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Thursday | 16 January 2025 | Epaper

Digital banking to build smart financial system

Published : Friday, 7 July, 2023 at 12:00 AM  Count : 1830
M A Masum
Digital banking, although it may be used in numerous ways, essentially refers to a combination of online and mobile banking. Online banking involves accessing banking features and services via bank's website from computer. Using online banking portal, customer can apply for a loan or a credit card, as well as check balance or pay electricity bill. It is easier than ever to manage personal finances via online banking without leaving home, which is quite convenient.

Digital banking is very safe despite increasing in cyber security threats worldwide. Banks use a variety of advanced security and monitoring techniques to protect customer information and money. Nowadays digital banking has made our life easier in many ways. From transferring money or paying bills, keeping track of account balance or expenses is also possible with just a few clicks. Digital banks have revolutionized financial inclusion in other countries around the world. Because the use of technology is acting as the main driving force there.

At a time when new generation banks around the world are turning away from traditional physical banks towards digital banking. Now our central bank is going to introduce digital banks in Bangladesh. Among South Asian countries, India and Pakistan already launched digital banks in 2022. Currently, 122 countries around the world are on the path to adopting digital currency policies. Digital currency will save our money and transactions will be more efficient. At present there are 61 banks in Bangladesh. Finance Minister has announced to launch digital banking in the next year.

Bangladesh Bank plans to promote digital banking to encourage broad adoption of financial products and services as it looks to accelerate financial inclusion, thus moving the country towards a cashless society. Bangladesh Bank board of directors at its 428th meeting approved the guidelines. Entrepreneurs will have to secure a digital-bank licence from the central bank under section 31 of the Bank Company Act 1991 and have to follow instructions of Bangladesh Payment and Settlement System Regulation 2014 to operate its payment service. Digital bank, also known as Neobank or virtual bank, offers all its services online, doing away with all the paperwork such as cheques, pay-in slips, and demand drafts. Such banks behave like any other scheduled commercial bank, and can offer loans and accept deposits.

The board of the Bangladesh Bank has approved the Digital Bank guideline keeping provision for paid-up capital at Tk125 crore. Currently, sponsors need a minimum of Tk 5 billion in capital to get a Bangladesh Bank licence, which is a lot more than the requirement set for the new banking concept of the country. The minimum shareholding of each sponsor will be Tk50 lakh (maximum 10% or Tk12.5 crore). At present, 61 banks are carrying out conventional banking activities in the country, along with several other companies that are providing mobile financial services. According to the guidelines, digital banks must go for public offering (IPO) within five years from the date of licensing and the amount of IPO should be minimal to the sponsors' initial contribution.

The digital banking system must operate exclusively online, relying on the utilization of cutting-edge technologies such as Artificial Intelligence (AI) based on the Fourth Industrial Revolution (4IR). Transactions will be conducted automatically, with AI algorithms accurately identifying and processing each transaction. In line with its digital nature, digital banks will not offer over-the-counter services or traditional banking facilities. Instead, they will focus on providing digital products and services to small and service-based businesses. The guidelines do not impose any investment ceiling on regulated digital banks, thereby facilitating their growth and development. 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 advanced 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.

Artificial intelligence will be utilized to analyze and solve disputes, ensuring a streamlined and efficient process. Physical instruments such as Automated Teller Machines (ATMs) and Cash Deposit Machines (CDMs) are prohibited within the digital banking framework. Furthermore, the establishment of physical bank branches or any other infrastructure is strictly prohibited.

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 instrument for transactions, according to the guidelines binding the operations of the banks in what is known as decentralized finance of DeFi.

Customer accounts will be opened online in line with know your customer (KYC) regulations. After opening an account, a customer can transfer and spend money online, via the networks of any other bank or MAFS agent, ATM booth, CDM and CRM systems. Digital banks can also introduce virtual cards, QR codes or any other advanced technology-based products to facilitate transactions.

To lead a digital bank, the Chief Executive Officer (CEO) must possess extensive technology knowledge and a minimum of five years of experience in digital banking, in addition to fifteen years of overall banking experience. With a strong focus on digital technologies and innovative approaches, the digital banking sector is poised to contribute significantly to the country's economic growth and financial inclusion. Any institution, individual or any member of his/her family is or had been a loan defaulter with a bank or financial institution shall not be eligible as a sponsor of the proposed bank.

The founders and shareholders of digital banks must pay for their stakes in cash. This means that in order to get a banking licence, the applicants must make cash deposits in their bank account and their income tax returns should clearly specify the source of those funds. The account can be maintained in any commercial bank and will be monitored by Bangladesh Bank. Once the digital bank is approved, the bank account will be tied to the central bank. The money invested in digital banks by sponsors or shareholders cannot be borrowed from any bank, financial institution, family member or any other source. No company, institution, individual or any member of a family who has defaulted on a loan can become a digital bank owner.

Various types of documents have to be submitted to the bank in case of taking loan. Moreover, there is a need to judge the customer's business potential. It remains to be seen how digital banking will provide such services. Other traditional banks of the country may face challenges. Especially those banks which are still lagging behind in technology may face fatal problems.

Greater importance should be given to ensure that default loans should not increase due to the gap of digital and the main purpose of the bank should not destroyed due to undue interference of the directors or top management. Also, to implement the target set by the government to make 75 percent of banking transactions cashless by 2041, there is no alternative to the prevalence of digital banking across the country. In short, digital banking is very important in the construction of digital Bangladesh.

The writer is Banker & economic analyst



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