Pakistan: Digitalization and Economic Development

Governor, State Bank of Pakistan, Jameel Ahmad has stated that rapid technological change has not only enabled banks to offer innovative financial services to customers but also empowered regulators to ensure compliance effectively and efficiently through advanced data collection and processing capabilities. He stated this in his keynote address at the 13th Bank of The Future Forum, focusing on the critical theme of ‘The Future of Banking’. The event, organized by Systems Limited, brought together distinguished dignitaries, eminent industry leaders, and fintech experts to discuss the evolving landscape of the banking sector in Pakistan and globally.

The Governor’s address covered many themes and underscored the SBP’s commitment to fostering innovation and digitalization within the banking sector, paving the way for a dynamic financial sector in Pakistan. The Governor shared the SBP’s digital transformation started in 2002, when SBP implemented the Temenos Banking System, and an ERP system for non-banking transactions, as well as a data warehouse for massive data-related requirements. In 2008, SBP implemented the Real-Time Gross Settlement System called PRISM for processing wholesale, large-value, institutional payments. Recently, SBP established its state-of-the-art, Tier-3 data center, the first of its kind in Pakistan.

The Governor shared that in 2008, SBP issued regulations for branchless banking services to enable the delivery of basic banking services from retail stores and kiryana shops. This initiative has resulted in a significant increase in the number of unique bank accounts, from 16% of the adult population in 2018 to 64% in 2024. He shared that in 2022, SBP issued the framework for establishing Digital Banks in Pakistan to further facilitate the entry of IT-enabled, non-banking entities into the financial services industry. As a result, in principle approvals were issued to five applicants who will shortly start pilot operations in the country.

The Governor shared that in line with international trends, SBP started working on transforming its retail payments industry by implementing the state-of-the-art ISO-20022 payment standard. Hence, Raast, our instant payment system based on the ISO 20022 standard, was launched in 2021. In a short span of almost three years, Raast has processed around 850 million transactions valuing over PKR 19 trillion. Today, with 38 million unique Raast IDs, the system processes an average of 2.5 million transactions a day. He shared that SBP is also working on integrating Raast with the Arab Monetary Fund’s instant payment system called Buna to facilitate millions of Pakistanis living in Arab countries in sending their remittances to Pakistan with ease and convenience.

The Governor shared that as a result of SBP’s efforts, today in Pakistan, we have around 59 million branchless banking wallets, 19 million mobile banking apps, another 3.7 million e-money wallets, and 12 million internet banking users. Since 2020, the overall number of retail transactions processed digitally has increased by 30%, and the share of digital payments in total retail payments by volume has risen from 76% in FY23 to 84% in FY24. The number of transactions processed using mobile and internet banking is growing at an annual rate of 70% and 30%, respectively. This is not surprising as the majority of our population is young and adept at using mobile apps.

The Governor shared that it is heartening to see the emergence of a vibrant fintech sector in Pakistan. These fintechs are striving hard to identify new markets and use cases and offer their tech-enabled services. He encouraged the IT sector to play a pivotal role in this transformation.

Making Pakistan hub of Islamic Finance by 2025

On the inaugural day of conference Dr. Miftah Ismail Adviser to the Prime Minister on Finance and Economic Affairs said the Ministry of Finance would soon set up a separate division for the promotion of Islamic banking in Pakistan. He was the Chief Guest at a two-day World Islamic Finance Forum (WIFF-2018). The international forum was organized by Institute of Business Administration’s Centre for Excellence in Islamic Finance IBA-CIEF in collaboration with key partners. The theme was “Expanding the Footprint of Islamic Finance: Innovation, Fintech and Regulations.”

In his visionary note, Shaikh Muhammad Taqi Usmani Chairman, Shariah Board of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) said the people of Pakistan origin were holding key positions in Islamic banking industry around the world, making contribution in developing regulatory framework and above all developing products that would meet the emerging needs of trade and industry. He urged the government to take concrete steps for making the economy Riba (interest) free. He also pointed out that Islamic financial institutions have ample liquidity and the government should work for creating new avenues for its deployment in remunerative options. He suggested that the ruling party should also include in its election manifesto that Riba would be eradicated totally from economy at the earliest.

Chairman AAOIFI Board of Trustees, Bahrain Shaikh Ebrahim Bin Khalifa Al Khalifa said it was heartening to note that Pakistan was striving to become another hub of Islamic finance. The country has all the basic ingredients — a population of 200 million predominantly Muslims, a robust banking and finance sector, vibrant agriculture, industrial and services sectors.

On the occasion were present the top officials of the apex regulators – State Bank of Pakistan (SBP) and Securities & Exchange Commission of Pakistan, Deputy Governors of the central bank, Jameel Ahmad and Shamsul Hasan talked about the central bank’s initiatives for the to promote Islamic banking in the country. The progress made over the last decade has been encouraging that has facilitated in achieving the target. They were also of the view that making Pakistan hub of Islamic finance would not be difficult.

Irfan Siddiqui, President Meezan Bank requested the federal government to set a target to acquire at least 25 per cent of the local funding through Islamic banking as Islamic financial institutions have ample liquidity and limited avenues for investment.

In his key note address, Dr. Ishrat Husain, Chairman, IBA-CIEF talked about the progress made by Islamic banking in Pakistan. He was of the view that the progress made during last one decade was enormous but new products need to be introduced to provide fresh impetus for growth.

IBA-CEIF Director, Ahmed Ali Siddiqui, welcoming the delegates, said the Centre had emerged as a regional platform for excellence in Islamic finance. He said focus areas of CEIF included development of Islamic finance professionals and new human resources talent pool through industry linkages and international collaborations.

Two of the closed-door meetings deserve special mention, though details discussed were not made public. In the first session players and regulators discussed details that could help in making capital market and mutual funds Shariah compliant. The issue of financial inclusion and outreach were the two important themes to be discussed at length. The second session was between Sharaih scholars and regulators for evolving regulatory frame work that can help in developing products to meet the needs of different income strata and those having different risk appetite.

Yet another initiative was presentation of research papers discussing contemporary issues. One of the sessions deserves a specific mention where lending to farmers was discussed. At present bulk of the loans are extended to farmers against passbook or the landownership document. This process mostly benefits the feudal lords. In this discussion the issue of warehouse receipt financing was also debated. However, it was evident that unless modern warehouses and collateral management companies are established warehouse receipt financing may not be possible. Authors of selected papers were awarded cash prizes.

The takeaways of the concluding remarks of Dr. Ishrat Husain were: 1) creation of Shariah Board at Ministry of Finance, 2) borrowing for infrastructure development projects through flotation of Rupee and Dollar denominated Sukuks, 3) focus on the development of Fintechs for extending outreach of banks and ensure financial inclusion and 4) development of alternative delivery channels.