• Central Bank of Malaysia announces AI financial regulation framework and open finance, tokenisation policies.
• Discussion paper seeks industry feedback on responsible AI adoption in financial services.

As financial regulators worldwide grapple with the challenge of overseeing artificial intelligence deployment in banking and finance, Malaysia has taken a step forward with Bank Negara Malaysia’s publication of a discussion paper on AI governance, initiating a ten-week consultation period that will shape how banks, insurers, and fintech companies deploy machine learning technologies.

The regulatory framework addresses a global challenge facing central banks from Singapore to the European Union, where policymakers balance innovation with financial stability as AI adoption accelerates in the sector.

Governor Abdul Rasheed Ghaffour used the MyFintech Week event to outline a broader regulatory roadmap extending through to the end of 2025, including forthcoming exposure drafts on open finance and asset tokenisation that represent Malaysia’s collected approach to emerging financial technology oversight.

Three-pronged regulatory approach

Speaking at Sasana Kijang on August 5, 2025, Governor Ghaffour outlined BNM’s immediate regulatory priorities. “We have released a Discussion Paper on Artificial Intelligence today, outlining our regulatory and developmental approach, including priority areas for industry-led collaboration and responsible adoption of AI in financial services,” he said, during the opening ceremony of MyFintech Week.

The regulatory roadmap extends beyond AI. By year-end 2025, BNM will issue an Exposure Draft on Open Finance, establishing a framework for customer-permissioned data sharing in Malaysia’s financial ecosystem. And, a discussion paper on Asset Tokenisation will follow, addressing potential use cases and safeguards for the adoption of tokenisation.

The coordinated approach reflects what Minister of Finance II Amir Hamzah Azizan described as the “F-I-N-D agenda” – Foster, Invest, Nurture, and Democratise – emphasising responsible innovation and shared infrastructure development in Malaysia’s financial sector.

AI adoption momentum in Malaysian finance

The timing of Malaysia’s AI financial regulation discussions aligns with industry adoption trends. According to BNM’s AI Survey 2024, 71% of banking institutions and development financial institutions had implemented at least one AI application by the end of 2024, up 56% on the previous year. Insurance and takaful operators showed similar growth, with AI adoption rising from 58% to 77% of companies.

According to the discussion paper unveiled at MyFintech Week, “Most AI applications currently in development or expected to be deployed in the near-term are designed to augment rather than replace human decision-making.” Simply put, financial service providers are primarily focusing on customer analytics, internal operational improvements, and fraud detection rather than core financial risk functions.

The AI survey also revealed that over 60% of banking institutions and insurance operators view AI as a strategic priority for the next one to three years, with particular interest in generative AI applications for internal process improvements.

Regulatory philosophy: Technology-neutral yet targeted

BNM’s approach to Malaysia’s AI financial regulation emphasises parity, proportionality, and neutrality. “Activities bearing the same types of risks will be regulated the same way, while regulatory expectations and supervisory rigour are calibrated to be commensurate with the materiality and likelihood of risks,” the discussion paper states.

The central bank maintains that existing technology-agnostic, outcome-focused regulatory requirements remain broadly adequate for current AI applications. However, BNM acknowledges that emerging AI use cases may require specific regulatory attention as the technology evolves. “As AI technologies and state of adoption in FSPs continue to grow and evolve, we recognise that AI use may introduce new risks that are not adequately addressed by the existing regulatory framework,” the paper states.

Industry collaboration and responsible innovation

The discussion paper emphasises “win-win-win” use cases – AI applications that benefit consumers, enhance outcomes for service providers, and align with regulatory objectives.

Examples include AI-driven fraud detection systems that reduce false positives and protect consumers, and personal financial management tools that improve financial litreacy through consumer-permissioned data analysis.

Leading financial institutions are already implementing specialised governance structures for AI projects. The survey found that institutions with more AI projects demonstrate greater confidence in managing concerns around staff expertise, model interpretability, and regulatory uncertainty.

BNM encourages industry-led collaboration through the Chief Risk Officers’ Forum, which developed an AI Governance Framework outlining responsible AI principles, including fairness, accountability, transparency, and reliability for Malaysian financial institutions.

Economic context and digital infrastructure

Malaysia’s economic fundamentals support this regulatory advancement. BNM has revised GDP growth projections to 4%-4.8% for 2025, while inflation is expected to remain moderate at 1.5%-2.3%. The ringgit has appreciated 5.55% against USD as of August 4, 2025, reflecting improved investor confidence in Malaysia’s structural reforms.

The country’s digital infrastructure foundation strengthens the case for comprehensive Malaysia AI financial regulation. With 97% of Malaysian households having internet access and 98% with smartphones, the financial sector considers itself well-positioned for AI adoption.

Malaysia currently ranks second globally in QR payment adoption, with DuitNow becoming integral in many daily transactions. Digital banks, digital insurers, and takaful operators are expected to accelerate digital-native model adoption in the industry.

Feedback timeline and implementation

BNM seeks comprehensive industry feedback on the AI discussion paper through to October 17, 2025. Responses should be submitted to aipolicy@bnm.gov.my with the subject line “AI in the Malaysian Financial Sector: Feedback from [name of institution/individual].”

The central bank specifically requests input on whether formal sector-specific AI definitions would benefit the industry, regulatory clarity, and AI trends that could shape the sector over the next 3-5 years.

Balancing innovation with systemic risk

The discussion paper’s most sobering assessment concerns the potential for AI to create new forms of systemic risk. “Convergence by the financial sector on the use of the same foundation models and/or the same datasets may introduce or amplify interconnections among FSPs,” the document says, highlighting how widespread adoption of similar AI systems could trigger synchronised market reactions during periods of volatility.

The concern reflects a deeper regulatory philosophy emerging in global financial centres: that AI’s promise of enhanced fraud detection, improved financial inclusion, and operational efficiency must be weighed against the possibility of creating more interconnected and potentially fragile financial networks.

BNM’s approach appears calibrated to navigate the tension through a regulatory sandbox. The central bank’s emphasis on “win-win-win” use cases – those benefiting consumers, financial institutions, and regulatory objectives simultaneously – suggests a pragmatic framework that prioritises demonstrable value over technological novelty.

The October 17 consultation deadline will test whether Malaysia’s financial industry shares this approach or wants to push for a more aggressive AI deployment.

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