Very recently, the central bank has issued a “Guidelines to Establish Digital Banks” -- in the preamble of the guidelines, it is said that digital innovation is continuously modifying the landscape of the financial system all over the world. The central bank facilitates an enabling regulatory environment that allows innovation to make the financial system more robust, efficient, and secure. It highlights the role of digital platforms in driving greater efficiency in the delivery of financial products and services and in widening the outreach of the financial system.
The guidelines state that it is a compilation of instructions required to be followed by applicants/promoters/sponsors/shareholders who are willing to establish a digital bank in Bangladesh. The instructions of the guidelines need to be followed by the proposed digital bank initiative along with Bank Company Act 1991 and other guidelines.
This is a milestone decision taken by the central bank. Simultaneously, the central bank has also issued a notification regarding the requirement of paid-up capital for new banks. The required capital is enhanced to Tk500 crores from Tk400cr for establishing a new bank.
The Guidelines contains 14 paragraphs such as status, capital requirement, fit and proper test for directors, operational framework, different regulatory compliances, application formalities for obtaining licenses, etc. Of the many factors, the operational framework constitutes a vital part, containing 23 items. It states that a digital bank is required to establish a registered head office in Bangladesh for serving the main point of contact for stakeholders, including central bank and other regulators.
The guidelines allow digital banks to execute cross-border transactions. It said that a digital bank can execute permissible transactions in foreign exchange pertaining to inward remittances, outward payments, and maintaining eligible foreign currency accounts in compliance with regulatory framework in force including retention of compatible digitized records. In this context, it needs to have an authorized dealer (AD) license under the Foreign Exchange Regulation Act 1947.
Establishment of digital banks is a great step to employ fintech in our banking sector. The application of fintech was found with the accommodation of MFS a decade ago. The concept of digital banks can be considered an upgraded version of MFS, containing different banking services.
It is true that banks use different technologies in providing banking services. But traditional banks provide services sitting in physical branches. The faceless banks can be of support to such customers without physical interaction. As a result, the banking services can go wider, including crossing borders to non-resident customers who can easily execute transactions of their accounts maintained with digital banks in Bangladesh. The accounts they maintain here can be used as a pathway to facilitate inward remittance services.
Banks today facilitate establishment of financial linkages between residents and non-residents. This results in cross border transactions to take place. In the present days, annual trade transactions comprising exports and imports of goods and services are nearly $160 billion. In addition, inward remittances sent by Bangladeshis working abroad are a major part of cross border transactions. Digital banks can be a wider solution to provide trade and wage remittances services.
Cross border trade has become part and parcel of the national economy. The present regulatory framework for banks facilitates maintaining online formalities such as online information to the central bank and customs system. Despite a different policy framework in place, development of cross border retail trade is not significant. These can easily be facilitated by the forthcoming digital banks, for example. Trade is one of the best alternatives to facilitate supply of foreign currency. Hence, trade should be within the framework for digital banks.
Wage remittances are one of the major sources of inflows of the country. It is reported that most transactions are executed through exchange houses abroad. It indicates there are many paths such as agents, exchange houses, banks, MFSs, etc required for remittances services. They can all be phased out with the help of digital banks. In these cases, digital booths need to be established by digital banks in different financial hubs of the world in association with counterparts there.
This will be alternative paths, without depending on different parties, for channeling remittances to bring home. Digital booths can also be used as primary windows to provide payment confirmation services on behalf of Bangladeshi banks for trade transactions. The proposition, as expressed here, may be interpreted as highly ambitious, but nevertheless should be made reality for strengthening transactional support with the external world. Simply expanding the scope of digital banks can bring a solution in this context.
Mehdi Rahman works in the development sector.
