On 27 December 2019, the central bank of Malaysia, Bank Negara Malaysia (BNM) issued an exposure draft on the licensing framework for digital banks (Exposure Draft), which outlines the proposed framework for the licensing of digital banks to offer banking products and services to underserved or unserved markets primarily through digital or electronic means. Licensing of digital banks with innovative business models is expected to offer meaningful access to, and promote responsible usage of, suitable and affordable financial solutions to consumers.
In a media release, BNM stated that it may issue up to 5 licences to qualified applicants to establish digital banks in Malaysia to carry out conventional or Islamic banking business. Malaysia’s decision to open doors to digital banks come close on the heels of other jurisdictions in the Asia Pacific region in issuing new digital banking licences. Hong Kong issued 8 digital banking licences in March 2019, followed by Taiwan with 3 digital banking licences in July 2019. The Monetary Authority of Singapore announced in June 2019 that it will issue up to 5 new digital banking licences in Singapore.
The Exposure Draft is issued together with the following documents which provide clarity on the procedures and criteria involved in the application process to be a licensed person under the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA):
- Application Procedures for New Licences under the FSA and IFSA (Licensing Procedures); and
- Application Procedures for Acquisition of Interest in Shares and to be a Financial Holding Company (Acquisition Procedures).
The key highlights of the Exposure Draft are set out below.
Overview of licensing framework
BNM will adopt a phased approach for the regulation of licensed digital banks. When a licensed digital bank starts operating, it will first undergo a foundational phase (Foundational Phase) which will last for a minimum of three years and up to a maximum of five years, during which the digital bank will be subjected to a more simplified regulatory requirement relating to capital adequacy, liquidity, stress testing and public disclosure requirements. During the Foundational Phase, licensed digital banks will be required to maintain a minimum amount of RM100 million in capital funds and its total asset size must not exceed RM2 billion.
After three years from the commencement of its operations, a licensed digital bank may submit an application to BNM to end its Foundational Phase and for the initial limitation on its total asset size to be uplifted. In assessing such application, BNM will consider whether the digital bank has complied with all applicable laws and regulatory requirements, achieved a minimum amount of capital of RM300 million in capital funds and shown satisfactory progress in achieving the committed value propositions set out in the digital bank’s business plans.
By the end of the fifth year from the commencement of its operations, a licensed digital bank will have to comply with all equivalent regulatory requirements applicable to a licensed bank or licensed Islamic bank and achieve a minimum amount of RM300 million in capital funds, while the limitation on its total asset size imposed during the Foundational Phase shall no longer be applicable. A licensed digital bank which fails to fulfil any such requirement by the end of the fifth year from the commencement of its operation may be subject to enforcement action, including a direction to implement its exit plan or a revocation of its licence.
Eligibility and application procedures
In addition to non-bank players, 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. This does not preclude licensed banks and licensed Islamic banks from digitalising 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.
In assessing the eligibility of an applicant for a digital banking licence, BNM shall consider various criteria as set out in the Licensing Procedures.
Of particular note, to fulfil the “best interests of Malaysia” criteria, an applicant must 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, in a sustainable manner, without jeopardising the interests of depositors.
BNM will further asses the suitability of the shareholders of the proposed licensed digital bank by considering a number of factors as set out in the Acquisition Procedures.
BNM may require a shareholder who holds an aggregate interest in shares of 50% or more in a proposed licensed digital bank to organise all its financial and financial-related subsidiaries under a financial group, headed by a single apex entity, which should be either a licensed institution under the FSA or IFSA, a financial holding company approved under the FSA or IFSA, or a foreign institution regulated by a supervisory authority outside Malaysia which exercises functions corresponding to those of BNM under the FSA or IFSA.
Submission of business plan and exit plan
As part of the application and review process, an applicant shall submit to BNM the information and documentation required under the Licensing Procedures. With respect to the submission of a business plan, an applicant is required to submit to BNM a detailed five year business plan, with emphasis on how the digital bank plans to serve the unserved and underserved segments. The business plan needs to include the applicant's market study of the unserved and underserved segments and an analysis of the market gap. Pro-forma financial statements will need to accompany the five year business plan, and indicate a projected path to profitability. An independent external party will need to validate the applicant's business plan.
In addition, a detailed exit plan for the first five years of the applicant’s operations will need to be developed in the event that the digital bank's business model proves to be unsustainable or ineffectual in order to ensure that the digital bank is able to unwind its business operations voluntarily without any regulatory intervention and in an orderly manner without causing disruption to its customer and the financial system.
Concluding remarks
BNM's move to issue digital banking licences is a significant milestone in the Malaysian financial services landscape and demonstrates the speed and importance of the financial technology evolution in recent years. BNM has stated that it will assess all feedback received on the Exposure Draft and aims to finalise a policy document by the first half of 2020 and applications for licence will be open upon issuance of the policy document.
