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Following the publication of the first Exposure Draft on the Licensing Framework for Digital Banks (Exposure Draft) on 27 December 2019, the second Exposure Draft on 3 March 2020 and a subsequent six-month public consultation, the central bank of Malaysia, Bank Negara Malaysia (BNM), has on 31 December 2020 issued the Policy Document on Licensing Framework for Digital Banks (Policy Document).

The proposed licensing framework for digital banks aims to utilise technology and innovation to uplift the financial well-being of individuals and particularly, the underserved and unserved market segments. BNM has also clarified that the provision of any financial services beyond the unserved and underserved segments should not substantially detract the licensed digital bank away from, or otherwise compromise the delivery of the primary commitments, which is to expand meaningful access to and responsible usage of financial solutions for the underserved and unserved market segments.

Along with the publication of the Policy Document and its accompanying frequently asked questions (FAQs), BNM announced that the submission of applications to conduct digital banking business or Islamic digital banking business shall be made no later than 30 June 2021. In making applications, applicants should refer to the application procedures described in the Policy Document as well as the Application Procedures for New Licences under the Financial Services Act 2013 (FSA) and Islamic Financial Services Act 2013 (IFSA) (Licensing Procedures), and the Application Procedures for Acquisition of Interest in Shares and to be a Financial Holding Company (Acquisition Procedures). BNM targets to issue up to five licences to qualified applicants by the first quarter of 2022.

We previously wrote on BNM's proposed regulatory framework for digital banks in the Exposure Draft here and in this article we will set out below a few key updates from the Policy Document and the FAQs issued by BNM.

Increased asset limit during the foundational phase

In line with the approach in the Exposure Draft, the licensed digital banks are required to maintain an asset limit during the "foundational phase". The "foundational phase" spans a minimum of three years and up to a maximum of five years. However, this asset limit has been increased from RM2 billion (in the Exposure Draft) to RM3 billion (in the Policy Document). For compliance, the licensed digital bank must monitor its off-balance sheet items for the purpose of ensuring any potential crystallisation of off-balance sheet items into on-balance sheet items does not result in a total size of assets exceeding the asset limit.

Minimum capital funds

It remains consistent that during the foundational phase the licensed digital banks will be required to maintain a minimum amount of RM100 million in capital funds. As part of the submission of the licence application for assessment, the applicant must indicate the source of funds that would be made available to meet the capital requirement for the proposed digital bank. Before BNM grants approval to the proposed digital bank, the applicant shall provide BNM confirmation with supporting documents signifying that funds have been transferred to the proposed digital bank in the form of the required amount of paid-up capital.

Eligibility and application procedures

BNM continues to adopt a similar stance in the Policy Document that the existing licenced banks or licensed Islamic banks may apply to carry on digital banking business or Islamic digital banking business should they wish to do so through a separate corporate body, such as their subsidiaries or through a joint venture arrangement with another party. This does not preclude any existing licensed banks and licensed Islamic banks from digitalising their existing business operations, which does not require the application of a separate licence under the Policy Document.

In the Exposure Draft, BNM indicated that preference will be accorded to an application where the controlling equity interest in the proposed licensed digital bank is held by Malaysians and this position has not changed in the Policy Document. However, BNM does not expressly exclude the foreigners from being controlling shareholders of licensed digital banks. In assessing the application, BNM will take into account, amongst others, the nature and sufficiency of the financial resources of the applicant as a source of continuing financial support to the licensed person and the business record and experience of the applicant and review whether the application will be in the best interest of Malaysia. For detailed information on how BNM assesses the eligibility of an applicant for a digital banking licence, an applicant shall have regard to the factors set out in Schedule 6 of the FSA and IFSA, the Licensing Procedures and the Acquisition Procedures.

Physical access points

A licensed digital bank is required to establish a registered office in Malaysia in which BNM is able to communicate with the digital bank during the supervisory process, including for its examination of and engagement with senior management and the board. The registered office and physical office shall also serve as a centre for the facilitation of any face-to-face customer complaints. Importantly, a licensed digital bank is not permitted to establish a branch, i.e. a fixed place to facilitate customer transactions.

Submission of business plan and exit plan

The proposed business plan remains a quintessential component in the licensing assessment of the proposed licensed digital bank. Upon approval of the licence, the licensed digital bank is only allowed to make appropriate adjustments to the implementation plan if they do not alter substantively the commitments made under the application for the licensing of the proposed licensed digital bank, or key elements of the business plan that were material to the assessment of the application. Therefore, an applicant should exercise due care in checking the comprehensiveness of the business plan, which should be thoroughly considered at board level prior to the formal submission to BNM.

Concluding remarks

The Policy Document adopts a substantially similar regulatory approach as proposed in the Exposure Draft. Companies which are interested in launching or offering digital banking services, be it conventional or Islamic, must submit their applications to BNM by 30 June 2021.