Saudi Arabia readies itself for virtual banks with new regulations

Preparing to usher the Kingdom’s banking sector into the digital era, Saudi Arabian Monetary Authority has issued new regulations for digital banks amid efforts to diversify its oil-reliant economy as per Saudi Vision 2030.

The Additional Licensing Guidelines and Criteria for Digital-Only Banks in Saudi Arabia defines a digital-only bank as one that conducts a banking business mainly through digital channels (eg the web and mobile applications). These virtual banks, which may be required to establish physical customer service centers, would be subject to the same set of prudential treatments as with traditional brick-and-mortar banks.

While it commands 20.2%, or over US$310 billion, of the world’s Islamic banking assets, according to latest IFSB calculations using second quarter of 2018 figures, this pool has been grown mainly by its four Islamic banks. Saudi Arabia does not have a fully-fledged digital Islamic bank yet, although, it is home to meem, the Islamic banking arm of Bahrain’s Gulf International Bank, which conducts its business largely on an online proposition while leveraging on its physical presence – it currently has nine branches in Saudi and one in Bahrain.

It has been reported that at least one entity has applied for a digital banking license with the regulator.

In the Islamic finance space, Germany-based Insha is the first and only digital bank currently operating in the world, according to IFN Islamic Fintech Landscape. Established in 2018 by Albaraka Turk, Insha targets to serve Germany’s Muslim minority, mainly composed of Turks, and was recently boosted by German Chancellor Angela Merkel’s decision to welcome 600,000 Syrian refugees in 2016 at the climax of a migration crisis.

Five other companies, namely Hada DBank, founded by Malaysians; Kenya’s Medina Digital Finance; the UK’s Lintel Financial Solutions; MoneeMint; and Niyah, are at different stages of progress.

Hada DBank and Medina Digital Finance have yet to secure a Fatwa and a license, while Lintel Financial Solutions is seeking the Financial Conduct Authority’s approval to start operations.

The boom of digital-only banks is a global phenomenon, fueled by the prospects of cost reduction, increased revenue and greater agility, while younger generations of clients tend to shun physical branches, opting instead for online transactions.
As a result, the number of new digital banks is bound to increase. The US’s JPMorgan recently announced that it will launch a UK digital bank in 2020 while Bank Negara Malaysia, which issued an exposure draft on a licensing framework for digital banks in January, plans to issue up to five licenses to qualified applicants to establish conventional or Islamic digital banks.

Ride-hailing group Grab, gaming firm Razer, airline AirAsia, telecoms firm Axiata and lender CIMB are reportedly among companies looking to apply for digital banking licenses in Malaysia. Axiata Group is said to be talking to 11 potential partners, including banks, to jointly bid for a digital banking license.

The global digital banking market is expected to reach US$9.01 billion by 2027, growing at an estimated compound annual growth rate of 3.2% over the forecast period, according to Absolute Markets Insights.


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