Bangladesh Bank recognizes the role of digital platforms and usage of artificial intelligence in driving greater efficiency in the delivery of financial products and services and in widening the outreach of the financial system…
On 21st June of 2023, Bangladesh Bank (BB) announced its much-awaited Digital Bank Establishment notice. Bangladesh Bank had invited applications from entrepreneurs and financial systems interested in establishing digital banks and delivering financial products efficiently through branchless operations pursuant to section 31 of the Bank Company Act, 1991. In response, Bangladesh Bank has received about 20 applications for setting up digital banks. Notably, four state-owned banks – “Sonali Bank”, “Janata Bank”, “Agrani Bank” and “Rupali Bank” and the e-commerce establishment “Daraz” through the help of different firms have applied for Digital Bank Licenses. As the application process unfolds, it is evident that these institutions are aligned with the vision of the government in creating a cashless society and fostering financial inclusion in Bangladesh.
One of the aforementioned bank’s officials stated that “We (four banks) are set to apply for a digital bank license from the Bangladesh Bank today (16th August 2023), the last date for application”.
On the other hand, AHM Hasinul Quddus the chief corporate affairs officer of Daraz also confirmed the news by stating, “Our commitment to ‘Uplifting community through the power of commerce’ drives us to fully support the establishment of a digital bank by the Bangladesh Bank.”
Daraz Approaching Digital Bank
Daraz-Bangladesh, a prominent online market and E-commerce field of Bangladesh has applied for a Digital Banking license with the help of other firms. Daraz-Bangladesh is a sub-establishment of Asian e-commerce giant Alibaba, having branches in most of Asian countries. Established in 2016, currently Daraz-Bangladesh has a net worth of $1.22 billion with an average annual revenue of $50.0M – $75.0M. And this year, Daraz-Bangladesh has set its sights on harmonizing with the government’s objective of achieving a stimulus of a cashless society aligning with other global countries in the upcoming 3-4 years. The company is actively searching for compatible partners who share the same vision, with the aim of creating a beneficial influence on the lives of the Bangladeshi populace.
AHM Hasinul Quddus added that “We see digital banks as a crucial catalyst for inclusive economic growth, allowing us to extend financial services and innovation to underserved areas and Micro, Small, and Medium Enterprises (MSMEs).”
Private Banks Leaning for Digital Licenses
Many Private Banks are willing to invest in consortium-formatted digital banks system to develop their digital presence. As City Bank has declared to invest Tk13.88 crore to establish a digital bank in collaboration with eight other banks, including Mutual Trust Bank, Eastern Bank, Dutch-Bangla Bank, Trust Bank, Prime Bank, Pubali Bank, NCC Bank, and Midland Bank. If this combined digital project of nine private banks gets approval to form a digital bank, then the dynamics of banking in Bangladesh would shift to a new height. Aside from these nine banks, Bank Asia has decided to invest Tk12.5 crore to acquire a stake in a digital bank.
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The country’s top mobile financial systems (Bkash and Nagad) are also leaning toward digital bank licenses. According to the sources, Bkash, a digital partner sub-establishment of Brack Bank has applied for name clearance to digital bank. On the other hand, Nagad had already approached the Bangladesh Bank for a digital bank license back in 2020.
Tanvir Ahmed Mishuk, the managing director of Nagad stated that, “We are planning to turn Nagad into a digital bank.”
“Digital banking is the only option to implement the government’s vision to make 75% of banking transactions cashless by 2027 because Mobile Financial Services (MFS) has limitations in providing digital services,” Mishuk added.
How Digital Banks Work?
Operating any Digital Bank will require registered headquarters within Bangladesh, adhering to the stipulations of the Banking Act. This headquarters will function as the primary point of contact for various stakeholders, including regulatory bodies like the central bank. The registered headquarters will not only accommodate management and support staff, also will be aligning with the guidelines and serve as a pivotal center for addressing customer complaints both in the physical and digital realms. However, physical branches, sub-branches, or windows are prohibited.
A technology-driven dispute resolution mechanism, bolstered by an AI system, remains on standby to manage day-to-day transactions, with or without customer notification. Digital banks can partner with agents from conventional banks or MFS providers, abiding by the Bangladesh Bank’s regulations.
Conversely, the digital bank itself cannot appoint agents. These banks are tasked with delivering efficient, cost-effective, and inventive digital financial products and services through a comprehensive online tech-driven ecosystem. Utilizing Fourth Industrial Revolution technologies such as AI, machine learning, and blockchain, they aim to address customer requirements and extend services to untapped markets, including underserved areas like hill districts and islands, to promote financial inclusivity.
- Over-the-counter (OTC) services won’t be provided by digital banks, and they will not establish their own branches, sub-branches, or ATM/CDM/CRM units.
- To facilitate customer transactions, digital banks may issue virtual cards, QR codes, and other advanced technology-based products, though physical instruments are off-limits.
- Foreign currency transactions and involvement in trade finance are restricted for digital banks, except for wage earners’ remittance collection.
- These banks are obligated to maintain the minimum Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) according to the Bank Company Act, as prescribed by the Bangladesh Bank.
- A set percentage for the Advance-to-Deposit Ratio (ADR), as determined by the central bank, must be upheld by digital banks.
- Adherence to Capital to Risk-Weighted Assets Ratio (CRAR) and liquidity ratios (LCR-Liquidity Coverage Ratio and NSFR-Net Stable Funding Ratio), in line with BASEL III RBCA guidelines or Bangladesh Bank’s instructions, is mandatory.
- Compliance with the Bangladesh Bank’s Deposit Insurance Scheme, as outlined in the Bank Deposit Insurance Act of 2000, is also a requirement.
- Corporate Social Responsibility (CSR) activities are to be carried out by digital banks, guided by the CSR policy of the Bangladesh Bank or in accordance with the institution’s directives.
BB’s Requirements of Digital Bank Establishment
- Must be a public limited company licensed under section 31 of the Bank Company Act, 1991.
- Initial minimum Paid-up capital of BDT 125.00 (One hundred twenty-five) crores shall be provided by the sponsors.
- The minimum shareholding stake of each sponsor shall be BDT 50.00(Fifty) Lac.
- Sponsors’ contribution to the share capital of the proposed DB will be required to be out of net worth declared to the Tax authorities. Sponsors’ contributions out of borrowings from banks or financial institutions or from anywhere else, even from family members, shall not be acceptable.
- The sponsors/directors must qualify for the Fit and Proper Test (FPT) criteria applicable to the proposed directors of DB.
- Bangladesh Bank now invites applications for establishing DB through the License Application Portal.
- The amount of BDT 5.00 (Five) Lacs should be paid as a non-refundable application processing fee through the same web portal.
Bangladesh Bank stated that “Bangladesh Bank recognizes the role of digital platforms and usage of artificial intelligence in driving greater efficiency in the delivery of financial products and services and in widening the outreach of the financial system.”
On 1st June, Finance Minister AHM Mustafa Kamal stated in his budget speech that Bangladesh Bank Committee is working to draw up strategies to broaden financial inclusion. Critiques and finance experts are applauding Bangladesh Bank’s Digital Bank initiative by comparing it with banking Google’s new no-card payment, palm payment, and sensor payment systems. It cannot be denied that the expectations of digital banking are surely crossing the boundaries but no matter how much actually it would be effective, only time will tell.
To conclude, the possible development of digital banks signifies a radical change in the accessibility and provision of financial services. These institutions seek to provide effective, affordable, and inclusive financial goods and services by utilizing the power of digital platforms, artificial intelligence, and cutting-edge technologies.