New digital banks and Fintech licences keep the digitisation momentum going in the Islamic financial sector in Saudi Arabia, Malaysia, Indonesia and Pakistan

Digital banks and FinTech applications and companies continue to flourish in the Islamic finance space in the first quarter of 2022. In Saudi Arabia, the Public Investment Fund (PIF), the Kingdom’s sovereign wealth fund with current assets under management in excess of US$650 billion, is particularly proactive in investing in various FinTech and digitisation start-ups.

The Saudi Central Bank (SAMA) in fact approved its third digital bank licence in February 2022 in the Kingdom for D360 Bank following the go ahead from the Counsel of Ministers.

D360 Bank will be established with a capital of SAR1.65 billion through a consortium of individual and corporate investors, including the PIF and Derayah Financial Company as key investors.

Last July, SAMA approved the Kingdom’s first two digital bank (DB) licences – one for STC Pay – which is in the process of converting into a local digital bank, STC Bank, with a capital of SAR2.5 billion – and the second 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. Abdul Rahman bin Saad Al-Rashed & Sons Company is a substantial shareholder in Arab National Bank in Saudi Arabia.

SAMA has been working relentlessly to develop and support innovation in the banking sector in partnership with FinTech companies to reap the benefits of the technological revolution for the financial sector and the economy at large while maintaining financial stability and protecting players in the banking sector and related parties.

SAMA’s FinTech policy is also in line with the objectives of the Financial Sector Development Programme – one of the Kingdom’s Vision 2030 realization programmes. This seeks to keep pace with global developments in financial services and FinTech during 2021-2025 to underpin economic diversification and to enable financial institutions to support private sector growth and provide opportunities to new companies and start-ups to provide financial services.

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.

According to SAMA, 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 and 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 February 2022, AlRajhi Bank Malaysia (ARBM), a wholly-owned subsidiary of the world’s largest Islamic bank by assets Al Rajhi Bank of Saudi Arabia, selected Thought Machine, the cloud native core banking technology firm, to power its upcoming next-generation digital bank. ARBM embarked on a multi-year digital transformation in 2021 and the bank will deploy Thought Machine’s core banking engine, Vault, to launch a new digital bank in 2022 with a range of sophisticated retail and SME financial services, such as savings and financing products.

Al Rajhi Bank Malaysia is building a full suite of Sharia’a compliant digital products. According to Arsalaan Ahmed, CEO of Al Rajhi Bank Malaysia, the bank is “launching a state-of-the-art digital bank which will be differentiated by its high levels of innovation, customer convenience and reliability. We are tapping into the vast potential in technology offered by our key partners to help advance towards our vision of becoming the number one Islamic finance innovation bank in Malaysia.”

SAMA at the same time announced that it has also approved licences for two new payment financial technology companies, Waslah al-Daf’ (Paylink) and Moyasar Financial Company, to provide E-commerce payment services. This brings the total number of payment companies licensed by SAMA to 16, in addition to nine companies granted an “In-Principle Approval”.

In addition, SAMA has licenced 16 Saudi FinTech companies in the recent past to provide payment services, consumer micro-finance and digital insurance brokerage. In addition, there are 32 FinTech companies operating under the Regulatory Sandbox environment, which was designed for testing innovative services and products in the Kingdom.

“SAMA reaffirms its commitment to support and facilitate the development of payments companies and financial technology sector, encouraging innovation in the financial services, and increasing efficiency in financial transactions, including enhancing the level of financial inclusion in the Kingdom, with the objective of providing access to financial services to the community,” said the central bank. 

In Indonesia, the local digital bank Bank Jago launched Jago Syariah in February 2022, an application that promises to provide Sharia’a compliant digital banking products. According to Bank Jago President-Director Kharim Siregar “digitisation will improve service quality for the customers while deepening our market share. We believe the presence of Sharia’s banking applications will have positive impacts in boosting the Sharia’a economy’s contribution to the national economy as a whole.”

The app’s features include Wadiah contracts and integration with various digital ecosystems and Islamic social finance (zakat, awqaf, sadaqah and infaq) and the ability to share accounts with family or friends.

Also in February 2022, in a major development, the State Bank of Pakistan (SBO) introduced a Licensing and Regulatory Framework for Digital Banks in line with international best practice. This, says the SBP, is the first step towards introducing a completely digital bank that will provide all the banking services, from account opening to deposit and lending, through digital means and the customers will not need to visit any bank branch physically. 

The framework for digital banks is the latest in a series of recent initiatives by the SBP towards digitalization of banking and payment solutions in the country. Other recent digitalization initiatives introduced by SBP, which are gaining traction and have opened new avenues for introducing innovative solutions, include customers’ digital on-boarding, Roshan Digital Account, Raast – Instant Payment System, Electronic Money Institutions licenses, and Asaan Mobile Accounts. 

The newly issued licensing and regulatory framework provides details for setting up digital banks as a separate and distinct category in Pakistan. A digital bank is defined as a bank which offers all kinds of financial products and services primarily through digital platforms or electronic channels instead of physical branches. Under this framework, SBP may grant two types of digital bank licenses: 1) Digital Retail Bank (DRB); and 2) Digital Full Bank (DFB). DRBs will primarily focus on retail customers while DFBs can deal with retail customers as well as business and corporate entities.

The framework mainly aims to enhance financial inclusion through affordable/cost effective digital financial services and is part of SBP’s comprehensive efforts to promote digital financial services in Pakistan. The framework includes guidance regarding licensing requirements, potential sponsors and permissible use-cases during different phases.

The demand for banking services says the SBP “is also faith sensitive” and there is a large market for Sharia’a compliant services. Over the years the Islamic banking industry has established a strong footing and gained a sizable share of the overall banking market. Therefore, licenses for DRBs and DFBs may be obtained for both conventional and Islamic variants. Further, conventional variants of DRBs and DFBs may also offer Islamic banking services through Islamic windows as per existing practice.

In line with international best practices and assessment of the overall banking situation in Pakistan, SBP has decided to initially issue up to five (5) digital banks’ licenses, which essentially means that SBP is looking to attract players with strong value proposition, a robust technological infrastructure, sufficient financial strength, technical expertise and effective risk management culture.

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