Mufti Muhammad Abu Bakar

Shari’ah Analyst – Meezan Bank Limited

The State Bank of Pakistan (SBP) has recently announced that it has issued no-objection certificates (NOCs) to five applicants for establishing digital banks in the country. The five applicants that have been issued NOCs are:

• Easy Paisa DB (Telenor Pakistan B.V & Ali Pay Holding Ltd.)

• Hugo Bank (Getz Bros & Co., Atlas Consolidated Pvt Ltd. and M & P Pakistan Pvt Ltd.)

• KT Bank (Kuda Technologies Ltd., Fatima Fertilizer Ltd. and City School Pvt Ltd.)

• Mashreq Bank (Mashreq Bank UAE)

• Raqami (Kuwait Investment Authority through PKIC and Enertech Holding Co.)

This move towards digitalization is seen as an important step towards modernizing Pakistan’s banking sector and bringing it in line with international standards. Digitalization will not only make banking services more convenient for customers but it will also help to combat financial crimes such as money laundering and disallow transfer of funds for illegal activities.

However, there are some concerns that need to be addressed as well. One of the main concerns is that the Federal Shariat Court has declared interest-based banking as prohibited, and the Government has agreed to convert the whole system of economy on Riba-free basis within 5 years.

This means that the new digital banking services and platforms launched by the SBP have to be in line with the decision of the Federal Shariat Court and the country’s constitution and they will have to adhere to strict Islamic banking principles. The 1973 Constitution of Pakistan in Clause 38 clearly stipulates that Riba shall be eliminated as soon as possible.

To ensure that the potential of these new digital banks is fully realized, it is strongly suggested that the SBP and the government take immediate action.

First, it is suggested that the SBP and government instruct all these five banks immediately to start their operations under an Islamic banking framework. This will ensure that the products and services offered by these digital banks are in line with the religious values of the general public and the country’s constitution.

Secondly, it is suggested that the SBP makes amendments in the Digital Banking License Framework so that only Islamic licenses will be issued. This will ensure that future digital banks that are established in the country also operate under Islamic banking principles.

By taking these steps, the SBP and the government can ensure that digitalization is promoted while adhering to the principles of Islamic banking as outlined and instructed by the Federal Shariat Court. This will help to strike a balance between modernizing the banking sector and preserving the country’s religious values and constitution.

Doing things this way also has economic merits. A lot of people hesitate to do banking in order to avoid the element of interest. Several scientific surveys conducted by various agencies have established this fact. Financial inclusion will be higher if people are given Shari’ah compliant banking solution than otherwise. Secondly, Islamic banks have in place an even more robust risk management framework with greater scrutiny of purpose of funding requirement and asset backed financing feature. Furthermore, deposits in Islamic banking have grown more swiftly than in conventional banking. Hence, it is in the best interest of any new player in this market segment to offer Shari’ah compliant financial services than otherwise.