KARACHI: The gap between the broader use of digital platforms and the prevalence of digital banking tools in Pakistan is one of the largest in the world, said Fernando Morillo, group head of retail banking at Mashreq, a Middle East–based financial institution that’s received a no-objection certificate (NOC) from the banking regulator to start a digital bank in Pakistan.

Speaking to Dawn in a recent interview on the sidelines of a business conference, Mr Morillo said the gap offers a “phenomenal opportunity” to bring about a behavioural change in how people meet their banking needs.

“We don’t see it as a zero-sum competitive game. Pakistan is the fifth most populous country. It’s a cash economy. Cash doesn’t add value as a tool to save because it doesn’t beat inflation. Neither does it add any value to payments because it’s the costliest way of payment,” he said.

The State Bank of Pakistan (SBP) issued NOCs in January to five of 20-odd applicants for establishing digital banks. The new entities will operate digitally without any network of brick-and-mortar branches.

Even though digital payments are on the rise, the economy is still dominated by cash. The currency in circulation is in excess of Rs7.5 trillion, which is more than 27 per cent of total money supply in the economy.

A recently released financial inclusion survey by not-for-profit Karandaaz showed 81pc of Pakistani adults didn’t have bank accounts in 2022. The main reason for not having a bank account was “do not need one and have never thought of using one,” as reported by 68pc of those without a bank account.

Mr Morillo said his financial institution has the “longest and deepest experience” as a digital bank. “We closed 85pc of our branches in the last five years. We did that while doubling the number of our clients,” he said. Mashreq has been present in Pakistan for the last 20 years in one form or another. It’s been running a representative office locally and claims to be handling almost 10pc of national foreign payments by virtue of being a “global clearing house” operating in 13 key jurisdictions.

“Besides, there’re almost 2m Pakistani workers in the United Arab Emirates. We’ve been one of the largest remitters, and thus don’t feel like a new player at all,” he said.

Responding to a question, Mashreq Pakistan CEO Irfan Lodhi said the banking regulator has given the upcoming digital banks a clear path forward under which the next step is the in-principle approval, leading to the pilot stage. “That’s where we’ll prove to the regulator that we’re ready to serve customers. Post that, we’ll move to commercial operations,” he said, adding that the entity will act as a digital retail bank at the first commercial stage.

One feature that sets Mashreq apart from competition, according to Mr Lodhi, is its “hollow” core banking, a back-end system that processes transactions within a bank. “Traditionally, it can take up to two years if you make a big change to your core banking to bring in a new capability or innovation… you have to go through a complete change management process,” he said, noting that Mashreq has overcome that legacy problem.

Published in Dawn, February 12th, 2023