On 27 December 2019, Bank Negara Malaysia (‘BNM’) issued the following documents –

  1. Exposure Draft of the Licensing Framework for Digital Banks (‘Draft Digital Bank Framework Document’);
  2. Policy Document on Application Procedures for New Licences under Financial Services Act 2013 and Islamic Financial Services Act 2013 (‘Licensing Procedures Policy Document’); and
  3. Policy Document on Application Procedures for Acquisition of Interest in Shares and to be a Financial Holding Company (‘Acquisition Procedures Policy Document’).

At the same time, BNM stated in a media release that it may issue up to five licences to qualified applicants to establish digital banks in Malaysia to carry out conventional or Islamic banking business.

The Licensing Procedures Policy Document

The Licensing Procedures Policy Document applies to –

  1. an applicant applying for a licence under section 10 of the Financial Services Act 2013 (‘FSA’) or section 10 of the Islamic Financial Services Act 2013 (‘IFSA’); and
  2. the shareholders of a proposed licensed person who require an approval under section 90 of the FSA or section 102 of the IFSA for the holding of interest in shares in the proposed licensed person.[1]

The Licensing Procedures Policy Document, inter alia, sets out the application process and assessment procedures for –

1. prospective applicants under section 10 of the FSA to obtain a licence to carry on -

  1. banking business;
  2. investment banking business;
  3. life insurance business;
  4. general insurance business; or
  5. professional reinsurer business; or

2. prospective applicants under section 10 of the IFSA to obtain a licence to carry on -

  1. Islamic banking business;
  2. international Islamic banking business;
  3. family takaful business;
  4. general takaful business;
  5. professional retakaful business; or
  6. international takaful operator business.

The Licensing Procedures Policy Document, inter alia, also sets out –

  1. the factors under the law which BNM will consider in assessing an application under section 10 of the FSA and section 10 of the IFSA; and
  2. the documents and information to be submitted to BNM to facilitate the assessment of the application.

The Licensing Procedures Policy Document came into effect on 27 December 2019.

The Acquisition Procedures Policy Document

The Acquisition Procedures Policy Document applies to a person that is required to obtain an approval pursuant to –

  1. section 87 of the FSA or section 99 of the IFSA;
  2. section 88 of the FSA or section 100 of the IFSA; or
  3. section 110 of the FSA or section 122 of the IFSA,[2]

including a proposed acquisition of interest in shares in a person who is in the process of applying for a licence under section 10 of the FSA or section 10 of the IFSA, as the case may be.

The Acquisition Procedures Policy Document, inter alia, sets out –

  1. the application procedure relating to an application to acquire interest in shares or control of a licensed person or a proposed licensed person, or to be a financial holding company;
  2. the factors under the law which BNM will consider in assessing the application as aforesaid; and
  3. the documents and information to be submitted to BNM to facilitate the assessment of the application.

The Acquisition Procedures Policy Document came into effect on 27 December 2019.

The Draft Digital Banking Framework Document

The Draft Digital Bank Framework Document applies to –

  • an applicant applying for a licence under section 10 of the FSA or section 10 of the IFSA to carry on digital banking business or Islamic digital banking business, as the case may be;
  • licensed digital banks which are licensed to carry on digital banking business or Islamic digital banking business; and
  • the shareholders who require an approval under section 90 of the FSA or section 102 of the IFSA for the holding of interest in shares of the proposed licensed digital bank.

In the Draft Digital Banking Framework Document, BNM has proposed a balanced approach that facilitates the introduction of digital banks with strong value propositions (including serving the unserved or under-served market segments) whilst safeguarding the integrity and stability of the financial system as well as the interest of depositors. To this end, the Draft Digital Banking Framework sets certain prescribed limits for the initial three to five years of operations (‘foundational phase’) of a licensed digital bank.

The Draft Digital Bank Framework Document comprises four Parts, namely -

  1. Overview (Part A);
  2. Eligibility and application procedures and requirements (including factors in considering suitability of shareholders of an applicant)(Part B);
  3. Requirements during the foundational phase (Part C); and
  4. Business activities including physical access points of a licensed digital bank.

During the foundational phase, a licensed digital bank shall –

  1. at all times maintain a minimum amount of capital funds of RM100 million;
  2. ensure that its total asset size does not exceed RM2 billion; and
  3. be subject to a simplified regulatory framework.

A licensed digital bank may submit a request to BNM to terminate its foundational phase and business limitations after three years from the commencement of its operations. In assessing such application, BNM will consider whether the applicant has complied with the following (‘Termination Criteria’) to the satisfaction of BNM –

  1. complied with all applicable laws and regulatory requirements;
  2. achieved a minimum amount of capital funds of RM300 million; and
  3. shown satisfactory progress in achieving the committed value propositions set out in the licensed digital bank’s business plans.

By the end of the fifth year from the commencement of its operations, a licensed digital bank must comply with all equivalent regulatory requirements applicable to a licensed bank or a licensed Islamic bank and achieve a minimum amount of capital funds of RM300 million and the business limitations imposed during the foundational phase shall cease.

A licensed digital bank that fails to fulfil any of the Termination Criteria by the end of the fifth year from the commencement of its operations may be subject to enforcement action, including a direction to implement its exit plan or revocation of its licence.

A prospective applicant for a licence to carry on digital banking or Islamic digital banking and its shareholders are also required to comply with the relevant requirements set out in the Licensing Procedures Policy Document and the Acquisition Procedures Policy Document.

The deadline for submission of feedback on the Draft Digital Bank Framework Document is 28 February 2020.

According to BNM, it aims to finalise the policy document by the first half of 2020 and applications may be submitted for digital banking licences upon the issuance of the policy document.

Comments

The much anticipated Digital Bank Framework Document will be welcomed by stakeholders seeking to establish conventional or Islamic digital banks as it sets out BNM’s expectations and requirements in relation to such banks.

It is interesting that BNM has adopted a two-phased approach to the introduction of digital banking in Malaysia by limiting the total asset size of a digital bank to RM2 billion during the initial three to five years of its operations.

The Licensing Procedures Policy Document and the Acquisition Procedures Policy Document are also welcomed as they formalise the requirements and procedures for applications for new licences under section 10 of the FSA and section 10 of the IFSA as well as for holding of interest in shares and for approval to be a financial holding company under section 110 of the FSA and section 122 of the IFSA.