Digital Bank – an opportunity to stimulate the financial services industry in Bangladesh

Illustration: TBS

Bangladesh's financial system has undergone a transformative shift – a race towards digitisation. As traditional banking is poised to embrace the digital age with multifaceted dimensions, it is time to explore the dynamics of digital banks in Bangladesh, highlighting the regulatory space that would govern this prospective banking and existing opportunities to accelerate adoption.

The initiative of the Central Bank to launch digital banks converges with its vision to settle at least 75% of retail transactions through digital technologies by 2027, leading to the attainment of Vision 2041, and taking an instrumental step towards implementing the National Financial Inclusion Strategy.

Now, what will most likely be the impetus to the Fourth Industrial Revolution (4IR) in Bangladesh begs the question – what do we really know about digital banks? As much as the concept is being widely discussed, are we fully aware of the intricacies within the "next big thing"? 

For now, the best way to delve deeper is to pay attention to what Bangladesh Bank (BB) has to say.

In June 2023, BB issued a "Guideline to Establish Digital Bank," specifying the requisites to establish such banks, its modus operandi and the range of services it can provide. 

Some of the key features include branchless operation with only a registered head office, leveraging existing agent networks of banks or Mobile Financial Services Providers (MFSPs), as well as ATMs, CDMs or CRMs, having minimum paid-up capital of Tk125 crore comprising of ordinary shares. In contrast, a minimum stake of Tk50 lakh is required for individual shareholders, issuance of virtual cards and/or QR codes to enable and accelerate consumer transactions, should be granted Authorised Dealer (AD) licence to execute permissible transactions, etc.

Besides, digital banks must go for an Initial Public Offering (IPO) within five years of receiving the license. They must also maintain a minimum Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as the BB directs. 

The proposed bank may also finance or lend to other sectors except foreign trade finance and term loans to medium and large industries. The Board of Directors of a digital bank can be comprised of a maximum of 20 directors, including three independent ones, who would not be able to serve as directors of any other banks, NBFIs, insurance firms or their affiliate corporations, and 50% of these Board members must have knowledge of emerging technologies, IT laws and regulations.

The Central Bank has already received applications from interested applicants for digital bank licenses within the stipulated timeline. After scrutiny, assessment and meticulous review, BB will issue a Letter of Intent (LOI) to eligible applicants. The guideline is based on the Bank-Company Act (BCA) 1991, its amendments, Payment and Settlement Systems Regulations 2014, and related regulations. 

The regulatory landscape for digital banks has been curated so organisations can exercise freedom and flexibility in their operations while remaining vigilant to compliance. With the added prioritisation of security, sustainability and compliance, this opportunity may open doors for technological innovation showcasing and place much-needed scrutiny that may engender quality service. 

At the same time, to gain customers' trust and ensure transparency and reliability, well-defined ICT risk governance mechanisms and comprehensive ICT security policies are vital to ensure data protection and end-to-end security. For that, employing human resources having sound knowledge of the latest technologies, ICT governance, cyber security, proper familiarity and experience in digital financial systems are some of the key requirements to set up a digital bank. 

For instance, a company like bKash has had the exclusive know-how of serving the country's people with digital financial services for over 12 years. Besides money transfer, bKash has introduced digital nano loans, savings schemes and inward foreign remittance in partnership with banks and NBFIs as applicable. 

To ensure an all-encompassing outreach of the digital bank, integrating services provided by bKash to its large, verified 72 million customers remains the most viable convergent approach. Considering the current digital and financial literacy of the mass population of the country, a hybrid digital payment system combining the services of digital bank and MFS like bKash may work best. It can turn out to be the adaptive model in the future.

Bangladesh's digital financial services landscape requires further innovation in services to drive equitable economic growth, which can only be achieved by bringing the rest of the unbanked population under the financial services umbrella. As per the Global Findex Database 2021, account ownership in Bangladesh, one of the significant financial inclusion indicators, stands at 53%, which has proportionately increased since MFS, like bKash, hit the market. 

Digital Banks may play a pivotal role in further accelerating this percentage. User-friendly interfaces, personalised services, uninterrupted accessibility and a progressive regulatory outlook, may inspire digital banks to succeed.

Bangladesh's time-befitting branchless banking service provision may foster an enabling environment and nurture the development of an ecosystem that has successfully evolved globally. Some well-known examples, such as Revolut, Wise, Monzo, Alex Bank, Chase etc., have already set standards with their revolutionary technological interventions in the global financial services. 

In today's digital world, where people spend almost one-third of their day on the internet, the potential emergence of digital banks in Bangladesh represents a substantial momentum in the financial sector. As regulations continue to adapt to this evolving landscape, digital banks are here to stay, revolutionising banking for the better.

Major General Sheikh Md Monirul Islam (retd), Chief External & Corporate Affairs Officer, bKash Limited.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.