Digital Bank

Phenomenal Opportunity in Pakistan by Upcoming Digital Bank

The financial industry has witnessed a significant shift towards digital banking over the past few years, with many people now preferring to carry out financial transactions online. However, in Pakistan, this transition has been slower than in other countries, presenting a unique opportunity for financial institutions like Mashreq to introduce and promote digital banking services.

Fernando Morillo, group head of retail banking at Mashreq, notes that Pakistan’s lag in digital banking adoption is one of the largest globally. This gap in adoption presents a considerable opportunity to encourage a shift in people’s banking behaviour, which Morillo sees as a mutually beneficial endeavour rather than a competitive one.

Pakistan is the fifth most populous country in the world, and as a cash economy, cash doesn’t offer any value as a savings tool or payment method due to inflation and high costs, respectively. Despite the growing popularity of digital payments, cash still dominates the economy in Pakistan, with more than Rs7.5 trillion in circulation, which accounts for over 27% of the total money supply in the economy.

In January, the State Bank of Pakistan (SBP) issued no-objection certificates (NOCs) to five out of over twenty applicants looking to establish digital banks. These banks will function digitally without physical branch networks. Mashreq is one of the financial institutions that has received a NOC from the banking regulator to launch a digital bank in Pakistan.

According to a recent financial inclusion survey by the non-profit organisation Karandaaz, 81% of Pakistani adults did not have bank accounts in 2022. The primary reason cited for not having a bank account was that they did not need one and had never considered using one, as reported by 68% of those without bank accounts.

This presents a significant challenge for financial institutions looking to introduce digital banking services in Pakistan. However, Mashreq’s extensive experience as a digital bank may prove beneficial in addressing this challenge. The financial institution has closed 85% of its branches in the past five years while doubling its client base, indicating its success in the digital banking space.

Mashreq has been operating in Pakistan in some capacity for the last 20 years, with a local representative office and claims to handle nearly 10% of national foreign payments as a “global clearinghouse” operating in 13 key jurisdictions. Additionally, nearly 2 million Pakistani workers in the United Arab Emirates have made Mashreq one of the largest remitters, making it an established player in the market.

Irfan Lodhi, CEO of Mashreq Pakistan, stated that the banking regulator has provided them with a clear roadmap to launch a digital retail bank in the country. This roadmap includes obtaining in-principle approval and moving on to the pilot stage, after which the bank will demonstrate its readiness to serve customers and transition to commercial operations.

One of Mashreq’s distinguishing features is its “hollow” core banking, which is the backend system that processes transactions within a bank. Changing a bank’s core banking system can take up to two years and requires a complete change management process. However, Mashreq has overcome this legacy problem and is well-positioned to introduce digital banking services in Pakistan.

In conclusion, the slow adoption of digital banking in Pakistan presents a unique opportunity for financial institutions like Mashreq to introduce and promote digital banking services in the country. With its extensive experience in the digital banking space and established presence in the market, Mashreq is well-positioned to succeed in this endeavor.

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