On a January morning in 2022, the governor of the State Bank of Pakistan (SBP) walked into a boardroom which had three deputy governors, all executive directors and the relevant directors present. Decision day had arrived for awarding five licences from the 20 local and international applications.
The governor had shrugged off all calls from very powerful quarters seeking a licence. He advised the people in the room that they needed to reach a consensus to recommend five names from the 20 applicants. The applicants included powerful commercial banks, international consortiums, electronic money institutions and existing microfinance banks. The recommenders understood that any award would result in making some people unhappy.
As the deliberations started, the group made an in-principle decision to eliminate the commercial banks’ applications. The rationale was that commercial banks’ existing licences allowed them to conduct digital banking, and across the board, commercial banks, while building up a material cost base and fancy titles, had not been able to master a simple end-to-end customer journey.
The SBP was looking for applicants who would be force accelerators for financial inclusion, provide data-based lending, and change the customer journey via back-office automation; they were looking for applicants who would work with the financial ecosystem by providing banking as a service.
The key challenge for these nascent banks will be patient capital and the staying power of their owners
The meeting lasted all day. The SBP knew that it would not be giving out additional licences till the current batch proved itself successful. It also knew that it would come under criticism given the large number of applicants and only five licences being granted.
The first past the post was Mashreq Bank. Mashreq had material experience as a digital bank in its own country (United Arab Emirates), deep pockets and was capable of accepting Pakistan’s sovereign risk.
The next past the post was Easypaisa. Although the microfinance bank had lost over $200 million in the past four years, its shareholders (Telenor and ANT Financial Services) had stood behind it. The clinching point was the presentation made by ANT senior management and their commitment to bringing their world-class technology to Pakistan.
The third bank approved was Raqami Islamic Digital Bank, a consortium led by Planet N, Pakistan Kuwait Investment Company and Enertec (100 per cent owned by Kuwait Investment Authority).
The next two licences were a simple bet by the SBP. Their hope was that the digital expertise of Kuda (Nigeria-based Fintech), combined with the local distribution of Fatima Group and City School for KT Bank and Muller & Phelps, Getz Bros & Co., and Atlas Consolidated for Hugo Bank, would be a winning combination. Hence, the entities provided an in-principle approval that evening were Mashreq, Easypaisa, Raqami, Hugo and KT.
As it stands, Easypaisa has been granted a commercial licence. Mashreq is in their pilot phase; Raqami and Hugo are awaiting their approval for their pilot, and KT Bank has yet to apply for its pilot.
Digital banks can be a game changer for the industry regarding financial inclusion, customer journey and the financial ecosystem as a whole if they are able to just execute the plans they had submitted to the SBP.
In addition to the normal challenges of cybersecurity, liquidity, and customer cost of acquisition, there is a unique challenge for digital banks in Pakistan. In our country, commercial banks are highly profitable because they are really fund managers. Generating inexpensive deposits from branches and then lending to the government via T-bills and treasury bonds, this should be a side activity, not the most profitable activity of a bank.
Keeping this scenario in mind, the key challenge in the case of Pakistan for the nascent digital banks will be patient capital and the staying power of their owners. Digital banks, unless led by credit in the best-case scenario, start making money in years five to seven, and if only led by transactional services and savings products, typically make money after year 10.
Unfortunately, most digital banks are not leading by credit due to a lack of data. This creates the opportunity to provide banking as a service. Using third-party data, digital banks are usually a valuation play with few global exceptions.
The challenge here is that firstly, the SBP has mandated no change in the capitalisation table before the digital banks become profitable, and secondly, given the long profitability gestation period, the owners are expected to lose north of $50m before seeing the light of profitability at the end of the tunnel.
While digital banks have the opportunity to be a force multiplier for financial inclusion by changing the customer journey and potentially creating the first banking unicorn in Pakistan, the test will be the mettle of their owners.
The writer is Chairman of the Pakistan Fintech Network
Published in Dawn, The Business and Finance Weekly, April 7th, 2025
