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Bank Negara issues policy document on digital banks

Bank Negara Malaysia has issued a policy document on licensing framework for digital banks following a six-month public consultation. In a statement issued on 31 December 2020, Bank Negara said the licensing framework for digital banks aims to enable the innovative application of technology to uplift the financial well-being of individuals and businesses and foster sustainable growth.

This includes expanding meaningful access to and promoting responsible usage of suitable financial solutions to the unserved and underserved segments. The framework adopts a balanced approach to enable admission of digital banks with strong value propositions while safeguarding the integrity and stability of the financial system, as well as depositors’ interests.

To achieve these outcomes, a simplified regulatory framework will be applied to digital banks during the initial stage of operations, commensurate with an asset threshold of not more than RM3 billion for three to five years.

The Bank stated that this functions as a foundational phase for the licensees to demonstrate their viability and sound operations, and for the Bank to observe the performance of the licensed digital banks and attendant risks that arises from their operations.

It noted that digital banks will be required to comply with the requirements under the Financial Services Act 2013 (FSA) or Islamic Financial Services Act 2013 (IFSA), including standards on prudential, Shariah, business conduct and consumer protection, as well as on anti-money laundering and terrorism financing.

During the foundational phase, Bank Negara said licensed digital banks will be subjected to a more simplified regulatory requirement relating to capital adequacy, liquidity, stress testing, Shariah governance and public disclosure requirements.

Submission of applications to conduct digital banking business or Islamic digital banking business shall be made to the Bank no later than 30 June 2021.

Applicants should be guided by the application procedures described in this Policy Document, as well as the Application Procedures for New Licences under the FSA and IFSA, and the Application Procedures for Acquisition of Interest in Shares and to be a Financial Holding Company.

Up to five licences may be issued to qualified applicants. Notification on the grant of licence will be made by the first quarter of 2022, the statement noted.

Another article reported that following the recent award of digital banking licences to companies in closest neighbour Singapore, interest in the local digital banking scene has been gaining traction. Observers say, like Singapore, the ability to bring in technology including proven digital straight through processing or STP in order to drive efficiency in the banking sector will be a crucial determinant in the dishing out of the licences.

However, unlike in Singapore where the licences were given mostly to huge firms with large ready customer bases, experts believe the future winners of these digital bank licences in Malaysia may not necessarily be of the same size.

Digital banking – banks without any physical presence whatsoever – is picking up in this region even as lenders face slower growth in loan volumes and top-line revenues amid saturated markets.

Before recent entrants, Singapore and Hong Kong – India, China, South Korea and Japan had already ventured into the digital banking model. Japan, for instance, went for the zero branch strategy as far back as the 1990s with the setting up of Japan Net Bank.

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