[Analytics] Digital banking is key to financial inclusion in Malaysia

Digital banking. Image: worldfinanceinforms.com. Sketched by the Pan Pacific Agency.

Digital banking is expanding globally and the Asia Pacific has emerged as a hotspot for digital banks. The Hong Kong Monetary Authority granted eight virtual banking licenses in 2019 while the Monetary Authority of Singapore announced four successful digital bank applicants in 2020. Following this trend, Bank Negara Malaysia (BNM), Malaysia’s central bank, issued its Licensing Framework for Digital Banks last year to kickstart digital banking in Malaysia. Nafis Alam specially for the East Asia Forum.

BNM received 29 applications for five digital banking licenses which are expected to be granted in the first quarter of 2022. The applicants included a diverse range of parties ranging from banks, technology firms, FinTech players, industrial conglomerates, cooperatives and even state governments.

These licenses will hasten the diffusion of innovative banking technology and boost financial inclusion by targeting the unserved and underserved banking population, uplifting the financial well-being of individuals and businesses and fostering economic and financial growth. Digital banking offers almost all banking activities online that were traditionally offered at bank branches. Digital banking is different from online banking offered by almost all traditional brick-and-mortar banks. Digital banks do not have any branches (except for a registered head office) and all banking activity can be done fully online without visiting a physical branch.

Malaysia is late compared to its neighbours to embark on digital banking but COVID-19 has accelerated its adoption of FinTech. BNM’s regulatory enhancement initiative to facilitate the development and adoption of FinTech solutions by introducing a regulatory sandbox framework in 2016 laid the groundwork for digital banking. It gave FinTech companies regulatory flexibility to experiment with technology-driven customer solutions.

The sandbox acted as a catalyst for technological innovations in financial services that will contribute to the growth and development of Malaysia’s financial sector. Participation in the sandbox initative has helped FinTechs to raise capital. One of BNM’s sandbox graduates, MoneyMatch, successfully raised RM 18.5 million (US$4.4 million).

In 2016, BNM established a Financial Technology Enabler Group to formulate and enhance regulatory policies that facilitate Malaysia’s adoption of financial technology. Malaysia’s movement restrictions introduced during the COVID-19 pandemic also helped to add three million new mobile banking service subscribers in 2020 and pushed e-wallet usage and adoption to new highs. Merchants were quick to embrace the trend, with over 400,000 new businesses registering for QR code payment services, a 164 per cent jump from the previous year. Capital raised on equity-based crowdfunding platforms also jumped more than 457 per cent to RM 127.7 million (US$30.4 million).

BNM also issued a simplified draft regulatory framework for digital banks. This aims to reduce the regulatory burden for new entrants that have strong value propositions for the development of the Malaysian economy, while safeguarding the integrity and stability of the financial system. Key features of the simplified regulatory framework include simplified capital adequacy requirements to calculate credit and market risk components for risk-weighted assets and strengthened liquidity requirements. Although digital banks will be required to comply with all regulatory requirements applicable to incumbent banks, BNM has provided clear and supportive guidelines to induce new industry entrants.

Malaysia’s push for digital banking will help provide cost-effective financial services to retail customers and the underserved business community. Digital banks are 90 per cent cheaper to operate than traditional banks because there are no physical branches and lower labour costs. This means they can more easily offer low-cost financial services to lower income groups.

Small and medium-sized enterprisies (SMEs), which contribute 50 per cent of Malaysian GDP and employ half of the working population, will be one of the biggest benificaries from digital banking. Aside from offering significantly more accessible loans to SMEs, digital banks in contrast with traditional incumbents will take a more borrower-centric approach to banking. They will offer tailored customer solutions, fast approval and disbursement of funds, simplified lending management and competitive pricing. Digital banks will help traditional banks transform their banking services operations by pushing them to look after Malaysia’s underbanked population.

Consumers are also eager to use digital banking services. According to the 2021 Visa Consumer Payment Attitudes study, over 74 per cent of Malaysians are aware of digital banking and 66 per cent are interested in using digital banking services. Digital banking will improve the financial wellbeing of individuals and businesses, foster sustainable growth — including access to financial services — and promote responsible use of suitable financial solutions to unserved and underserved populations. This includes low-income individuals, young people, start-ups and micro-enterprises.

Digital banking will act as a catalyst for achieving greater financial inclusion in Malaysia. It is too early to assess how digital banking will shape Malaysia’s banking sector but it is likely that consumers and SMEs are going to be the winners from financial digitisation, with cheaper banking alternatives and varied innovative financial products and services becoming more readily available.

Nafis Alam is Head of the School of Accounting and Finance at the Asia Pacific University of Technology and Innovation, Malaysia, and a Research Affiliate at the Cambridge Centre for Alternative Finance, University of Cambridge.

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