback is currently under review at SBP,” Abid Qamar, chief spokesman, SBP told The News by email.

To a query about what digital banks mean for branchless banking services providers, M Mudassar Aqil, CEO, Telenor Microfinance Bank /Easypaisa said branchless banking licenses, which were issued from 2008 onwards, were the first step that SBP took towards exploring digital accounts and digital on-boarding. It was sort of an experiment with limited exposure, hence daily/monthly limits etc.

“It is only after the success observed with branchless banking services like Easypaisa, that the SBP is now moving towards issuing digital bank licenses which would allow for customers to open and operate a completely digital bank account in Pakistan,” Aqil said.

For branchless banking services, it is also an opportunity to migrate and increase their offerings under this new regulation. However, Pakistan is still very much a cash economy and there is a strong reliance on cash. Therefore, branchless banking players were also uniquely positioned to work towards financial inclusion in the country through their agent networks for cash in/out.

Digital banks have the potential to become a simpler and more convenient medium for the masses to access financial services. Several macroeconomic factors such as tele-density, uptake of digital payments and e-commerce indicate that the railroads for creation of a sustainable digital ecosystem were in place.

Moreover, with extensive agent networks and easier requirements for access, digital banks potentially could become the go-to financial solution for a major chunk of the population, Aqil added.

The traditional brick and mortar concept of banking is being challenged all over the world and digital banking platforms can also provide financial services to the unbanked and underbanked segments of the population, especially in rural areas, and eventually increase digital financial access to provide high quality, affordable financial services.

A digital bank serves customers primarily through digital/electronic channels without having brick and mortar branches like traditional banks.

The framework includes two types of digital banks one is digital retail bank (DRB), which will retail customers and other is digital full bank that will offer services to corporate clients.

The initial minimum capital requirement (MCR) for digital retail bank is Rs1.5 billion for the pilot stage and Rs2.0 billion at commercial launch, whereas total MCR is Rs4.0 billion with remaining Rs2.0 billion to be met gradually over the transition period.

The proposed framework also provides an option for an Electronic Money Institutions (EMI) to transform into a DRB. For customers, access points are primarily digital and electronic channels.

“Some challenges which a digital-only bank would face in Pakistan include firstly, the lack of financial literacy and although things have improved recently, there is still a lot

of ground to cover,” Aqil said. Secondly, significant adoption issues of these platforms, and lack of trust in virtual businesses still hinders growth. Thirdly, digital transactions don’t offer any clear benefits to customers as compared to cash, and hence customers still prefer to use cash. Lastly, it is no secret that a majority of the people in Pakistan still want to evade documentation and taxation, he added.

“However, immense opportunities exist for all players in the digital financial services sphere. Ease of access and convenience is a clear reason why customers are moving towards digital services like e-commerce, food delivery, ride hailing, etc.

Within financial services, customers will find it much easier to open and operate digital bank accounts, irrespective of their location instead of having to visit physical bank branches,” Aqil added.

“With only 21 percent of the country’s adult population having access to financial services and the growing rate of internet and smartphone penetration, there is only immense opportunity.”

The role of personal finance is diversifying extensively especially with the growth of digital banking. Personal finance management (PFM) took some time to get off the ground, but today almost all the aspects of consumers’ financial lives have migrated to digital channels.

People look for online PFM tools so they can have a consolidated view of their finances in one place and manage their finances effectively.

“Hysab Kytab recently became the first comprehensive PFM in Pakistan to be offered to banking customers through its integration with the HBL Mobile Banking app.

The uptake of this feature in the banking application has been very encouraging - endorsing the need for a personal financial management tool by the end-users,” it said in a statement.