The State Bank of Pakistan’s (SBP) Regulatory Sandbox could provide Pakistani fintechs and financial institutions with an opportunity to develop locally tailored artificial intelligence solutions as international technology providers face rising compliance costs under the European Union’s AI Act. The central bank introduced Pakistan’s first Regulatory Sandbox in late 2025 as part of its Vision 2028 strategy, inviting both licensed and non licensed entities to test innovative financial products using real consumer data within a controlled regulatory environment.
The first cohort of participants was shortlisted in early 2026 and includes fintech companies and private banks working across three major areas: technology enabled remittances, open banking and remote merchant onboarding. Regulatory sandboxes are generally used by financial regulators as controlled testing environments where emerging technologies can be assessed before broader deployment. These environments can also provide regulators with practical information about new technologies, including artificial intelligence, machine learning and blockchain, helping them develop regulatory approaches based on actual market experience.
The timing of SBP’s sandbox has become particularly significant because of regulatory changes taking place in the European Union. The EU AI Act introduces mandatory requirements for the governance and use of artificial intelligence, including transparency obligations, mechanisms for human oversight and continuous monitoring of high risk AI systems. Although Pakistani companies are not directly subject to EU regulations simply because they operate in Pakistan, the international technology providers and service companies they rely on may be subject to the requirements when they operate within the European market or fall within the regulation’s scope.
Pakistan’s banking industry has substantial reliance on international technology vendors, including companies such as Temenos, Oracle and Salesforce. These providers support banks through core banking platforms, digital customer portals and electronic payment processing infrastructure. Many global technology companies either have operations in the European Union or conduct significant business there, potentially exposing their AI related products and services to additional compliance requirements under the EU AI Act.
The resulting costs could eventually reach Pakistani financial institutions through the global technology supply chain. International vendors facing higher expenses to meet mandatory AI governance, monitoring and transparency requirements may pass part of those costs to their customers through increased licensing fees, subscriptions, implementation charges or other service expenses. Such cost increases would not necessarily remain limited to European customers, particularly because multinational technology providers often maintain common product standards and pricing structures across multiple markets.
This reflects what is commonly referred to as the “Brussels Effect”, where the scale and purchasing power of the European market encourages multinational companies to align products and services with EU regulatory standards. Rather than maintaining entirely separate technology systems for different jurisdictions, global providers may apply EU compliant standards more broadly. As a result, companies and financial institutions outside the EU can also experience the financial impact of European regulatory requirements.
For Pakistani banks using imported software and cross border cloud infrastructure, higher costs associated with AI enabled services could therefore become an emerging concern. The SBP Regulatory Sandbox could offer a potential route for developing domestic alternatives at the component level. Instead of replacing entire core banking platforms, Pakistani fintechs could develop specialised AI modules that work alongside existing systems used by banks.
One potential policy approach would be for SBP to encourage startups and fintech companies participating in the Regulatory Sandbox to develop AI applications for specific banking requirements. These could include locally developed tools for know your customer and anti money laundering processes, fraud detection, credit scoring and transaction monitoring. Testing such solutions within the sandbox could allow banks and regulators to assess their performance before wider adoption.
Pakistani banks could continue using established international software for their core banking operations and other infrastructure while adding locally developed AI functionality where appropriate. Fintechs that successfully demonstrate their solutions through the SBP Regulatory Sandbox could provide banks with component level alternatives that reduce dependence on additional AI services from international vendors.
Such an approach could also allow financial institutions to maintain operational continuity while managing the potential increase in technology costs linked to international AI regulation. The sandbox therefore has significance beyond its role as a testing environment. It could become a mechanism for encouraging domestic financial technology development and giving Pakistani fintechs an opportunity to address specific requirements emerging from changes in the global technology regulatory landscape.
As AI regulation expands across major markets, the ability to develop and test locally relevant financial technology solutions could become increasingly important for Pakistan’s banking sector. SBP’s Regulatory Sandbox provides an existing framework through which these solutions can be evaluated, while giving fintech companies an opportunity to build products designed around the operational and regulatory requirements of Pakistani financial institutions.
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