Enough infrastructure to handle digital banks?

The Bangladesh Bank on Wednesday approved guidelines for issuing digital bank licence under the Bank Companies Act, 1994, in a bid to accelerate financial inclusion.

Though industry insiders – especially those in the technology sector – welcomed the move, they have however raised questions on whether the country’s information and technology infrastructure is enough to handle digital banks.

On its 428th meeting, the central bank board of directors approved digital bank guidelines, while setting the minimum capital requirement for such an establishment at Tk 125 Crore, compared to the mandatory requirement of Tk 500 crore for a conventional bank.

Moreover, each sponsor of a digital bank will have to hold at least Tk 50 lakh in shares.

At a Bangladesh Association of Software and Information Services (BASIS) meeting on Wednesday, IT specialists pointed out that the country needs to make key preparations such personal identity authentication, real time interoperable payments, and a comprehensive credit bureau with data of all lending institutions for successful implementation of digital banks.

They added that every stakeholder, including banks, fintech institutions and regulators have to work together make digital bank ventures successful.

Addressing the event, BASIC President Russel T Ahmed said, “It is very disappointing that the banking regulator did not even consult us – the professionals who will provide the technological support to make it a success.

“At least one-third of the ownership of every digital bank should be owned by technology sector organisations or entrepreneurs.”

Criticising the guidelines, Ahmed said, “A digital bank operating under the conventional bank act will not viable.

“Young IT experts are crucial to operate a digital bank, but regulator guidelines have made 15 years banking experience mandatory for appointing managing directors and CEOs of such banks.”

Speaking to The Business Post, “The Bangladesh Institute of Bank Management (BIBM) Professor Shah Md Ahsan Habib said, “The digital bank is a creative initiative, but three factors are essential for launching such establishments.

“The first thing is the need for making big investments in cyber security and developing IT infrastructure. We must focus on digital literacy. Otherwise people will not be encouraged to use digital banks.”

Habib pointed out that the banking regulator will have to develop a digital infrastructure as well to effectively monitor digital banks.

According to the central bank guidelines, fintech companies, tech firms, microfinance institutions, mobile financial service (MFS) providers, banks and financial institutions can come into joint ventures for setting up digital banks.

Moreover, digital banks will have to maintain Advance to Deposit ratio (ADR) to the percentage as determined by the central bank from time to time.

Commenting on the digital bank infrastructure requirement, Nagad’s founder and Managing Director Tanvir A Mishuk said, “Nagad is already well-equipped with all necessary products and services to establish a digital bank.

“If Nagad gets a licence for a digital bank today, it will begin providing people with services from the next day.”

He further said, “Firstly, we will introduce single-digit and collateral-free loans for small informal businesses that are currently resorting to mahajans [moneylenders] for up to 40 per cent interest rate.

“Such businesses have no trade licences and no access to credit in the traditional banking system. With digital banks, we will motivate these people to come under financial inclusion, thus putting their money into the formal channel.”

Mishuk further said, “To assess one’s creditworthiness, we have created an AI-based credit rating system that will analyse all transactions-related data available on public domains using one’s NID and mobile number.

“In this way, the system will determine if giving a loan to a particular individual is safe or not. Our team has worked on this AI-based credit rating system over the last two years, and it is now fully ready.”

What’s the background?

Around two years ago, Bank Asia had applied to the central bank for a digital bank licence, but got denied as there were no guidelines available at that time to run such banks.

Responding to a query, Bank Asia’s former managing director Arfan Ali said, “It is very good news that the central bank has finalised the regulatory guidelines for digital banks.

“Clients, especially the new generation, want to avoid visiting bank branches physically and this tendency has increased due to the pandemic. However, the paid up capital of a digital bank should be increased from Tk 125 crore because the amount is too small.”

Nagad, a digital payment service provider, also wants to get a digital bank licence from the central bank. The company has yet to get a mobile financial service licence from the banking regulator, but they have already secured a NBFI licence.

In June last year, Finance Minister AHM Mustafa Kamal in his FY23 budget speech had said that the government was establishing digital banks in the country.

He had mentioned that establishing such banks is either at the initial implementation or experimental stage in various developed countries, as well as some developing ones in Asia, including Singapore, Malaysia, and India.

Huge employment opportunities will be generated for young IT workers once digital banks are established, Kamal had said. The finance minister had also repeated in his budget speech for FY24 about the formulation of digital banks.