Newly announced digital banks to benefit from pandemic-driven digitalisation; immediate threat to traditional banks moderated by regulatory threshold

Published on 29 Apr 2022.

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The five banks newly awarded digital bank licences will stand to gain from the spike in digital adoption, spurred by the pandemic. “Considering the ubiquity of smartphones and high digital adoption and market readiness, the market potential for digital banking is bright,” highlights Sophia Lee, RAM Ratings’ co-head of Financial Institution Ratings. 

Increasing internet penetration and use of smartphones are driving market growth in digital banking. Based on Bank Negara Malaysia statistics, internet banking (conducted by individuals) and mobile banking transactions jumped a respective 40% and 290% to RM1.2 trillion and RM800 billion over the last two years, boosted by the Covid-19 crisis.

We expect the entry of digital banks to spur financial innovation and accelerate the digitalisation of financial services. Unlike traditional banks, digital banks offer financial products and services through digital and electronic platforms (online and mobile applications). Their value proposition is delivering simpler, faster and more convenient solutions to consumers. The issuance of not one, but two Islamic digital bank licences to provide a shariah-based option to consumers also surprised on the upside and affirms Malaysia’s commitment and role as an established global Islamic finance leader.

“By utilising technologies based on artificial intelligence or other forms of predictive algorithms along with big data analytics, digital banks may undertake alternative assessments of credit risks to enable greater financial inclusion,” Lee adds. “As such, those who are unable to access financing products from traditional banks due to the lack of standard documentation or credit history could stand to gain.” This may also fuel competition in the unsecured retail lending (personal loans and credit cards) and micro enterprise segments of traditional banks (which represent about 7% and 4% of the banking system’s loans, respectively). 

The threat to incumbents in the near to medium term will be limited, given the temporary asset threshold of RM3 bil for the first three to five years of a digital bank’s operations (the “foundational phase”) and the licensing framework’s requirement to focus on driving financial inclusion to address market gaps in the underserved and unserved customer segments. With an estimated combined market share of less than 0.5% of the banking system’s asset base, digital banks are likely to target niche segments untapped by traditional banks. 

In addition, the profit performance of digital banks will be constrained in the early years in view of the hefty initial outlay to develop their ecosystems, market their products and create scale by occasionally offering promotional rates in a competitive operating environment. Digital banks will be subject to the same regulatory framework governing commercial banks but capital adequacy and liquidity requirements will be simplified during the foundational phase.

“It is paramount that traditional banks re-evaluate their current digital offerings to keep up with accelerated digitalisation to ensure long-term market relevance. Traditional banks can pursue digital transformation under the existing licensing framework without a separate digital banking licence. Incumbents are seen upping their game by digitising existing banking operations and investing in new capabilities. Some banks are also leveraging the agility of FinTech players through partnerships to accelerate their progress,” Lee said.

Following Bank Negara Malaysia’s announcement, the five digital bank licence winners will undergo a period of operational readiness that will be validated by the bank through an audit before they can commence operations. This process may take between 12 to 24 months.

5 new digital bank licence winners in Malaysia


Analytical contact
Sophia Lee
(603) 3385 2619


About RAM Rating Services Berhad (RAM Ratings)

Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Registration of Credit Rating Agencies, 2011. In addition to the provision of credit ratings for corporate bonds and sukuk and their issuers, RAM Ratings also provides research and publications on Islamic finance, fixed income and macro-economic and industry analysis as well as data analytics relating to credit risk, counterparty assessments and other related domains. 


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