Malaysia Joins Digital Banking Revolution – Bank Negara Malaysia Issues Exposure Draft On Licensing Framework For Digital Banks

Author:Ms Natalie Curtis, Kenneth Lo and John Ling
Profession:Herbert Smith Freehills

On 27 December 2019, Bank Negara Malaysia (BNM) issued an exposure draft on the Licensing Framework for Digital Banks (Exposure Draft). According to BNM, up to five licences may be issued to applicants to establish digital banks that conduct either conventional or Islamic banking business in Malaysia.

BNM's move to promote the development of digital banks is in line with the direction taken by regulators in Singapore and Hong Kong, which have each issued similar licensing frameworks in the past two years.

What are digital banks

Digital banks (also known as virtual banks) primarily deliver banking services through digital channels such as the internet with minimal (if any) brick-and-mortar presence.

Usually operated by a mix of e-commerce firms, technology and telecommunications companies, fintech and financial institutions, digital banks typically target 'unbanked' or 'underserved' customer segments such as low-income individuals, early income millennials, start-ups and small SMEs.

BNM's proposed licensing framework

BNM has proposed to adopt a phased approach for the regulation of licensed digital banks.

Foundational Phase

The first phase (Foundational Phase) will last for a minimum of three years or up to a maximum of five years, during which, simplified regulatory requirements (including capital adequacy, liquidity stress testing and public disclosure) will apply.

During the Foundational Phase, a licensed digital bank is required to:

maintain a minimum amount of capital funds of RM100 million; and ensure that its total assets do not exceed RM2 billion. After three years from the commencement of its operations, a licensed digital bank may apply to BNM for the Foundational Phase to end, and for the limitation on total asset size to be uplifted.

Post-Foundational Phase

By the end of the fifth year from the commencement of their operation, all licensed digital banks will be required to comply with all equivalent regulatory requirements applicable to a licensed bank or licensed Islamic bank. A minimum amount of capital funds of RM300 million must be achieved, while the limitation on total asset size will no longer be applicable.

A licensed digital bank which fails to fulfil any such requirements 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.

Who may apply

Non-bank players may apply for a digital bank...

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