Bank Negara Malaysia is reviving its plans to issue the country’s first virtual-bank licenses – which it calls digital banking businesses – but with updated guidelines that will require applicants seriously think through their technology and operations.
The central bank issued the guidelines on December 31. The guidelines do not consider a timeline, but Varun Mittal, partner at EY in Singapore, told DigFin the new deadline for applicants is June 30.
The last V.B. application draft rules were published on March 2020, with the expectation that Malaysia would hand out its first licenses late last year, in line with Singapore’s timing. Singapore’s process was further along by last spring, though, and the COVID-19 pandemic caused Bank Negara to postpone the virtual-bank process.
Since that time, the authorities have tweaked the process in three important ways.
Tech deep dive
First is the applicant’s business plan, detailed in section 10 of Bank Negara’s licensing framework for virtual banks. The framework has been amended to require a lot more detail about the proposed tech stack.
This includes several changes. One is any product or service intended to be sold through agents or intermediaries. The central bank is frowning on the practice, mandating a plan for having third-party sales fully migrated to a digital in-house capability within five years. It also wants to know what prevents a would-be VB from selling without agents, and where these agents will be, down to the township.
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Another aspect is Bank Negara is now explicitly requiring V.B.s be built on cloud. Not just that, but it wants to know how cloud fits into the V.B.’s architecture. For example, applicants must describe whether it is being deployed for Software-as-a-Service models, or for Platforms, or Infrastructure as services.
Bank Negara will now require applicants also detail how they will use or be able to accommodate new technologies including big-data analytics, artificial intelligence, and distributed-ledger technology.
The second big change is that the applications must now be vetted in advance by a third-party consultant.
These reviews must attest the technology plans fit the proposed financial statements, down to individual line items. The consultant must also agree that the V.B.’s business assumptions add up, and validate the sources that go into that assessment, such as outside market research.
Bank Negara has also slipped in language requiring applicants suggest the performance indicators they will use when arguing their bank will advance financial inclusion.
More assets allowed
The third change from a year ago is that Bank Negara is allowing digital banks to have up to RM3 billion ($747 million) of assets on their balance sheet during their initial phase of operating. This is up from the RM2 billion proscribed earlier.
Bank Negara has inserted language warning digital banks not to let off-balance sheet assets sneak onto their loan books.
This so-called “foundational phase” was in the original framework. It is a three- to five-year probation.
Once graduated, a digital bank will no longer have constraints on its asset size. Nor has Bank Negara changed the capital requirements (RM300 million for a graduated bank).
But it has added one more statement of firm intent. Unlike Hong Kong and Singapore, Malaysia’s regulators always required any applicant include a detailed exit plan. The language in this revised framework is the same, except in the event that, by year five, if a bank fails to meet Bank Negara’s standards, it “shall implement” its exit plan. The previous language was ambiguous. The criteria a digital bank must meet now also includes the line that its RM300 million capital base has not been impaired by any losses.
What’s it all mean?
Taken together, Bank Negara is signaling it will only award licenses to applications that are as watertight as humanly possible. It does not want any half-baked plans of the sort that flooded the Hong Kong and Singapore regulators, each of which announced culls of applications halfway through their processes. Don’t waste our time, is Bank Negara’s message.
It is also tightening language to ensure these digital banks really do address financial inclusion goals – a much bigger need in middle-income Malaysia, with its big rural population, than in rich city-states. It’s also inserted language to make sure these are truly digital-only banks, forcing them to justify any agents and being more explicit in banning branches.
But perhaps as a reward for the extra work that it is putting on applicants – and maybe a recognition that the regulator must balance safety with the ability of these new banks to actually make money – Bank Negara has granted a 50 percent boost to assets.
Other aspects of the regime remain unchanged from last year, including ownership, capital size and adequacy, risk weightings, and collateral management, as well as requirements for an Islamic digital bank.