Bangladesh Bank has moved to allow bKash, 51% owned and controlled by BRAC Bank, to establish a digital bank under rules that bar banks and finance companies from becoming sponsors.

The decision allows a bank to enter the digital-bank structure through a separate legal entity it controls.

On September 24, the Bangladesh Bank board decided to issue a Letter of Intent (LoI), an initial approval, to bKash Digital Bank along with Robi Axiata-backed Boost Digital Bank, VEON and Square Group-backed Nova Digital Bank, Bhutan’s DK Bank-backed DK Digital Bank, and renewed the LoI for Kori Digital Bank.

Before approving bKash, Bangladesh Bank did not consider issues related to its parent company, BRAC Bank, as part of its formal evaluation process. Parent-company matters were not included in the application evaluation matrix or the evaluation committee’s terms of reference (ToR), and no separate legal opinion was sought on the ownership structure.

Bangladesh Bank’s position is that its digital bank guidelines prohibit banks and finance companies from becoming sponsors, but do not extend that ban to their subsidiaries, affiliates or other controlled entities.

The approval relies on a narrow opening in the guidelines: a bank cannot sponsor a digital bank, but its controlled entity can.

Bangladesh Bank's assistant spokesperson Mohammad Shahriar Siddiqui set out the regulator’s position in a written response to questions from Daily Waadaa.

The licensing process had triggered a confrontation inside the central bank months earlier. On February 16, a day before the BNP government took office, then-governor Ahsan H Mansur faced protests from a group of Bangladesh Bank officials after the board was convened to consider digital-bank approvals, including bKash’s proposal. The protesting officials alleged that the process was being rushed during the political transition to favour bKash.

Nine days later, on February 25, the government removed economist Mansur and appointed businessman Md Mostaqur Rahman as governor. 

Mostaqur, who by virtue of his office also chairs the Bangladesh Bank board, later presided over the process that led to the September 24 decision on the digital banks.

Unlike the February episode, that decision did not trigger any comparable public protest inside the central bank.

Clause 6.11 of Bangladesh Bank’s Guidelines to Establish Digital Bank Version-2 bars any bank or finance company operating in Bangladesh from sponsoring a proposed digital bank. However, BRAC Bank is the controlling parent of bKash Limited.

Asked how bKash could still qualify, Bangladesh Bank said a mobile financial service (MFS) provider is a separate regulated and legal entity.

The central bank interprets Clause 6.11 as applying only to banks and finance companies, not to their subsidiaries, affiliates or other controlled entities.

BRAC Bank was outside the evaluation framework

Waadaa asked how BRAC Bank’s indirect ownership, control, board influence and financial interest were considered when Bangladesh Bank assessed the proposed ownership and governance structure of bKash Digital Bank.

The central bank said it had established an evaluation process with the governor’s approval and prepared an application evaluation matrix under which the applicants and their sponsors underwent fit-and-proper assessments.

But matters involving the sponsor’s parent company were not part of that matrix.

A different approach in 2023

Bangladesh Bank’s present interpretation raises questions when set against its handling of bank-linked proposals in the first digital-bank licensing round in 2023.

In its written response, the central bank said proposals that were bank-led, bank-owned or bank-sponsored were not granted digital-bank licences in 2023 following a decision by its board.

It added that MFS providers were not considered ineligible sponsors at the time.

During the first licensing round, bank-linked proposals involving bKash and other applicants were not taken forward as full-fledged digital banks. Bangladesh Bank instead discussed allowing them to operate through a separate digital-banking window.

The latest regulatory framework draws a formal line between a bank and a separate MFS entity it controls.

Bangladesh Bank’s current response treats bKash according to its legal status as an MFS provider.

The response however does not explain how bKash’s BRAC Bank ownership was classified when bank-owned proposals were set aside in 2023, and how that classification compares with the approach taken in the latest licensing round.

Competition was not the initial priority

Waadaa asked whether Bangladesh Bank had assessed the possible impact of bKash’s existing customer base, agent and merchant networks and its position in the MFS market on market concentration and fair competition in digital banking.

The central bank did not identify any market-concentration assessment, competition study or findings in its response.

Instead, it said market concentration and fair competition were not given the same priority at the initial stage as financial inclusion, collateral-free financing, lower-cost banking and economic growth.

Bangladesh Bank said allowing an MFS provider to sponsor a digital bank would not undermine fair competition.

Its reasoning is that the MFS provider and the proposed digital bank must operate as separate entities.

Bangladesh Bank acknowledged that a sponsor’s experience in providing payment services is given preference under the eligibility criteria in the guidelines.

That means existing payment-service experience can strengthen an MFS provider’s credentials as a digital-bank sponsor, while Bangladesh Bank maintains that its existing market position will not distort fair competition, experts told Waadaa.

The regulator did not cite a separate competition or market-concentration assessment to support that conclusion.

Waadaa asked bKash whether BRAC Bank would have any direct or indirect ownership, control, board representation, management influence or financial interest in the proposed bKash Digital Bank.

It also asked whether the digital bank would use bKash’s existing app, agent and merchant networks, technology infrastructure, customer-acquisition channels, customer data or transaction history.

Shamsuddin Haider Dalim, head of corporate communications at bKash, said, “bKash Digital Bank applied after fulfilling the requirements set by Bangladesh Bank."

"We understand that the central bank decided to grant preliminary approval to several applicants after reviewing their applications through multiple stages.”

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