Bank Negara Malaysia issues exposure draft on Licensing Framework for Digital Banks
14 May 2020
On 3 March 2020, Bank Negara Malaysia (“BNM”) issued an updated exposure draft on the Licensing Framework for Digital Banks (“exposure draft”). The exposure draft sets out the proposed framework to allow entry into the Malaysian market for digital banks with innovative business models that seek to serve the underserved and unserved market segments. Licensing of these new players with innovative business models is expected to add dynamism to the banking landscape to serve the economy and contribute to individual well-being. This includes expanding meaningful access to and responsible usage of suitable and affordable financial solutions for the underserved and unserved market segments.
Licensed banks and licensed Islamic banks may apply for a digital bank licence separate from their current licensed entity should they wish to carry on digital banking business or Islamic digital banking business in a joint venture with other parties. It should be noted that licensed banks and licensed Islamic banks are able to digitalise their current business operations, which remains within the scope of their existing banking licence and does not require the application of a separate digital bank licence.
The policy document will be applicable to:
- an applicant applying for a licence under section 10 of the Financial Services Act 2013 (“FSA”) or section 10 of the Islamic Financial Services Act 2013 (Licensing Procedures) (“IFSA”) to carry on digital banking business or Islamic digital banking business, as the case may be;
- licensed digital banks as defined in the policy document; and
- the shareholders who require an approval under section 90 of the FSA or section 102 of the IFSA for the holding of interest in the shares of the proposed licensed digital bank.
Key highlights of the exposure draft are set out below.
Eligibility and additional application procedures
To fulfil the “best interests of Malaysia” criteria in assessing an application to carry on a digital banking business or Islamic digital banking business, an applicant is required to demonstrate to BNM’s satisfaction a commitment in driving financial inclusion, including ensuring quality access and responsible usage of financial services, particularly to underserved and hard-to-reach segments that may be unserved, which includes retail as well as micro, small and medium enterprises (MSMEs), in a sustainable manner, without jeopardising the interests of depositors.
BNM will also assess the suitability of the shareholders of the proposed licensed digital bank by considering factors such as risk management and compliance capabilities, application of transformative technology in the development and delivery of financial services, access to robust customer analytics, ability to serve as a source of financial strength, and requisite Shariah expertise for licensed Islamic digital banks.
As part of the application and review process, an applicant must submit the following:
- A business plan that covers a five-year period, includes an independent external assurance on the feasibility of the business plan and an operational readiness review as stated in the policy document; and
- A comprehensive exit plan for the first five years of the applicant’s operations in the event that such business models prove to be unsustainable or ineffectual.
Business activities and presence
A licensed digital bank is required to establish a registered office in Malaysia. A licensed digital bank must ensure that its sole registered office sufficiently allows BNM to communicate with the licensed digital bank during the supervisory process, including for the purposes of examination and engagement with senior management and the board.
A licensed digital bank may participate in the Shared ATM Network and any other cash-out services offered by PayNet. It may also be permitted to offer financial services through agents, subject to BNM’s approval. A licensed digital bank is not allowed to establish any physical branches.The consultation closed on 30 April 2020.
Reference material
The exposure draft is available on the BNM website www.bnm.gov.my by clicking here.