On 31 December 2020, Bank Negara Malaysia (BNM) issued its Licensing Framework for Digital Banks (“Licensing Framework“) and indicated that it may issue up to five digital bank licences.
The grant of the licences is subject to the applicants demonstrating that their proposed services will harness technology to deliver services that meet the needs of unserved and/or underserved customer segments in Malaysia. The business models of the applicants must demonstrate that the business is viable and sustainable in the long term.
The introduction of digital banks in Malaysia is a welcome addition to the existing banking landscape. As the Licensing Framework opens the banking sector to non-traditional players, eligible persons with innovative business models are encouraged to apply for a digital bank licence by 30 June 2021 (“Application Deadline“). As the competition in retail and wholesale (SME) banking will intensify with new licensees entering the market, existing banks should reflect on their current models and update them to remain competitive.
- Given the short 6-month window, interested persons are encouraged to formalise their respective consortiums and joint ventures, and engage advisors to assist with the structuring of the proposed licensed entity and the preparation of the application in advance of the Application Deadline.
- Interested persons are encouraged to consider the salient points in the “In more detail” section below to ascertain whether their existing proposed business model may need to be restructured so that they can meet BNM’s requirements.
- Existing licensees should also consider their existing business models to determine if modifications or changes should be made to cater to a more competitive environment when new licensees enter the market.
In more detail
The Licensing Framework provides clarity on BNM’s expectations and requirements. Some salient points that need to be considered include:
- whether the proposed licensed entity can be structured so that the controlling equity interest of the entity is held by Malaysians and therefore viewed more favourably by BNM
- whether the applicant can maintain a minimum amount of capital funds of MYR 100 million unimpaired by losses during the foundational phase. This will have an impact on the structuring the joint venture and consortium arrangements to address capital calls or alternative means of funding (including the ability of one shareholder to dilute another, and the impact on shareholding).
- whether the applicant is able to demonstrate the application will be in the best interest of Malaysia. The formulation of the 5-year business plan that targets specific unserved and/or underserved markets using innovative technology will need to be balanced against risks (including cybersecurity) and the ability to carry on the business in a sustainable manner. The model will need to demonstrate a path to profitability.
- whether the applicant can demonstrate its business record and experience including, the availability of resources and expertise from the shareholders such as risk management and compliance capabilities and the application of transformative technology. The ability to meet this criterion will hinge on identifying qualified candidates for the key offices – directors, chief executive officer, and other senior management personnel – each of whom will have the responsibility to implement risk management and compliance management frameworks and internal controls for the digital bank. There will likely be competition when hiring talent with a financial services background and a strong grasp of the deployment of banking service through technology.
BNM’s approach to regulating digital banks
BNM’s approach to regulating digital banks is to some extent similar to the Monetary Authority of Singapore’s approach. A phased approach will be applied and less stringent regulatory requirements and business restrictions will be imposed during the foundational period. This is to minimise risks and manage any adverse impact on customers and the financial system during the foundational period.
The grant of these new digital banking licences should spur existing licensees to step up their game, and therefore offer greater choice to the consumer.