The Bangladesh Bank (BB) yesterday granted final approval for Nagad Digital Bank to become the country's first digital bank licensee.

This marks a significant step for Nagad, the second-largest mobile financial service (MFS) provider in Bangladesh, which in the past few years has witnessed an astronomical rise.

However, much like its “questionable” rise which The Economist once termed came at the “courtesy of state apparatus,” the BB approval for digital banks too comes with unprecedented regulatory approval.

The central bank made an exemption regarding the shareholding of three of Nagad's institutional investors: Osiris Capital Partners LLC, Blue Haven Ventures LLC, and Finclusion Ventures Pte Ltd.

Typically, individuals or companies are restricted to owning a maximum of 10% of a bank's shares. However, a special provision has been made to allow these three investors to hold a larger stake in Nagad Digital Bank.

On Monday, the central bank's Banking Regulation and Policy Department released two circulars pertaining to Nagad Digital Bank. One circular, signed by Deputy Governor Nurun Nahar, officially designated Nagad Digital Bank PLC as a scheduled bank, effective June 3, 2024.

With this new status, Nagad Digital Bank can now function similarly to traditional banks, offering the same financial services.

However, the key distinction is that digital banks operate entirely online, with only a central headquarters and no physical branches. This contrasts with traditional banks, which maintain a network of branches across the country.

A separate circular issued by the central bank clarified that section 14A(1) of the Bank Companies Act, which typically limits individual or company ownership to a maximum of 10% of a bank's shares, would not apply against Nagad.

BB circular specifically mentioned that the section 14A (1) would not apply to the investments made by Osiris Capital Partners LLC, Blue Haven Ventures LLC, and Finclusion Ventures Pte Ltd in Nagad Digital Bank.

This exemption essentially allows these three institutional investors to hold a larger stake in the newly established digital bank.

This is not the first time Nagad has been granted an exception by regulators. Currently, Nagad operates its mobile financial services (MFS) without a full-fledged central bank license due to not meeting all licensing criteria.

Initially, Nagad attempted to operate its MFS with a non-bank financial institution (NBFI) license, obtained in May of the previous year. However, in August 2023, Nagad relinquished this NBFI license and applied for a digital bank license instead.

Earlier in 2020, it was Nagad which initially sought a digital bank license from the Bangladesh Bank, prompting the regulator to establish guidelines for this new type of financial institution.

The central bank released guidelines for digital banks in June of last year, requiring a minimum paid-up capital of Tk125 crore. Each sponsor must hold at least Tk50 lakh, up to a maximum of 10% (Tk12.5 crore) of the total capital.

However, this 10% limit can be waived in consultation with the government.

Furthermore, the guidelines mandate that a digital bank must launch an initial public offering (IPO) within five years of receiving its license, with the IPO value at least matching the sponsor's initial investment.