Bangladesh prepares for digital banks

Written by Kapronasia || June 26 2023

With a population of 169 million, of whom 40% to 50% lack a bank account, Bangladesh is a prime candidate for digital banks. Unlike the advanced economies of East Asia, Bangladesh can genuinely benefit from online banks that can rapidly bring more people into the formal financial system. With that in mind, the Bangladeshi central bank in June announced that it is ready to approve a framework for digital banks.

In many Asian countries for which digital banking is a “nice to have,” the approval process can be lengthy. For instance, Singapore announced it would allow digital banks in mid-2019; the first ones launched three years later. 3 ½ years after first mooting the idea of digital banks, Malaysia’s central bank has yet to approve a single digital lender to begin operations.

But in countries where they are needed, it is a different story. Bangladesh’s neighbor Pakistan has been relatively quick about producing a digital banking framework and issuing licenses to establish five digital lenders. Like Bangladesh, it has a large unbanked population and the sooner it brings more people into the financial system, the better.

We expect Bangladesh will be similarly swift in getting the digital banks up and running – especially since the online lenders will be set up to help the Bangladeshi government hit certain digitization and financial inclusion milestones. For instance, Bangladesh wants at least 75% of local transactions to be conducted digitally by 2027, as part of the government's goal for a "Smart Bangladesh" by 2041.

As the Dhaka Tribune noted in April, “It [the initiative] aims to foster the inclusivity of all people in Bangladesh to ensure a decent standard of living for everyone while striving to ensure a prosperous country with a lower Gini ratio.”

Under the draft guidelines for digital banks, the online lenders will be required to issue customers bank cards and QR codes as well as use “advanced technologies” like artificial intelligence, machine learning and blockchain to facilitate transactions. Those requirements should be easy for the digibanks to fulfill as they are the type of technologies that fintechs like to focus on regardless of regulatory mandates.

Crucially, capitalization requirements are very modest, which could allow some enterprising start-ups to win licenses. Singapore and Hong Kong this is not. Bangladesh’s online banks must have paid-up capital of 1.25 billion taka (US$11.55 million) each, considerably lower than the requirement for conventional banks of 5 billion taka. In contrast, Singapore requires holders of digital full bank (DFB, for retail and non-retail) licenses to hold S$1.5 billion in paid-up capital. The city-state's wholesale digibanks that do not serve the retail market “only” need to have S$100 million.

Nagad, Bangladesh's second-largest mobile financial service provider, is expected to be one of the first to gain a foothold in the industry. Officials said Nagad had approached the central bank in 2020 seeking a license to set up a digital bank and it was this request that spurred the institution to look into formulating guidelines.

We are also interested to see if Bangladesh’s leading e-wallet bKash will throw its hat in the ring. Given its dominance in the country’s e-payments market, a digital banking license seems like a logical next step. The firm is 51% controlled by BRAC Bank, a leading incumbent lender and 20% by Ant Group, while other shareholders include Money in Motion, the Bill and Melinda Gates Foundation, the International Finance Corporation and Softbank. According to Tellimer Insights, as of June 2022, bKash had 62.3 million customers (of whom 37.5 million were active), 280,000 merchants and 295,000 agents in its network. It facilitated 3.4 trillion taka (US$39 billion) in transactions during the first half of 2022.