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.
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.
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 licence. However, BNM may require a shareholder who holds an aggregate interest in shares of 50% or more in a proposed licensed digital bank to organise all its financial and financial-related subsidiaries under a financial group, headed by a single apex entity, which should be either:
- a licensed institution under the Financial Services Act 2013 (FSA) or the Islamic Financial Services Act 2013 (IFSA);
- a financial holding company approved under the FSA or IFSA; or
- a foreign institution regulated by a supervisory authority outside Malaysia which exercises functions corresponding to those of BNM under the FSA or IFSA.
Licensed banks and licensed Islamic banks may also apply for a digital bank licence separate from their current licensed entity should they wish to carry on digital banking business or Islamic digital banking business in a joint venture with other parties. However, this does not preclude licensed banks and licensed Islamic banks from digitalising their current business operations, as this remains within the scope of their existing banking licence.
While the Exposure Draft does not expressly rule out non-Malaysian parties from submitting an application, applications where the controlling equity interest in the proposed licensed digital bank resides with Malaysians will be given preference.
Am I eligible
In assessing the eligibility of applicants, BNM has proposed to consider the following criteria:
- the character and integrity of the applicant;
- the interests of depositors, participants, users or the public generally;
- the feasibility of the plans of the applicant;
- the financial resources of the applicant;
- the business record and experience of the applicant;
- whether the proposed licensed digital bank will be operated responsibly by persons with suitable competence and experience;
- whether, given the nature, scale and activities of the corporate group of the applicant, the proposed licensed digital bank can be regulated effectively; and
- the best interest of Malaysia.
To fulfil the "best interest of Malaysia" criterion, applicants are required to show a commitment in driving financial inclusion, including ensuring quality access and responsible usage of financial services, particularly to underserved and hard-to reach segments that may be unserved, which includes retail as well as micro, small and medium enterprises.
The suitability of the shareholders of the proposed licensed digital banks will also be assessed, having regard to the following criteria:
- risk management and compliance capabilities;
- application of transformative technology;
- access to deep and robust customer analytics;
- ability to continuously serve as a source of financial strength to the proposed licensed digital bank; and
- with respect to licensed Islamic digital banks, the requisite Shariah expertise to effectively carry on Islamic digital banking business.
BNM has stated that it aims to finalise a Policy Document by the first half of 2020, with licence applications being open upon issuance of the Policy Document.
Comparison with Singapore and Hong Kong regime
|License types||Digital full bank licence and digital wholesale bank licence||Virtual bank licence||Digital bank licence|
|Number of licenses||Up to 5 licences will be granted from 21 applications received||8 licences granted in 2019 from around 30 applications received||Up to 5 licences will be granted|
|Applicants||Targeted at non-bank players||Both financial and
non-financial firms allowed to own and operate a virtual
Non-financial firms' ownership will be subject to certain additional conditions (such as control requirements)
|Open to non-bank
Licensed banks and licensed Islamic banks may also apply, however, they do not require a digital bank licence to digitise their current operations
A separate licence should be sought if digital banking business is to be carried out as a joint venture with other parties
|Incorporation||Must be locally incorporated||Must be locally incorporated||Must be locally incorporated|
|Foreign ownership restrictions||Must be controlled by Singaporeans||No foreign ownership restrictions||No express foreign ownership restrictions, but preference will be given to proposed digital banks controlled by Malaysians|
|Minimum paid up capital||Full bank:
SGD$15 million (RM46 million) initially and S$1.5 billion (RM4.6
Wholesale bank: SGD$100 million (RM304 million)
|HK$300 million (RM158 million)||Foundational
Phase: RM100 million
Post-Foundational Phase: RM300 million
|Customers||Retail and non-retail segments are covered||Primarily retail, but virtual banks can also provide services to other segments||Both retail and non-retail segments covered, with focus being placed on unserved segments (including retail as well as micro, small and medium enterprises)|
|Phases||Phased-in requirement||No phased-in requirement||Phased-in requirement|
|ATM access||No access to ATMs or cash deposit machines, but will be able to offer cashback services through electronic funds transfer at point of sale (EFTPOS) terminals at retail merchants||Will need to negotiate access with ATM operators||May participate in the Shared ATM Network and any other cash-out services offered by PayNet|
|Physical presence||Only allowed to operate one physical place of business||Must have a physical presence in Hong Kong to provide customer services such as handling complaints and enquiries, and to verify the identity of customers||Not allowed to establish any physical branches|
We have called on our financial services regulatory expertise,
our deep understanding of the commercial drivers of IT procurement
and outsourcing, our corporate structuring experience, and our
broad geographical footprint through Malaysia, Singapore, Hong
Kong, China and beyond to establish a team capable of delivering
complete, accurate, and commercial advice in relation to assisting
our clients obtain virtual banking licences and work towards a
In Asia, our team has been advising several virtual bank licence holders on all aspects of the process, including:
- applications to the regulator to obtain a virtual bank licence;
- corporate structuring;
- procurement of the IT infrastructure necessary to support the virtual bank; and
- compliance with the regulations governing virtual banks (including in relation to financial services regulatory, data protection, information security and cloud computing arrangements etc).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.