Unicorn Nagad now plans to form subsidiary under digital bank: Tanvir A Mishuk

Nagad, the second largest mobile financial service provider (MFS) which was awarded for fastest growing unicorn startup recently, now plans to expand its business by setting up a digital bank.

"We have surrendered the licence of the non-bank financial institution (NBFI) as we will apply for the digital bank licence under which Nagad will form a subsidiary," said Tanvir A Mishuk, founder and managing director of Nagad, in an interview with The Business Standard.

Earlier, in August last year, the board of Bangladesh Bank gave a letter of intent against "Nagad Finance PLC" under which Nagad was supposed to form a subsidiary to legitimate its MFS operation.

The MFS company now became a lucrative platform to foreign investors after it got recognition as a billion-dollar company, he said, adding that many foreign investors already expressed interest to invest in Nagad which is good for the country to bring in dollars.

Startup Bangladesh Limited, the flagship venture capital company of the Information and Communication Technology Division of the government of Bangladesh, recognised Nagad with the "Fastest to Unicorn Award" at an event titled "Bangladesh Startup Summit 2023" held recently.

Nagad's valuation of $1 billion, equivalent to Tk10,000 crore, was measured by one of the big four global accounting firms in December 2022. Now, Nagad is considering taking foreign investment for setting up a digital bank, Mishuk said.

"If we announce a digital bank and offload 25% share, I believe many multinational companies will come to invest up to Tk1,000 crore due to the brand value of Nagad," he said.

"We need branding of unicorn companies to attract foreign investors," he said, stating that there are many more billion-dollar companies in Bangladesh but they lack branding.

Mishuk said a digital bank will require huge technological investment for which Nagad will go for strategic partnerships with foreign investors.

At present, Nagad does not need further investment for its MFS platform, he said, adding that Nagad already has foreign investment of less than 20%.

At present, Nagad has the highest customer base of 8 crore and it will extend its service to micro borrowers by setting up a digital bank, Mishuk said.

Micro-borrowers are currently taking loans from informal channels. A digital bank will help to bring them into the formal financial channel, he said.

Moreover, small depositors now cannot save deposits of Tk50 with banks. But, a digital bank will open the door for micro depositors.

Digital banks will increase money flow for conventional banks as they will have only one head office. So, digital banks will need to use banks' vaults across the country which will increase money flow in the banking channel, Mishuk said.

Nagad has nearly three lakh retail points which will be used for the digital bank. The daily transaction through the Nagad platform is Tk1,000 crore, the second highest among MFS providers, he said.

Traditional banks cannot reach remote areas through branches but digital banks can easily reach those remote customers through retail points, he said.

He said conventional banks are fulfilling the demand of high-value customers. But digital bank products will have to be developed in a way so that retail customers can borrow money in the morning and pay it back in the evening.

Retail business people who do not have trade licences and taxpayer identification numbers (TIN) can borrow from digital banks without collateral, Mishuk said.

So, huge technological investment will be needed to develop digital bank products in line with the demand of micro borrowers, he said.

Earlier, in August 2020, Nagad announced turning itself into a digital bank and approached the Bangladesh Bank for introducing Digital bank guidelines.

"We approached the telecom minister about Nagad's transformation into a digital bank and received a positive response," Mishuk told journalists at an event in August 2020.

Following Nagad's call, the Bangladesh Bank began formulating digital bank guidelines and finalised the guidelines in June this year.

The Bangladesh Bank has set the minimum capital requirement for a digital bank at Tk125 crore when a conventional bank requires Tk500 crore to get the licence.

Though Nagad is preparing an application for a digital bank licence, it could not settle the dispute about its full licence of MFS operation.

Nagad has been running under a temporary MFS licence since 2019 through a service agreement with the Bangladesh Post Office.

The relationship of Nagad with the Post Office is only revenue sharing under the service agreement.

According to the regulations, an MFS company cannot exist on its own but has to be a subsidiary of another financial institution or government entity. For example, bKash is a subsidiary of Brac Bank and Rocket of Dutch-Bangla Bank.

To get a full licence, the Bangladesh Post Office has to form a company to run Nagad as its subsidiary. Despite being given five extensions, the last of which is to end on 30 September this year, Nagad could still not become a subsidiary of Bangladesh Post Office.

Under the circumstances, since Nagad as an MFS cannot operate alone, it has applied to the Bangladesh Bank to operate as a non-bank financial institution jointly with Summit Group under which it will work as a subsidiary to legalise its operation.