Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on December 31, 2019

Banking sector
Maintain positive:
Last Friday, Bank Negara Malaysia (BNM) finally released the much anticipated exposure draft of the Licensing Framework for Digital Banks. BNM aims to finalise the policy document by the first half of calendar year 2020.

 

Five licences must be issued for conventional or Islamic banking businesses to comply with the Financial Services Act 2013 or Islamic Financial Services Act 2013 requirements.

We believe it is only natural for e-money providers to expand into digital banking, especially with an explosion of e-money users. Currently, there is a plethora of e-money providers with 42 non-bank providers. E-money usage growth has been tremendous recently. Year-to-date October 2019, the volume and value of transactions grew 8% year-on-year (y-o-y) to 1.59 billion and 57.8% y-o-y to RM13.9 billion respectively.

We opine that the capital requirements are high enough to exclude start-ups or smaller financial technology companies and e-money providers. The minimum total capital ratio requirement is the same as with existing traditional banks. Interestingly, digital banks are not allowed to establish any physical branch.

With this requirement, we expect this may disincentivise existing traditional banks to acquire digital bank licences, meaning existing banks must create a digital bank subsidiary and with that, it could tie the banks with additional capital.

Besides, existing banks’ licences already allowed them to offer products digitally. However, of the banks expressing interest, only CIMB Group Holdings Bhd has the experience after it set up a digital-only bank in the Philippines and Vietnam.

We had expected the limit will be applied on customer types such as retail and small and medium enterprises only, and also a restriction on a per customer basis. We opine that this will steer digital banks towards more microlending offerings.

We opine that BNM seems to have taken a hybrid approach between the Monetary Authority of Singapore and Hong Kong Monetary Authority requirements.

In our opinion, the initial draft requirements by BNM are to minimise the financial system’s exposure to the new banking method with an asset size limitation and capital requirements, as well as to drive its financial inclusion agenda especially with the limit.

Overall, we believe it is still early days for digital banks to be a threat to existing banks in the short to medium term. We believe digital bank licences will most likely be issued by end-2020 and operational by 2021. — MIDF Research, Dec 30

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