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Digital Banks Gaining Momentum as Saudi Arabia and UK Licence Three Digital Banks and Malaysia Plans to Issue Five Such Licences by First Quarter 2022

The launching of Digital Banks (DBs) in traditional Islamic finance markets is fast gaining momentum especially in the two largest such markets, namely Saudi Arabia and Malaysia, signifying that digitisation in the financial services sector in many markets is now becoming a priority, partly expedited by the vagaries and disruption caused by the COVID-19 pandemic. In addition, the UK is also capitalising on its pole position as the leading centre for Islamic finance and investment outside the Muslim countries.

In July, the Saudi Cabinet approved two digital banking licences to local promoters whilst Bank Negara Malaysia (BNM) announced in early August that it had received 29 applications for a digital bank licence, following a 6-month application period, which ended on 30 June 2021.

In Riyadh, Minister of Finance Mohammed Al-Jadaan, Chairman of the Saudi Arabian Financial Sector Development Programme, and the Governor of the Saudi Central Bank (SAMA), Dr Fahad bin Abdullah Al-Mubarak, confirmed that DB licences have been approved to STC Pay – which will be converted into a local digital bank, STC Bank, with a capital of SAR2.5 billion – and to a consortium of investors led by Abdul Rahman bin Saad Al-Rashed & Sons Company, which is establishing Saudi Digital Bank with a capital of SAR1.5 billion to conduct banking business in the Kingdom.

This follows an extensive due diligence process of applicants for the two DB licences by SAMA under the Banking Control Law during the past six months. Digital banking, says SAMA, is in line with the central bank’s role in keeping pace with the latest developments in the financial sector in a digital economy. To that end, 16 Saudi Fintech companies have been licensed in the recent past by the central bank to provide payment services, consumer microfinance and digital insurance brokerage.

In addition, SAMA had licensed 32 Fintech companies to work under the Regulatory Sandbox environment, which was designed for testing innovative services and products in the Kingdom. SAMA also encourages local banks to provide best possible services and products through available digital banking channels in accordance with international best practice.

All the above is also pursuant to the “Open Banking Policy” adopted by SAMA in 2020, which allows bank clients to manage their bank accounts and share data securely. Clients are given the option to allow third party service providers, including banks and FinTech companies, to access their banking information.

The Financial Sector Development Programme, one of the Kingdom’s Vision 2030 realization programmes, seeks to keep pace with global developments in financial services and FinTech during 2021-2025 to underpin economic diversification.

According to SAMA Governor Al-Mubarak, digital banks are subject to the same supervision and controls applied to commercial banks operating in the Kingdom, with an increased focus on aspects of technology, cyber security, anti-money laundering, tracking terrorist financing as well as operational risks. DBs are licenced to provide services and products exclusively through electronic channels by adopting an innovative and sustainable banking business model to enhance financial inclusion and keep pace with cutting edge technological developments in the financial sector. SAMA expects to continue to receive digital banking license applications.

In Malaysia, BNM confirmed that among the 29 DB applications received were a diverse range of parties ranging from banks, industry conglomerates, technology firms, e-commerce operators, FinTech players, cooperatives and state governments.
“Successful applicants that meet all prudential criteria,” said BNM, “will be expected to contribute towards greater financial inclusion by offering products and services to address market gaps in the underserved and unserved segments. This includes promoting suitable and affordable financial solutions by leveraging on innovative application of technology.”

BNM issued a Policy Document on Licensing Framework for Digital Banks on 31 December 2020 following a six-month public consultation. BNM’s approach is based on a step-by-step phased introduction of various thresholds.
The framework, says BNM, “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 unserved and underserved segments.”
The framework, adds the central bank, adopts 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. BNM plans to issue “up to five licences” and successful applicants will be notified in the first quarter of 2022.
Two of the DG applicants in Malaysia are consortia led by Green Packet – a tech firm with 16 years’ track record, Zico Holdings, a financial advisory and Sharia’a regulatory compliance form – and M24 Tawreeq, the first fully-digital Islamic factoring finance company in Malaysia, which plans to launch a dedicated Islamic digital bank.

“The consortium’s application is focused on establishing an Islamic Digital Bank, which would include several other strategic collaborators that will further complement the products and value-added services to be offered by the consortium, augment its client servicing capabilities, and expand its customer base,” according to a regulatory filing by ZICO on the Singapore Exchange.

In London, Boubyan Bank Group of Kuwait launched Nomo, a fully licensed and regulated UK Islamic digital bank catering for “customers with a global financial outlook”, in July 2021.

Nomo was launched as a brand name of the UK-based Bank of London and The Middle East (BLME), in which Boubyan Bank is the sole shareholder. Nomo deposits of up to £85,000 are protected by the FSCS (Financial Services Compensation Scheme), which safeguards bank deposits in the UK.

Nomo has been developed to accommodate a growing segment of individuals in the Middle East with international banking needs. Nomo provides a digital solution for accessing, moving, and investing money in the UK and internationally with ease and assurance.

Eligible customers from Kuwait will be able to open their new UK account in minutes through the cutting-edge and intuitive Nomo iPhone app, providing them with the ability to make seamless international payments in GBP (£) and USD ($) and transact through a virtual and/or digital MasterCard debit card. Nomo also caters to its customers through a range of innovative digital banking products.

Boubyan Bank Group CEO and BLME Chairman, Adel Al-Majed, stressed that “Nomo is a fully licensed UK bank, offering a unique opportunity for customers to benefit from one of the most prestigious banking systems in the world. As well as daily banking services, Nomo provides Sharia-compliant investment opportunities by offering fixed-term deposits.

“Most Islamic banks across the wider GCC region are behind the global digital curve in terms of the digital products and services being offered to customers. Nomo aims to propel Islamic digital banking towards a more innovative future where the priority is customer convenience on an international scale. To achieve this, we’ve put together a carefully selected team of global digital banking and payments experts to help us create the future of Islamic international digital banking.”

Similarly, Andrew Ball, CEO of BLME, is confident that “digitization will enable customers in the Middle East to open and enjoy the benefits of a UK bank account in the knowledge that it also meets their Sharia’a principles and beliefs.”

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