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Malaysia Creating Framework for Digital Islamic Banks

Malaysia Digital Islamic Banking Services

Malaysia’s central bank, Bank Negara Malaysia, in a bid to push the financial sector to join the digital banking revolution, is preparing the issuance of the country’s first five digital banking licences to “qualified applicants,” both conventional and Islamic banks and both local and foreign financial institutions.

The move to support the development of digital banks in Malaysia follows efforts undertaken by regulators in Singapore and Hong Kong, which have each issued similar licensing frameworks in the past two years.

However, Malaysia’s roadmap is different in that it is the first country to explicitly include Islamic banks.

In a statement, the bank noted that the issuance of digital banking licences is part of a series of measures adopted by the central bank to enable innovative integration of technology to the financial sector.

Digital banks – also called virtual banks, neo-banks or challenger banks – predominantly deliver banking services through digital channels such as Internet portals and smartphone apps with minimal, if any, brick-and-mortar presence.

Their services are usually taken up by tech-savvy younger clients or “unbanked” or “underserved” customer segments who otherwise have no access to banking such as low-income individuals or early-income millennials, as well as those who look for tailored small business banking services which high-street banks do not offer, such as start-ups, SMEs, entrepreneurs and freelancers.

In the conventional banking segment, digital banks are usually operated by a variety or mix of e-commerce companies, technology and telecommunications corporations and financial technology firms that act alone or in cooperation with established banks.

As of 2018, the digital banking market volume was around US$5.2 billion in terms of assets under management and is expected to reach US$16.2 billion by 2025 based on a compound annual growth rate of 15.3%.

The Islamic financial industry has been a bit slower in adapting to the new digital opportunities, and while there have indeed been some Islamic digital banks launched in recent years, they are neither as large as their conventional counterparts nor as well-known.

Malaysia could potentially join with digital Islamic banking services in case Maybank and CIMB receive digital banking licences. Both are established Malaysian banks with large Islamic windows which reportedly applied for a digital banking license.

Industry experts across the board agree that digital banking is ideal for Islamic banks as consumers and businesses have become more sophisticated and selective these days as a result of technological advancements.

Moreover, banks can access customer information, allowing them to mine data and employ data algorithms to adapt business models and understand their customers better.

This, in turn, entails opportunities for growth especially in the lending business and the development of new services.

The emergence of digital banking is also an opportunity for Islamic banks that comes amidst slower growth in the industry over the past three years.

In addition to the “underbanked” and SMEs, which would welcome digital banking in a first phase, there is an entirely new customer segment to address – Islamic finance customers who are younger, more affluent and taking advantage of e-commerce in sectors such as tourism, fashion, health, beauty, as well as media and entertainment.

There are 60 million potential youthful clients in the GCC alone, and many of them are equipped with the latest tech gadgets and thus are increasingly mobile with better access to technology than ever before.

With the digital banking roadmap open for Islamic banks, Malaysia could set the standard for other Islamic jurisdictions aiming to issue digital banking licences.

The moves being made by Malaysia signal that digitizing banking services are no longer a niche program, but a commercial necessity.


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