Malaysia’s central bank Bank Negara Malaysia is pushing the financial sector to join the digital banking revolution: It is preparing the issuance of the country’s first five digital banking licences to “qualified applicants,” both conventional and Islamic banks and both local and foreign financial institutions. The move to support the development of digital banks in Malaysia follows efforts undertaken by regulators in Singapore and Hong Kong, which have each issued similar licensing frameworks in the past two years, but Malaysia’s roadmap is the first that explicitly includes Islamic banks.
“The issuance of digital banking licences is part of a series of measures adopted by the central bank to enable innovative integration of technology to the financial sector,” the central bank said in a statement.
Digital banks – also named virtual banks, neobanks or challenger banks– predominantly deliver banking services through digital channels such as Internet portals and smartphone apps with minimal, if any, brick-and-mortar presence. Typically, their services are taken up by tech-savvy younger clients or “unbanked” or “underserved” customer segments who otherwise have no access to banking such as low-income individuals or early-income millennials, as well as those who look for tailored small business banking services which high-street banks do not offer, such as start-ups, small and medium enterprises, entrepreneurs and freelancer.
In the conventional banking segment, digital banks are usually operated by a variety or mix of e-commerce companies, technology and telecommunications corporations and financial technology firms that act alone or in cooperation with established banks. Among the largest standalone digital banks globally are currently N26 from Germany, Monzo, Starling and Revolut from the UK, Chime from the US, Tangerine from Canada, Nubank from Brazil, Neat from Hong Kong and WeBank from China.
As of 2018, the digital banking market volume was around $5.2bn in terms of assets under management and is expected to reach $16.2bn by 2025 based on a compound annual growth rate of 15.3%.
The Islamic financial industry has been a bit slower in adapting to the new digital opportunities, and while there have indeed already some Islamic digital banks been launched in the recent past, they are neither as large as their conventional counterparts nor as well-known. Examples are insha, a co-operation of Turkey’s Albaraka Turk Participation Bank with German solarisBank, and some others such as Boubyan Bank. Adding to this, Qatar Islamic Bank as part of its digital transformation has developed a fully digital financing services arm for which it already received a number of awards.
Malaysia could potentially join with digital Islamic banking services in case Maybank and CIMB receive digital banking licences. Both are established Malaysian banks with large Islamic windows which reportedly applied of a digital banking license.
Industry analysts widely agree on the notion that digital banking is the way to go also for Islamic banks as consumers and businesses have become more sophisticated and selective these days as a result of technological advancements. In turn, banks would get access to customer information which would allow them to mine data and employ data algorithms in order to adapt business models and understand their customers better, which entails opportunities for growth especially in the lending business and the development of new services.
The emergence of digital banking is also an opportunity for Islamic banks that comes amidst slower growth in the industry over the past three years. Apart from the “underbanked” and small and medium enterprises, which would welcome digital banking in a first phase, there is an entire new customer segment to address as Islamic finance customers have become younger and more affluent and are taking advantage of e-commerce in sectors such as tourism, fashion, health, beauty, as well as media and entertainment. There are 60mn potential youthful clients in the GCC alone, and many of them are equipped with the latest tech gadgets and thus are increasingly mobile with better access to technology than ever before.
With the digital banking roadmap open for Islamic banks, Malaysia could become a role model for other Islamic jurisdiction to issue digital banking licences as the country signals that digitizing banking services are no longer a niche program, but a commercial necessity.