Digital Banking in Regional Context (Last Part)
By Rezaul Hossain | September 20, 2021

The digital banking has arisen as a new opportunity for financial institutions in Bangladesh, while the notion is gaining traction in regional countries.

The mobile financial service (MFS) provided through cell phone has played an important role in the country's financial inclusion efforts. In the case of digital banking, cell phone penetration will also play a crucial role. In terms of the majority of the people, we attempt to compare the prospects of digital banking in Bangladesh, Malaysia, and Pakistan.

Looking at the numbers above, we can see that Malaysia, with the smallest population, has the most connections and subscriber penetration, while Pakistan, with the greatest population, has the least connections and subscriber penetration. Bangladesh falls around middle of the scale. Let us now examine the financial sectors of these three economies. According to the most recent figures, 47 percent of adults in Bangladesh have a bank account, while 92 percent of adults in Malaysia have a bank account.

In Pakistan, official finance covers about 23 percent of the population, while informal finance covers the remaining 24 percent. Malaysia has a disproportionately large number of financial inclusions. The percentage of their population who is banked is larger than in other ASEAN countries.

To learn about the financial inclusion, we should go through a comparative analysis in the region. In Bangladesh, there are 61 banks of which 10 maintain fully Islamic shariah complains. Including 10 Islamic.

To reach the customers, the banks have expanded nearly 13 thousand agent banking points apart from 10.78 thousand branches across the country. In the last decade, the mobile financial service (MFS) gained momentum as 15 banks serve nearly 100 million people with 300 thousand of agents as delivery channels.

In Pakistan, the number of banks and digital banks is 53 in total of which 22 operate with shariah compliance. These banks expanded service with 16.07 thousand branches and 221.52 thousand other agent outlets.

To tell success story in Asia, we mention Malaysia in very ways. The country has only 25 banks of which 16 backed by shariah complain. By end of 2020, the number of branch stood at 2.4 thousand while 18 banks tagged with MFS.

The branchless banking allows financial institutions and other commercial players to offer financial services outside traditional bank premises by using delivery channels like retail agents and mobile phones.

As evident from the previous tables, mobile financial services in both Bangladesh and Pakistan have a far greater reach compared to traditional bank channels. In these two countries, financial inclusion is mostly being driven by banks, NBFI, and MFS.

We have taken a brief look at the markets of the three Islamic Countries. Now let us take a look at the regulatory aspects as well. Because, before rolling out digital banks to the market, the ground has to be prepared via a proper regulatory framework.

With that in mind, we now take a brief comparative look at some of the regulatory aspects mentioned in the draft guidelines of Pakistan and Malaysia; and discuss what should be the right approach for Bangladesh.

In Pakistan, any banks, digital money service provider and any individual having minimum three years of experience in financial service or financial technology. Malaysia central bank is only allowing existing banks to convert as digital bank. In case of Bangladesh, traditional banks, tech organization and joint venture are capable to run digital bank.

Bangladesh is currently having a financial inclusion rate of 47 percent but not all of them have access-to-finance. This (access-to-finance) is the area where Bangladesh is doing poorly. So, the overall or macro-level goal of digital banks should be increase access-to-finance for the underserved segments.

An interesting point to note in the Guideline of Pakistan is that they did not make it mandatory for the CEO to come from a banking background.

This approach is very conducive to bringing in creative, out-of-the box thinking in the digital banking sector, which will set it apart from the traditional banking practice. Bangladesh should adopt a similar approach.

By imposing these conditions, the draft guideline for digital bank in Pakistan emphasizes the ability and background of the sponsors, including sponsors must demonstrate strong financial strength; sponsors must submit an enforceable and executable bank guarantee; the central bank shall review the sponsors' sources of funds, financial standing, and credit worthiness; and fit and proper.

In Malaysia, digital banks are required to display a commitment in driving financial inclusion, particularly to underserved and hard-to-reach segments (including retail and MSMEs.

Whereas, Malaysia focuses on the Ability of the proposed organization, by imposing these conditions of robust risk management and compliance capabilities, transformative technology capabilities, access to deep and robust customer analytics and ability to continuously serve as a source of financial strength.

In Bangladesh, the sponsors’ background should be checked carefully. Their financial strength, business acumen and business success history, these factors should be carefully evaluated.

It is not necessary that the sponsors should come from banking background. But they should have proven track record in any of the following of new market penetration, cash management and cutting edge technological solutions implementation.

This should be coupled with solid understanding of the local market (gained through extensive work experience in any relevant commercial and technology companies.

In terms of ownership structure, there is no specific percentage has been mentioned for the banks and other organization to occupy the license for digital bank.

Malaysia requires that one shareholder should be there who holds an aggregate interest in shares of 50 percent or more. The digital bank initiative should be headed by a single apex entity, which may be either a licensed institution or a financial holding company. Malaysia also puts preference on controlling equity interest held by Malaysians.

In the context of Bangladesh, Banks, MFS, FinTech should be encouraged to step forward in introducing digital banks. So, there should not be any stringent requirements that hinders forming an alliance among like-minded parties.

A minimum shareholding requirement of at least 5 to 10 percent by each participating stakeholder may be there, but should not be any mandatory requirement of having a majority controlling shareholder.

Malaysia also required the applicant to submit a five-year business plan. It should identify specific unserved and underserved target segments; include pro-forma financial statements and road to profitability and performance indicators reflecting the applicant’s value proposition in driving the financial inclusion objectives.

As part of the licensing application, proposed digital banks in Pakistan have to submit a five-year business plan along with comprehensive feasibility study, business and enablement plan and detailed financial projections and underlying assumptions.

In Bangladesh perspective, the applicant should submit a business case up till BEP showing the business and enablement plan, detailed financial projections and underlying assumptions, and clear and tenable path to profitability. BEP can be 5 to 10 years.

Despite growth in MFS, the access-to-finance (loans) is still a challenge for SMEs and MSMEs; as that is mostly controlled by the traditional banks and micro finance institutes.

Digital banking can, and should, use the platform and network readied by MFS operators as a springboard to launch itself in the market in Bangladesh. The ‘agent banking’ and ‘sub-branch’ approaches of banks can also play a large role in the coming days to establish digital banking as a practice in Bangladesh.

In conclusion, Digital Bank is currently a need and a logical evolutionary step in Bangladesh market. The regulator and all relevant/interested parties should work together to prepare a proper guideline and framework for launching and operating digital banks in Bangladesh.

Rezaul Hossain is market transformation expert.