EMI license in Malaysia - YB Case 2024

EMI license in Malaysia

EMI license in Malaysia
In recent years, Malaysia's electronic money market has demonstrated significant growth, driven by the increase in internet commerce and mobile payments. In this context, obtaining a Malaysian Electronic Money Issuer (EMI) license becomes a pivotal step for companies aiming to solidify their position in the financial market of this region. This license grants the right to issue and manage electronic funds, constituting a crucial component of contemporary financial services in Malaysia.

This article elaborates extensively on the process of obtaining an EMI license in Malaysia, encompassing a legislative overview, key steps in application submission, and operational requirements. Additionally, it scrutinizes the intricacies of company registration within the federal territory of Labuan, offering supplementary tax incentives and privileges for financial institutions.

Overview of the EMI situation in Malaysia

Malaysia, a country with a rapidly growing digital economy, presents significant interest for digital currency operators seeking to expand their presence in the Southeast Asian region. In recent years, Malaysia has demonstrated substantial growth rates in the realm of digital payments, thereby necessitating regulatory procedures and standardization of electronic financial services.

Malaysia demonstrates resilient economic growth, registering a 4.3% increase in 2019, while the country's digital economy is estimated at 20% of GDP. These metrics render the market conducive for obtaining approval for electronic money operations, facilitating a broad range of financial offerings to be carried out within the Malaysian marketplace.

The Central Bank of Malaysia (BNM) is proactively working to create a robust regulatory framework. The licensing process for electronic payment systems in Malaysia is strategically designed to solidify market infrastructure and guarantee consumer protection. In 2020, BNM implemented revised regulations for electronic money management, thereby bolstering transparency and clarity in financial transactions and safeguarding client funds.

For registration as an EMI in Malaysia, enterprises must adhere to stringent regulatory standards set by BNM, including ensuring adequate financing and compliance with AML/CFT norms. The EMI authorization process necessitates submission of a comprehensive business plan and confirmation of the enterprise's financial stability within Malaysia.

The number of licenses issued for electronic money transactions in Malaysia is increasing every year, reflecting the growing interest in this market segment. By 2021, there were over 50 registered e-money operators in Malaysia, an increase of 20% compared to the previous year.

Importance of EMI licenses for digital payments and e-commerce in Malaysia

In Malaysia, electronic payment system licensing is essential to the growth of the digital economy in the nation. A major contributing aspect to the stabilization and advancement of financial technology in Malaysia is the EMI license's existence, given the country's rapid shift to cashless transactions and e-commerce growth.

Importance of EMI license for digital payments

The EMI license in Malaysia confers the entitlement for companies to legitimately establish and administer electronic means, constituting the cornerstone of contemporary payment systems. This document serves as the legal foundation for conducting operations with electronic money, encompassing transfers, goods and services payments, as well as the retention of monetary funds in users' electronic accounts.

EMI approval in Malaysia comes with extensive regulatory oversight to ensure high safety standards.

The EMI license in Malaysia significantly streamlines the process of accepting payments for e-commerce businesses and other forms of online enterprise, enabling them to integrate various payment methods. This not only enhances user experience through transaction simplification and acceleration but also facilitates the expansion of the customer base by virtue of payment accessibility and convenience.

Obtaining approvals for electronic money licenses in Malaysia is catalyzing the proliferation of innovative solutions within the realm of financial technology. Enterprises holding Malaysian EMI licenses frequently proffer pioneering solutions such as mobile wallets, smart cards, and other technologies, rendering financial transactions more accessible and convenient for a broad audience.

The registration of EMIs in Malaysia, coupled with corresponding regulatory oversight, serves as a bulwark for economic security within the nation. Rigorous monitoring of EMI operations mitigates financial malfeasance risks, upholds payment system stability, and fosters overall economic resilience.

EMI regulation in Malaysia

Strict oversight of operations in the digital currency sphere in Malaysia is carried out by the Central Bank, which acts as the primary regulator, bolstered by legislation. Such regulation fosters financial system stability and safeguards consumer rights.

Bank Negara Malaysia's Role in Monitoring the Electronic Money Sector

In its capacity as the primary regulator, the Central Bank of Malaysia (Bank Negara Malaysia, BNM) actively participates in the oversight and supervision of the electronic money sector in the country, encompassing licensing, control, and compliance matters relating to digital transactions.

Development of a regulatory framework
BNM sets standards and establishes criteria for market participants seeking to obtain an EMI license in Malaysia. The central bank develops comprehensive regulatory frameworks that dictate the functioning of licensed entities, encompassing aspects such as capital requirements, risk management measures, security standards, and operational protocols. The objective of such regulation is not only to safeguard consumer interests but also to maintain the stability of the country's financial system.
License issuance process
Within the framework of the electronic money licensing process in Malaysia, BNM meticulously scrutinizes each application to ensure compliance with established requirements. This encompasses an assessment of applicants' financial stability, the quality of the proposed business plan, as well as the experience and reputation of management. Such scrupulous diligence ensures that licenses for electronic money operations are granted exclusively to reliable and professionally prepared Malaysian entities.
Monitoring and control
BNM continues to oversee the operations of institutions granted approval for electronic money issuance in Malaysia. It routinely conducts audits, analyzes operational risks, and assesses the financial standing of said institutions. Additionally, the Central Bank ensures compliance of these entities with international standards in anti-money laundering and counter-terrorism financing.
Innovation support
BNM facilitates innovation in the fintech sphere, including in the electronic money sector. The central bank supports the development and deployment of cutting-edge technological solutions aimed at enhancing the accessibility and efficiency of financial services. This, in turn, fosters economic growth and improves the standard of living for the population.

Main legislative acts

Financial Services Act 2013

This legislation establishes the legal framework for regulating all financial institutions operating traditional and Islamic financial services, excluding those regulated by separate laws specific to individual sectors. This statutory instrument provides comprehensive regulation of banking activities, including the licensing of electronic payment systems within the jurisdiction of Malaysia.

Islamic Financial Services Act 2013

The Law on Islamic Financial Services regulates Islamic financial products and transactions, including those involving electronic money, provided they adhere to Islamic financial principles. Furthermore, this legislation promotes the integration of traditional and Islamic financial systems within the framework of the national financial market.

Regulation in the field of AML and CFT

The Central Bank of Malaysia, tasked with pivotal functions, has intensified the implementation process and oversight of compliance standards in the realm of AML/CFT. Entities engaged in electronic money issuance within Malaysian jurisdiction are mandated to strictly adhere to these norms. This encompasses rigorous client due diligence, transaction monitoring, and reporting of suspicious financial activities.

Electronic Cash Licensing Requirements in Malaysia

To obtain approval for engaging in digital currency activities in Malaysia, enterprises are mandated to fulfill specific criteria outlined by the Bank of Malaysia. These criteria encompass financial prerequisites, provision of a detailed business plan, and adherence to management's qualification and reputational standards.

Starting capital and financial requirements

For EMI registration in Malaysia, demonstrating financial stability and providing sufficient initial capital is requisite. The initial capital amount may correlate with the scale of projected operations, typically not less than 200,000 EUR. In the future, this capital must represent over 80% of the average monthly outstanding electronic money obligations over the past six months. This capitalization requirement underscores the gravity and scope of operations the enterprise intends to undertake, ensuring a requisite level of financial resilience and ability to withstand potential economic risks.

This reserve capital functions as a financial safeguard, guaranteeing the organization's capacity to deliver dependable and secure digital currency services. Additionally, it ensures the ability to reimburse users in the event of financial security incidents or market volatility. This holds significant importance in nurturing trust among consumers and maintaining equilibrium within the country's financial environment.

Business plan

The procedure for obtaining permission for electronic systems in Malaysia necessitates the submission of a business plan, which must intricately detail envisaged operations, managerial structure, and growth strategies. The business plan must encompass:

  • Description of the products and services offered.
  • Marketing and sales strategies.
  • Technological infrastructure.
  • Assessment of future financial performance.
  • Measures to prevent risks and ensure safe operations.

Criteria for directors and senior management

Candidates for leadership positions must undergo thorough background and reputation checks. This includes verifying employment history, education, as well as any legal infractions or financial improprieties. The objective of these checks is to ensure the utmost integrity and reliability of individuals making critical decisions within the organization.

Managers and executives are expected to possess the requisite knowledge and experience to oversee a company operating in the electronic money sphere. It is anticipated that they will have significant expertise in financial services, risk management, information technology, and regulatory compliance. This ensures their capability to effectively manage operations and make informed managerial decisions.

To obtain and retain authorization for the usage of digital currencies in Malaysia, strict adherence to the aforementioned conditions is imperative. This not only guarantees adherence of corporations to legal standards while also nurturing the preservation of a robust level of confidence and safety within the domain of electronic transactions.

Step-by-step process for obtaining an EMI license in Malaysia

For successful issuance of EMI operations license in Malaysia, enterprises must meticulously adhere to regulatory requirements and navigate through several stages.

Step 1

Preliminary preparation

  • The assessment of BNM requirements commences with meticulous scrutiny of all regulatory mandates concerning EMI clearance, encompassing capital adequacy requisites, AML/CFT policy directives, and governance and technological infrastructure standards.
  • Develop a precise business model and business plan satisfying BNM requirements, elucidating operational model, products, target audience, risk management measures, and financial forecasts.
Step 2

Collection and preparation of documentation

  • Legal preparation. Assemble all requisite legal documents, encompassing articles of incorporation, agreements with service providers, property ownership or lease agreements for office premises.
  • Prepare financial statements validating financial stability and outline a financial activity plan for the initial operational years in accordance with regulatory requirements.
  • Develop internal policies and procedures, including AML/CFT, risk management, data processing, and security policies. Compile a Disaster Recovery Plan outlining procedures and measures for restoring operations in the event of force majeure circumstances.
Step 3

Submit your application to BNM

  • Submit a formal application to BNM including all collected documents, policies and business plan.
  • Pay the required government fees and charges to process your application.
Step 4

Waiting for BNM decision

  • BNM will conduct a detailed review of the documentation submitted and may request additional information or clarification.
  • A meeting or inspection may be scheduled to assess your operational readiness and your office's compliance with security requirements.
Step 5

Obtaining a license

  • Notice of decision. If your application is approved, BNM will send an official notification that the EMI license has been issued.
  • Issuance of a license. Upon notification and possible payment of final fees, you will receive a license that authorizes you to begin trading digital currencies in Malaysia.

The issuance of an EMI license in Malaysia entails a comprehensive process, necessitating meticulous preparation and strict adherence to regulatory directives. Your success is largely contingent upon the quality of preparatory measures and your ability to demonstrate a commitment to upholding high standards of commercial conduct.

Regulation of electronic money transactions in Malaysia

In Malaysia, stringent regulatory frameworks have been established to govern electronic money operations, ensuring their safety and reliability. These frameworks encompass rules for issuance, management, utilization of funds, and investment derived from digital currency transactions.

Rules for issuing and managing electronic money

As previously stated, the licensing of digital financial transaction systems in Malaysia is conducted under the stringent supervision of the BNM, which establishes high standards for all operators. Each issuer of digital currencies must ensure that its operational systems and procedures comply with security and reliability requirements. This encompasses the utilization of cutting-edge technologies to safeguard user data and prevent financial crimes.

Restrictions on the use of funds collected from the issuance of electronic money

The funds collected from the issuance of electronic money shall be managed with particular prudence to safeguard the interests of the owners of the funds. These funds may not be utilized for conducting any commercial activities unrelated to digital money operations, including lending or any other financial investments in third-party enterprises without explicit consent from the owners. Such measures are intended to minimize risk and ensure the liquidity and availability of funds to users at all times.

Policy for investing funds accumulated through electronic money transactions

The Central Bank of Malaysia also imposes stringent regulations on the investment of funds derived from electronic money transactions. These funds may only be invested in highly liquid and low-risk assets, such as government bonds or other financial instruments approved by BNM. This ensures that funds are always available to meet user demands and are safeguarded against potential financial disruptions.

Trust and fund management in Malaysia

Management of trust funds and funds in Malaysia is subject to strict legal requirements. These norms are designed to ensure the protection of client assets and bolster confidence in banking and financial institutions engaged in electronic money operations.

Legal requirements for maintaining funds in a trust account

For all institutions licensed for electronic money in Malaysia, it is mandatory to maintain client funds in segregated trust accounts. This ensures that client funds are kept separate from the institution's operational funds, thereby crucially minimizing risks and safeguarding depositor interests. In accordance with regulations, institutions must regularly furnish reports on the status of these accounts, affirming their adherence to established standards of security and reliability.

Use of funds: permitted investments and conditions for the use of investment income

Furthermore, strict guidelines dictate the permissible utilization of these funds. Specifically, investments from trust assets are only admissible in highly liquid and low-risk assets such as government bonds or other financial instruments sanctioned by the regulatory authority. These measures are intended to ensure that assets can be readily and swiftly converted back into cash if deemed necessary.

The utilization conditions of investment profits are equally rigorously regulated. Profits derived from investing entrusted funds may only be allocated for specific purposes explicitly outlined in regulatory documentation, such as covering operational expenses associated with managing entrusted funds.

Regulatory initiatives aimed at controlling trust assets and capital in Malaysia establish stable asset protection for clients and ensure the integrity of the national financial system. Companies seeking to obtain a Malaysian EMI license must strictly adhere to these regulations.

Business Taxation in Malaysia

The Income Tax Act of 1967 governs corporate taxes in Malaysia, and the Royal Malaysian Customs Department (RMCD) and the Inland Revenue Board of Malaysia (LHDN) are in charge of it. Comprehending and complying with these standards is vital for the prosperous functioning of businesses.

Determining the taxation percentage applicable to SMEs

SMEs in Malaysia are defined by the next criteria:

  • Authorized funds: ≤ RM 2.5 million.
  • Annual gross income: ≤ RM 50 million.

Starting from the 2024 tax period, if an international entity or non-resident owns over 20% of a SME's charter capital, the SME won't qualify for the lower tax rates of 15% or 17%. Instead, the tax rate for such cases is 24%.

Corporate income tax in 2024

As of 2024, the company taxation framework in Malaysia stands as follows:

  1. Businesses having up to RM 50 million in revenue and RM 2.5 million in capital:
    • 15% tax on the first RM 150,000.
    • 17% tax on RM 150,001 to RM 600,000.
    • 24% tax on income over RM 600,001.
  2. Enterprises with registered capital > RM 2.5 million taxed at 24%.
  3. Non-resident entities taxed: 24%.

Regulatory compliance and reporting for EMI license holders in Malaysia

Organizations that have obtained a license to conduct electronic money operations in Malaysia are obligated to strictly adhere to established regulatory norms and regularly submit reports to the Central Bank of Malaysia.

Annual and monthly reporting requirements to BNM

Organizations holding an EMI license in Malaysia are obligated to submit regular reports to BNM on a monthly and annual basis. Monthly reports typically entail data regarding current operations, cash flow, and changes in the company's financial position. These reports enable the regulator to monitor the institution's activity and promptly respond to any deviations from the norm.

Annual reports are more comprehensive, encompassing full financial statements, market risk analysis, audit opinions, and regulatory compliance assessments. These documents must be submitted within strictly defined deadlines and contain a thorough analysis of the enterprise's operations, financial condition, and risk management.

Continuous compliance with operational and financial audits

In Malaysia, companies must undergo regular reviews of their operations and finances to keep their EMI licenses.

Operational audits focus on scrutinizing internal processes, management systems, and security, as well as ensuring compliance with established regulatory standards. The objective of these audits is to ascertain that the company operates efficiently and in accordance with legislation.

Financial audits check a company's financial health, ensure it has enough money set aside, and follows financial rules. They're vital for showing that a company is stable and trustworthy in the long run.

Special conditions in Labuan for EMI licensing

The Federal Territory of Labuan in Malaysia is renowned as a premier Asian financial center, offering substantial advantages for enterprises engaging in digital currency operations. Registering an EMI in Labuan attracts a multitude of international investors with its favorable conditions for conducting business activities.

System of tax incentives and fiscal advantages

The tax advantages offered by Labuan make it an attractive destination for establishing companies and EMI license holders in Malaysia.

  • Corporate tax: 3% on trading profits, 0% on non-trading with substantial business activity compliance.
  • No taxes on dividends and interest; exempt for Labuan entities.
  • Agreements with 40+ countries prevent double taxation.
  • No customs duties on exports and imports through Labuan.

These conditions create a favorable economic environment for transactions with electronic money and help attract capital and investment to the region.

Benefits of EMI Registration in Labuan

Registering an EMI in Labuan is beneficial not only because of tax preferences, but also due to additional business opportunities:

  • Labuan excels in registration and licensing processes for financial entities, minimizing delays and enabling swift operations.
  • Labuan's regulatory standards earn global recognition for fairness and stringency.
  • Labuan's advanced financial infrastructure supports diverse services, including electronic money operations.

Conclusion

Registering a license for electronic financial instruments in Malaysia is a detailed process. It involves thorough preparation and careful review of regulatory rules set by the Central Bank of Malaysia. Meeting these requirements is crucial for organizations looking to grow in Malaysia's electronic payments market. By following these steps, businesses ensure legal compliance and establish a solid base for sustained growth in the dynamic fintech industry.

YB CASE helps get electronic money licenses in Malaysia and other countries. We guide you from start to finish, making sure you meet all legal requirements.

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