In a major development for the country’s banking sector, the State Bank of Pakistan (SBP) on Monday announced the introduction of a licensing and regulatory framework for digital banks.

In a statement, SBP termed the development as 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.

“The framework for digital banks... is the latest in a series of recent initiatives by the State Bank of Pakistan towards digitalisation of banking and payments solution in the country,” SBP said.

The central bank said that the licensing and regulatory framework provides details for setting up digital banks as a separate and distinct category in Pakistan.

Digital bank is defined as a bank offering all kinds of financial products and services primarily through digital platforms or electronic channels instead of physical branches.

Under this framework, SBP may grant two types of digital bank licenses: 1) Digital Retail Bank (DRB); and, 2) 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.

The SBP said that the framework aims to enhance financial inclusion through affordable/cost effective digital financial services and is part of SBP’s comprehensive efforts to promote digital financial services in Pakistan.

As per the framework, digital banks are required to maintain a principal place of business in Pakistan to house the offices of its management, staff, other support operations and serve as the main hub/ point of contact for various stakeholders including SBP and other regulators.

Setting up digital banks will also require less capital relative to the brick-and-mortar banks currently in existence, encouraging new technology oriented entrepreneurs to enter this new realm of business.

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 transition phase, DRBs may graduate to receive license of a DFB, subject to fulfillment of minimum capital requirement and completion of a two years progression phase.

The central bank stated that the framework covers all the essential guidance and supplementary regulations for a diverse range of possible applicants interested to set up digital bank in Pakistan.

The SBP added that it has decided to issue up to five digital banks’ licenses initially, and was projecting that a few digital banks will be operational in the course of 2022.

“Applications, in this regard, will be accepted till March 31, 2022,” it said.

This article was first published in Business Recorder on January 3, 2022.