The central bank has been working for several months to formulate regulatory guidelines to pave way for digital banks to be established in the country.
Forming a committee earlier last year, it was tasked with observing how such kinds of banks are operating in other countries. Digital banks, also known as Neobanks operate exclusively online without traditional physical branch networks.
Finance Minister AHM Mustafa Kamal in his FY2022-23 budget speech mentioned launching digital banks to widen and accelerate financial inclusion, which would also create new jobs for young IT workers.
According to a primary report submitted by the committee in the form of proposals, once a digital bank is approved, its operations are usually extended in three phases- starting with retail, then moving to SME and then corporate.
Central bank sources said that digital banks are allowed retail banking first and if they succeed in handling customer deposits and withdrawals, small loans and fund transfers, the banks will be allowed to move on to the next phase- incorporating lending to SMEs.
Digital banks will then deal with corporate lending in the third phase where they will be allowed to receive export payments, settle import bills and go for big lending.
However, in the proposal, the committee suggested that Bangladesh can drop the second phase with most of the members voting for the first phase to be carried out for at least two to three years.
But many of the proposals submitted by the previous committee may change as a new committee has been formed recently with senior policymakers of the central bank and the next decision will be taken based on that committee’s report, sources said.
Bank Asia and mobile financial services (MFS) provider Nagad have recently sought permission from the central bank in forming digital banks, while many other MFS players have also shown interest in launching digital banks pushing the central bank in formulating guidelines.
Once formulated, the central bank will start issuing licenses. However, an assessment would be carried out first before issuing licenses.
The guidelines would be formulated under the Bank Company Act and compliance with all the instructions of the act would be a must for a digital bank. For instance, the paid-up capital requirement for a digital bank would be Tk500 crore as it is required for a conventional bank.
According to central bank sources, other capital-related requirements for digital banks would also be the same as conventional banks.
“I welcome the government's decision to allow digital banks to operate in the country. Technology is changing the way banks operate and interact with customers.
“With the use of the latest technologies like artificial intelligence, robotic process automation, blockchain, augmented/virtual/mixed reality, etc, digital banks will not only be more customer-friendly but also be efficient using minimal resources and most importantly more transparent,” Syed Almas Kabir told Dhaka Tribune.
He further said: “The license for digital banking must mandate an end-to-end platform encompassing the user interface that consumers would see, back-end that bankers would see through the admin control panels and the middleware that would connect all these. A digital bank should facilitate all functional levels of banking on all service delivery platforms. Without the appropriate middleware, it would only be internet-based banking, not a truly digital bank.”
“When a traditional bank requires Tk400 crore to set up, requiring Tk500 crore as minimum capital for a digital bank might discourage many initiators. I believe this requirement should be revised and may even be made less than that for a traditional bank.”
As per the concept adopted by the central bank, there would be no branch-based service of the digital banks except for one corporate office. The banks will have no other branches but provide services, including lending and collection of deposits, online instead.
“Digital banks will revolutionize the banking industry and the way we do banking, as it will be a big leap forward towards a cashless society, although ATMs will be required to cash out. Until we integrate all banking platforms and make all transactions digital, the requirement for ATMs will remain,” he added.
Not only Bangladesh, but many other countries were also either planning to incorporate the digital bank concept or have already issued licenses to new banks to operate digitally.
In the South Asian region, Pakistan invited applications from competent entities to apply for licenses and in India, the central bank is still in the process of finalizing a regulatory framework for digital bank licenses.
At present, a total of 61 banks are in operation in the country. Almost all the banks have adopted digital banking systems apart from traditional banking operations.
Speaking to Dhaka Tribune, Bank Asia’s Managing Director Md Arfan Ali said, the millennial demographic will not be visiting bank branches and would be carrying out every traditional form of banking online.
“The world has already adapted to it and it's just a natural transition from traditional banking in the local context. Although other forms of digital financial platforms exist, none offer services such in regards to availing credit like that of the traditional sense. Digital banks can bring the informal economy under banking services and help in the country’s goals of bringing all citizens under financial institutions like that of banks by 2026 to meet social inclusion,” Bank Asia’s top brass also said.
"Digital bank is absolutely a time-demanding service for the country that can help Bangladesh to grow even faster than its speciation. Now we are offering mobile digital financial services to the customers but there are so many limitations and challenges to offering services to the customers. Service numbers are very limited and users can’t get all the financial services they need," Nagad said in a statement issued to Dhaka Tribune.
"Already digital bank is well established in developed countries, and even some of the neighboring countries are also running several digital banks. We are also closely working with the policymakers with it and hope within the shortest possible time this state-of-the-art service will hit the market which can help users to change their way of doing life," it also said.
"Here our recommendation is to the betterment of the country’s digitalization process we need to ease the process of establishing a digital bank and its paid-up capital shouldn’t be the same as traditional commercial bank. Tanvir A Mishuk, founder and Managing Director of Nagad Limited, a disruptive mobile financial service carrier of the country that has changed the dynamics of digital payment in the country," the statement added.
The central bank had also introduced a Tk100 crore refinance initiative titled "digital nano loan" disbursements with an aim to expand financial inclusion for the underprivileged.
Participating banks will be able to disburse loans of Tk500 to Tk50,000 to individual customers with up to 9% interest under the scheme.
However, in this case, the loans have to be disbursed entirely digitally by using internet banking, mobile apps, mobile financial services (MFS), or e-wallet services, according to a central bank circular.
He also said that with digital transactions booming, now is the perfect time to make the transition.
However, the top official said digital banks will have to start with retail lending which is much easier and then move into SME lending, but, corporate lending is a step that comes much later.
MFS transactions hit a record high in April at Tk93,033 crore, according to central bank data.
