Digital bank licence requires Tk125cr capital

Infographic: TBS

The Bangladesh Bank has set the minimum capital requirement for a digital bank at Tk125 crore, a new banking concept in the country, when a conventional bank requires Tk500 crore to get the licence.

A digital bank will be governed by the Banking Company Act, according to a guideline the Bangladesh Bank has finalised for placing in the next board meeting scheduled next week.

The minimum shareholding of each sponsor will be Tk50 lakh (maximum 10% or Tk12.5 crore), the guideline says.

A sponsor of a conventional bank needs to invest a minimum of Tk10 crore to hold a minimum 2% shareholding, according to the bank company act.

The less capital requirement makes it easier for sponsors to get a stake in digital banks than conventional banks.

The Bangladesh Bank in its draft guideline encouraged fintech companies, tech firms, microfinance institutions, mobile financial service-providers, banks and financial institutions to come into joint ventures for setting up digital banks.

"The ceiling of 10%, in consultation with the government, may be relaxed in case of a digital bank formed as a joint venture of banks, financial institutes, microfinance institutions, MFS providers, fintech companies and technology firms or for a needed special case," reads the guideline.

A digital bank must go for an initial public offering (IPO) within five years from the date of the licence issuance by the central bank and the IPO amount should be minimum to the sponsor's initial contribution.

Digital banking is part of the broader context for the move to online banking, where banking services are delivered via the Internet.
The major difference is digital banks will have only headquarters, and no other physical presence while conventional banks have physical presence across the country.

The business, governance and operational requirements applicable to traditional banks in general, shall continue to apply to digital banks, according to the guideline.

The central bank is going to introduce digital banks in Bangladesh at a time when new generation banks across the globe are turning away from traditional brick-and-mortar banks in favour of digital banking.

Among the South Asian countries, India and Pakistan introduced digital banks in 2022.

At present, the banking sector is oversaturated with 61 conventional banks in Bangladesh.

The finance minister in his budget speech for the next fiscal year announced the launch of digital banking in the new year.

"The committee's work on formulating the outline for setting up digital banks is now completed. In FY2023-24, we hope to be able to launch a digital bank," according to the speech.

At present, Nagad, the country's second-largest MFS provider, is planning to set up a digital bank.

Nagad first approached the Bangladesh Bank for a digital bank licence in 2020 and following that the regulator moved to formulate guidelines in this regard.

When asked, Tanvir Ahmed Mishuk, managing director of Nagad, said they are planning to turn Nagad into a digital bank.

He said digital banking is the only option to implement the government's vision to make 75% of banking transactions cashless by 2027 because MFS has limitations in providing digital services.

How digital banks will operate

A digital bank will require establishing a registered head office in Bangladesh complying with the Act to serve as the main point of contact for stakeholders, including the central bank and other regulators.

The registered head office will host the offices of management and the support staff, as per the guideline. It also serves as the central hub for receiving and resolving customer complaints both physically and digitally but no physical branch/sub-branch or window shall be allowed.

A tech-based dispute resolution mechanism shall be active stand-by with AI (artificial intelligence) system to resolve day-to-day transactions with or without any intimation from the customer.

A digital bank is allowed to use the agents of conventional banks or MFS providers complying with the regulations of the Bangladesh Bank from time to time. But a digital bank shall not have any agent of its own.

It will offer efficient, low cost and innovative digital financial products and services through an online end-to-end tech-based digital ecosystem using AI, machine learning, blockchain and other advance technologies of the 4th Industrial Revolution (4IR) to serve customer needs and reach unserved, underserved and hard-to-reach (hill districts, islands, etc) market segments for promoting financial inclusion.

Digital banks will not provide any over-the-counter (OTC) service, and will not have any branch or sub-branch, ATM/CDM/CRM of its own.

Digital banks may issue a virtual card, QR Code and any other advanced technology-based product for facilitating their customer transactions. But it is not allowed to issue any physical instruments for transactions.

Digital banks will not be allowed to transact in foreign currency or involve in trade finance except collecting wage earners' remittances.

It will have to maintain the minimum Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) prescribed by the Bangladesh Bank from time to time as per the Bank Company Act.

A digital bank will have to maintain the Advance-to-Deposit Ratio (ADR) to the percentage as determined by the central bank from time to time.

It will also have to maintain at all times a Capital to Risk-Weighted Assets Ratio (CRAR) and liquidity ratios (LCR-Liquidity Coverage Ratio and NSFR-Net Stable Funding Ratio) as per BASEL III RBCA guidelines or as per instructions given by the Bangladesh Bank in this regard from time to time.

Digital banks will comply with the Deposit Insurance Scheme of the Bangladesh Bank under the Bank Deposit Insurance Act, 2000.
It has to comply with Corporate Social Responsibility (CSR) activities guided by the CSR policy of the Bangladesh Bank or as per instructions given by BB in this regard from time to time.

Requirements for sponsors

A sponsor holding 5% or more shares will have to sign a capital maintenance agreement (CMA) jointly and severally inject additional capital if the bank ever falls below any minimum paid-up capital requirement. In case of failure to inject such capital within the stipulated time, the responsibility would fall on individuals within the sponsors' group to bear the entire burden of the required injection.

An individual or any member of his/her family is or had been a loan defaulter with a bank or financial institution at any time during the past five years shall not be eligible to apply as a sponsor of the proposed digital bank.

An individual awaiting the verdict of any indisposed lawsuit in any court or tribunal against his or her loan default status shall not be eligible to apply as a sponsor of a digital bank.

Sponsors' share will not be transferred within a period of five years from the commencement of the business, without prior permission from the Bangladesh Bank. The bank shall issue public shares within five years from the date of commencement of the business.

The sponsors/directors must qualify for the Fit and Proper Test (FPT) criteria. The Bangladesh Bank shall evaluate the expertise and integrity (FPT) of proposed sponsors and any potential conflicts of interest.

The Bangladesh Bank as part of the FPT may consider the financial performance of the businesses in which sponsors have control or substantial ownership, particularly businesses offering financial services.

A director or advisor or consultant to any banking company will not be a director of the proposed digital bank.

A maximum number of directors from a family will be in accordance with the banking company act.

The board of digital banks preferably will include at least 50% of members having adequate education, knowledge and experience in technology-based banking, emerging technologies, cyber laws and regulations and the remaining 50% of members shall have adequate knowledge and experience in banking, e-commerce and banking laws and regulations and so on.

The board must not comprise more than an aggregate voting share of 50% of non-resident persons or companies including dual citizens.

Requirement for managerial posts

The CEO of the digital bank shall have at least 15 years of experience in the banking profession having at least five years of experience in technology-based banking, regulations, guidelines, circulars etc.

The appointment of the CEO of a digital bank shall be subject to compliance with regulations and directives issued by the Bangladesh Bank in this regard from time to time.

The chief operating officer (COO), chief financial officer (CFO), chief information technology officer (CITO), chief information security officer (CISO), chief risk officer (CRO), head of Internal Control & Compliance (HICC) of the proposed digital bank shall have at least five years of experience in technology-based banking. 

The appointment of the COO, CFO, CITO, CISO, CRO, HICC and other key officials of the digital bank shall be subject to compliance with regulations and directives issued by the central bank.

Application evaluation process

Shortlisted applications shall be evaluated by a panel of members to be nominated by the governor of the Bangladesh Bank.

Successful applicants will get the Letter of Intent (LOI) from the Bangladesh Bank for establishing the digital bank.

The LOI shall automatically be revoked if the proposed digital bank fails to comply with the conditions.