Natalie Curtis and John Ling
Following a six-month consultation period, Bank Negara Malaysia (BNM) issued the Policy Document on Licensing Framework for Digital Banks (Policy Document) on 31 December 2020.
Together with the issuance of the Policy Document, BNM announced that applications to conduct digital banking business or Islamic digital banking business are now open until 30 June 2021. In line with previous announcements, BNM proposes to issue up to five digital banking licences by the first quarter of 2022.
BNM expects that the licensing of these players will add dynamism to the banking landscape in Malaysia – particularly, in providing access to financial solutions for the underserved and unserved market segments.
We previously wrote on BNM’s proposed regulatory framework for digital banks in the exposure draft of the Policy Document (Exposure Draft) here. The Policy Document adopts a substantially similar regulatory approach as proposed in the Exposure Draft.
We set out below a few key updates from the Policy Document and its accompanying frequently asked questions (FAQs) issued by BNM.
Increased asset limit during the foundational phase
BNM will adopt a phased approach for the regulation of digital banks. The first phase, referred to as the ‘foundational phase’, will span a minimum of three years and up to a maximum of five years from the commencement of operations. Consistent with the approach in the Exposure Draft, an asset limit will apply to the licensed digital bank during the foundational phase.
The asset limit for the foundational phase has been increased from RM2 billion (in the Exposure Draft) to RM3 billion (in the Policy Document). BNM has also clarified that the licensed digital bank would be required to monitor off-balance sheet items to ensure any potential crystallisation of off-balance sheet items into on-balance sheet items does not result in a total size of assets that exceed the asset limit.
Foreign shareholders in licensed digital banks
In the Exposure Draft, BNM indicated that applications where the controlling equity interest in the proposed licensed digital bank resides with Malaysians will be given preference. BNM continues to adopt a similar stance in the Policy Document, emphasising the importance of strong and well-managed domestic banking institution for the stability of the financial system and its orderly growth and development.
That being said, BNM does not expressly rule out foreigners from being controlling shareholders of licensed digital banks. BNM will take into consideration all relevant matters (such as the business record and experience, business plans and the sufficiency of financial resources) in assessing the suitability of the controlling stake in the proposed licensed digital bank being held by foreigners. A shareholder’s experience in or access to transformative technology in the development and delivery of financial services would be a key consideration that may be persuasive to BNM.
Focus on unserved and underserved segments
In the Policy Document and the FAQs, BNM has reiterated that the primary aim of the licensing of digital banks is to provide access to and responsible usage of financial solutions for the underserved and unserved market segments.
BNM has provided examples of three categories of unserved and underserved market segments:
- Customers who face challenges in obtaining financial services due to higher information asymmetry and higher risk profile. For example, start-ups, SMEs with insufficient collateral, SMEs in high-growth sectors, lower-income segments, self-employed individuals, first-time borrowers, individuals who recently joined the workforce and retirees.
- Customers with a low level of financial literacy or limited understanding of the formal processes to obtain financial services. This may be due to the education level, language barriers, or lack of access to the right information.
- Customers who are physically difficult to reach or be served through traditional means. For example, customers residing in hard-to-reach locations or persons with disabilities.
BNM expects applicants to identify their target unserved or underserved customer segments and leverage on technology, alternative data and in-depth understanding of customer behavior in order to meet the needs of the target segments.
While the provision of financial services to customers outside the unserved and underserved market segments are not prohibited, BNM expects the overall conduct of a licensed digital bank to be aligned with financial inclusion objectives.
Minimum capital funds
During the foundational phase, a licensed digital bank is required to maintain a minimum amount of capital funds of RM100 million. As part of the submission, BNM has indicated that an applicant must indicate the source of funds that would be made available to meet the minimum capital requirements. Prior to the grant of the licence, the applicant will be required to provide BNM with a confirmation and supporting documentation demonstrating that the funds have been transferred to the proposed licensed digital bank in the form of the required amount of paid-up capital.
Our team has been advising several digital bank licence holders (in both Hong Kong and more recently, Singapore) on all aspects of launching a digital bank, including:
- applications to the regulators to obtain a digital bank licence;
- corporate structuring;
- procurement of the IT infrastructure necessary to support the digital bank; and
- compliance with the regulations governing digital banks (including in relation to financial services regulatory, data protection, information security and cloud computing arrangements etc).
Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.