Bank Negara Malaysia Consults Industry on Licensing Framework for Digital Banks Through Detailed Exposure Draft with Five Licenses Set for FH2020

Bank Negara Malaysia (BNM), the central bank, closed 2019 with a potentially important FinTech consultation paper for the financial services industry on 27 December 2019 – an Exposure Draft on the Licensing Framework for Digital Banks.

This framework forms part of the series of measures adopted by the Bank to enable innovative application of technology in the financial sector. Up to five licences may be issued to qualified applicants to establish digital banks to conduct either conventional or Islamic banking business in Malaysia.

In the light of the fast continuing proliferation of technology-based innovations in the financial sector, BNM has issued a series of enabling regulations including the Regulatory Sandbox, regulations on the use of cloud and electronic Know-Your-Customer, and has also participated in industry collaborations to test use cases for distributed ledger technology and develop Open API specifications.

In line with these efforts, the Bank has developed a framework for digital banks to offer banking products and services to underserved or unserved market primarily through digital or electronic means. “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,” said BNM in the consultation document.

According to BNM, 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. “However, 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.”

The Exposure Draft outlines the proposed framework for the licensing of digital banks to offer banking products and services to address market gaps in the underserved and unserved segments. Such digital banks are expected to offer meaningful access to and promote responsible usage of suitable and affordable financial solutions to financial consumers.

The document comprehensively covers the eligibility requirement and application procedures that must be complied with by an applicant intending to carry on digital banking business or Islamic digital banking business; explains the business limitations and regulatory framework applicable to a licensed digital bank during the foundational phase; and explains the business activities that must be undertaken and the physical access points that may be established by the licensed digital bank.

Bank Negara says it has adopted “a balanced approach to enable admission of digital banks with strong value propositions whilst safeguarding the integrity and stability of the financial system as well as depositors’ interests, taking into account that such digital banks have not operated in a full financial and economic cycle.” To achieve these outcomes, an asset threshold of not more than RM2 billion in the initial three to

five years of operations will be applied. This functions as a ‘foundational phase’ for the licensees to demonstrate their viability and sound operations, and for the Bank to observe performance and attendant risks.

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 relevant requirements that comprises amongst others, standards on prudential, business conduct and consumer protection, as well as on anti-money laundering and terrorism financing. During the above-mentioned foundational phase, licensed digital banks will be subjected to a more simplified regulatory requirement relating to capital adequacy, liquidity, stress testing and public disclosure requirements.

On the minimum capital funds, digital banks will be required to maintain minimum capital funds unimpaired by losses of RM100 million during the foundational phase, and RM300 million thereafter.

Bank Negara is inviting written feedback, preferably electronic submission, on the Exposure Draft, including areas to be clarified or elaborated further or alternative proposals that the Bank should consider. The written feedback should be supported with clear rationale and accompanying evidence or illustrations to facilitate the Bank’s assessment. All the relevant documents are available on the BNM website.

The Bank will assess all feedback received and aims to finalise the Policy Document by the end of the first half of 2020. Applications for licences will be open upon issuance of the Policy Document.

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