This article first appeared in The Edge Malaysia Weekly on January 6, 2020 - January 12, 2020

Bank Negara Malaysia recently said it intended to issue up to five licences to qualified applicants to set up digital banks — those with no physical presence at all — in the country. People have been anticipating the arrival of such banks.

In its exposure draft on the licensing framework released on Dec 27 last year, Bank Negara states that digital banks can conduct either conventional or Islamic banking business. However, they will have to offer products and services to address market gaps in the underserved and unserved segments.

This suggests that their products and services will be quite different from those offered by existing “traditional” banks. Most incumbent banks already have some form of digital offering.

When Bank Negara opened up the Islamic banking sector to foreign players in 2004/05, it was anticipated that entrants such as Kuwait Finance House (M) Bhd, Al Rajhi Banking & Investment Corp (M) Sdn Bhd and Asian Finance Bank Malaysia Bhd (AFB) would be a boon for the industry, as they were expected to come up with innovative products, the likes of which the market had not seen.

Some 15 years on, for various reasons, including stiff competition from the local Islamic banks, they have yet to set themselves apart with their offerings or make a dent in the market.

AFB was acquired by MBSB Bank a few years ago, and Al Rajhi is waiting to be merged with Malaysian Industrial Development Finance Bhd.

Bank Negara must ensure that the digital banks will not suffer the same fate.

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