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Bank Negara dreams big for digitalizing Malaysia

Malaysia’s central bank calls for an open data ecosystem and the digital infrastructure to make this possible.

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Bank Negara Malaysia, the nation’s central bank, recently issued a five-year plan to modernize the country’s financial sector, with a strong emphasis on digitalization.

Although the blueprint is a broad list of to-dos, some of the goals are within the central bank’s power to implement and others are attestations of desire, which will require a lot of politicking.

A blueprint this broad by necessity covers many areas, which demonstrates Bank Negara’s importance in many aspects of Malaysia’s economy; this also makes it difficult to untangle from the blueprint what areas will see the most action from technocrats.

A few areas are mentioned, however, including a desire to build on successful digital platforms in areas such as trade finance and digital banking to insurance and takaful (Islamic insurance and investments).

The central bank is also keen to expand a lot of experiments in digital payments and make the system more open and connected with real-time payment infrastructure in other Southeast Asian markets.

These digitalization plans are part of a broader five-year plan for modernizing Malaysia’s financial services. Other parts of the central bank’s mission include supporting economic transformation, ensuring financial wellbeing among households and businesses, supporting sustainability, and promoting Islamic finance.

Broadly, Bank Negara outlines two major goals.



First is to strengthen digital infrastructure, in particular by safeguarding against cyberattacks; ensuring infrastructure is inclusive and open; and making it flexible enough to accommodate emerging technologies and new types of business.

Secondly, the regulator’s blueprint raises questions about data: ensuring its ethical use, its safety, and capacity for being shared in a fair manner.

Following on are goals around cyber security, including the central bank’s own regtech needs, and enabling innovation.

Financial infrastructure

Bank Negara says it will address real-time payment infrastructure, including real-time gross settlement systems and retail payment systems, to ensure they are fit for the next five years.

This includes admitting fintechs and other non-bank payment service providers to the central bank’s funds and securities settlement system, called RENTAS, as well as to the domestic payments system.

The central bank will also consider pushing players to adopt technical standards such as ISO20022 for payment messages or Malaysia’s DuitNow QR code, so that payments can be standardized across activities such as welfare payments, tax refunds, and trade finance.

On the international front, Bank Negara says it wants to connect the country’s real-time payments system with those of other countries, both in Southeast Asia and beyond. Malaysia has already established QR code linkages with Thailand and Indonesia, and Bank Negara wants to see these used for peer-to-peer fund transfers.

The central bank also affirms its commitment to work with Bank of International Settlements’ ongoing exploration of developing a global hub for all real-time payment systems (called Project Nexus); and to Project Dunbar, a multi-country project for central-bank digital currencies.

Finally, the central bank says it will lobby the government for a national digital identity, and for the use of digital and electronic signatures.

Data

On the open-data front, Bank Negara has again laid out a series of goals, which it says are vital to financial inclusion and education. These are more aspirational, as meaningful changes require the government or the legislature to act.

Among these goals, the central bank wants to improve the financial sector’s framework for data governance, as well as broaden data sharing to other industries. Bank Negara will lobby for legal frameworks to protect data, both at the national and the state levels.

Innovation

Beyond promoting infrastructure and standards, and lobbying for better frameworks for open data, the central bank is looking to support financial innovation.

First, it says it will refresh its Regulatory Sandbox, such as speeding up the process to enable live testing, especially for more mature innovations that the central bank deems to be lower risk; likewise for innovations proposed by licensed financial institutions.

Second, the central bank will look to advance what it calls “collaborative pilot” mechanisms in areas where it sees a need for digital transformation, so that fintech can support broader industry modernization. This could include creating shared platforms, promoting common standards, or piloting new industry use cases.

For example, Bank Negara has already supported open API standards, and it developed Project Spyder, a DLT-based trade finance solution. Bank Negara would like to extend this sort of thing to insurance and takaful (Islamic investments).

Bank Negara says it will implement a digital banking framework (although it is silent on licensing digital banks, an ongoing process), and finalize a regulatory framework for digital insurers and digital takaful operators in 2022.

It also pledges to draft regulations for what it terms Payment System Operators – such as Visa, Mastercard, and the local Paynet system – to clarify issues such as governance and risk management. The central bank says it will also review existing policies on digital payments.

Cybersecurity

A final major area of work is cybersecurity, including developing better intelligence on vulnerabilities; expanding measures to enhance resilience to attack; and strengthening Malaysia’s role in global efforts against malign hackers.

An important aspect of this is improving Bank Negara’s own use of technology for supervising markets and regulating institutions. The central bank recognizes the need to integrate its risk analytics engines, and streamline its compliance processes, from reporting quality and pace, to the granularity of information the bank wants to see.

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Bank Negara dreams big for digitalizing Malaysia