Muhammad bin Ibrahim: The way forward for development financial
institutions
Opening address by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank
Negara Malaysia), at the Global Symposium on Development Financial Institutions "The Way
Forward for Development Financial Institutions", Kuala Lumpur, 19 September 2017.
* * *
Selamat datang" and a very warm welcome. Thank you for the opportunity to speak today at this
important gathering to discuss the way forward for development financial institutions.
In 2012, the music video "Gangnam Style" by Korean pop artist PSY took the world by storm.
Being the first video to record more than 1 billion YouTube views, its infectious dance moves
have become universally recognised, transcending borders and social status.
The video marked the beginning of the rise of the Korean cultural phenomenon known as Korean
Wave or "Hallyu", a new growth area for its economy. Today, the export of Korean culture
content, including films and music, is estimated at USD83.2 billion.
In under a decade, the sector grew to contribute 0.7% to South Korea's GDP in 2011, supported
over 67,000 jobs and generated USD3.3 billion in tax revenues.
This extraordinary rise of the Korean Wave can be attributed to the growth of investment in the
creative industry. The industry was boosted by the government's strategy to prioritise the sector
as an engine of growth after the Asian Financial Crisis. The Korean government had earmarked
1% of the national budget for development financial institutions to kickstart the sector. Following
in their footsteps, domestic conglomerates like Samsung and Daewoo started investing in film
financing and video production.
Korea's experience above illustrates an important lesson for economic development. Properly
structured development institutions can be a potent agent of change for private sector
investment, drive growth, and forge inclusive societies. It can do a lot of good. But in reality, the
real challenge is how to replicate the key factors that contribute to the success, and to achieve
this more consistently across different political, economic and social contexts.
With this in mind, let me outline the crucial factors that might help us understand this
phenomena:
a. First, a mindset shift to contribute more broadly to catalyse new growth areas;
b. Second, the need to strengthen accountability frameworks;
c. Third, the continuous cultivation of a strong culture of innovation; and
d. Fourth, a robust corporate governance.
Stepping up to the plate by further developing the non-lending roles
More than ever, development financial institutions need to step up to promote new growth areas.
They should perform a broader role to stimulate economic activity that would not otherwise take
place. They could also improve the quality and scale of such activities. They can provide unique
value propositions in terms of advisory and nurturing new growth sectors to become profitable
and thus, attractive for private investors. I will highlight two successful examples.
Firstly, in the Korean Wave example, they were the first to spearhead investments in the film and
music industry. At that time, commercial banks did not have the capability to assess the viability
of the industry, nor accept the intangible assets offered as collateral. It was only much later,
when the industry recorded healthy profits that private investments followed. The success
speaks for itself. Between 2008 and 2011, private domestic and foreign investments in the
culture content industry had quadrupled to more than USD 157 million.
The second example is Uganda's first ever private bond issuance by a multinational mobile
telecommunications company. The provision of a financial guarantee by a development financial
institution helped to connect Uganda's poor and low income population in more than 20 rural
communities by enabling access to telecommunication services. This culminated in the telecom
industry that now provides 135,000 jobs for Ugandans and contributes 1.4% of its GDP.
Taking lessons from these examples, I believe that development financial institutions need to
possess three key traits to promote and champion the new growth areas:
a. First, they must have specific mandates to develop and prioritise niche segments identified
to be of strategic and economic importance. These will give them legitimacy with funders
and partners;
b. Second, affiliations with Government, ministries and agencies to facilitate the design of
appropriate government support. This will enable them to take higher risks; and
c. Third, a broader focus on socio-developmental goals allows risk-return trade-offs to take into
account positive externalities for the economy.
The lessons we learnt imply that leaders must recognise and align their priorities to steer their
respective institutions to contribute more broadly and strategically to economic development.
This will include playing a more active role in technical assistance, and serving as key
repositories of specialist knowledge, resource aggregators for strategic development projects
and credible advisers to the Government.
These 'additionalities' are important ingredients in ensuring the effectiveness of development
financial institutions.
Strengthen accountability frameworks through performance standards that emphasise
development additionalities
While the notion of additionalities is not new, their link to how the development institutions are
managed and governed remains generally weak. As a result, their important contributions are
often not translated into tangible outcomes that are seen and felt by the stakeholders and the
public at large.
This leads me to my second point. Traditionally the achievements of development institutions
have always been measured predominantly by the volume of financing provided to the targeted
sectors. There are several reasons for this. Non-financial development additionalities are harder
to quantify the cause and effects are also not always clear. As such, more effort and investments
are required to collect the data for measuring socio-economic and development outcomes that
are associated with such programmes.
However, this must not hold back efforts for us to do better. They are a major channel for
directing development, both at an international and domestic level. It is therefore, imperative that
there is confidence in the effective and efficient use of funding aid to achieve the intended
development goals. Providing this confidence can be enhanced by creating a broader and robust
mechanism to measure performance.
Performance measurement systems that accord greater quantification of development impacts
will strengthen accountability frameworks, with many attendant benefits. It will further reinforce
the Government's developmental agenda. It will provide a mechanism to address market failures.
It will ensure that funds are allocated to the right sectors within the economy. Effectively done, it
will increase the development financial institution's credibility, reputation and potential as key
players in advancing socio-economic development.
In Malaysia, we are encouraging these institutions to improve performance measurement
frameworks to better capture the development impact of business activities.
A number of them are already implementing frameworks to provide broader performance
measures for value-based intermediation activities (VBI) which focus on the impact on the
economy, community and environment. Of particular importance, they need to measure granular
outcomes such as creation of good paying jobs and expansion of capacity and capability.
Another commendable example is the performance measures published by the Industrial
Development Corporation of South Africa (IDC), which linked its activities to the creation of more
than 340,000 jobs in the economy between 2013 to 2017. Out of this, 10% were based in rural
areas. Approximately USD3.3 billion of IDC's financing-related activities could also be traced to
the specific economic empowerment of targeted groups such as youth and women.
Cultivate a strong culture of innovation within to increase value-add and catalyse private
investment
Development institutions should be leading innovators in providing solutions to stimulate
investment and entrepreneurship especially in uncharted sectors. In my view, a key part of their
contribution to development has to be in evolving non-traditional approaches to encourage
investments in targeted sectors, precisely because conventional approaches have not
responded adequately.
Indeed, they should be providing the richest environment for adaptive learning, creativity and
innovation to effectively serve their mandates. Innovation is also being supported through a "test
and learn" approach which allows for experimentation by financial institutions in close
coordination with regulators. This approach promotes a deeper understanding of risks inherent in
new solutions and products, and the appropriate ways to control them. The introduction of the
regulatory sandbox in several countries, including Malaysia, to support regulatory flexibilities for
the deployment of FinTech reflects such a "test and learn" approach. Development financial
institutions should use technology to advance the cause of their mandate.
To be innovative, development financial institutions must be able to attract and retain good
leadership and talent. KfW in Germany and Business Development Bank of Canada (BDC), two
global development financial institutions, were recognised as being among the top 100
employers in their respective countries in 2017. Well-designed talent strategies, and an
environment that nurtures experimentation and adaptive learning with appropriate oversight and
controls are key. These require bold and visionary leadership.
Another way to promote creativity is to create a facilitative environment for public private
partnerships provides the best prospects to drive innovative strategies. With advances in
technology, the scope and potential for such partnerships have increased exponentially. We see
this in partnerships between mobile network providers and financial institutions in sharing data
which can increase financial inclusion among borrowers that do not have a prior credit history.
Partnerships that leverage on e-marketplaces and social media platforms also have enormous
potential to increase the reach and development impact through the deployment of innovative
strategies.
Enhance corporate governance
For many institutions, the ability to significantly increase their impact is closely tied to issues of
corporate governance. Narrowly defined financing targets and links between business and
Government have led to suboptimal resource allocations, increased moral hazard, and market
distortions. These can pose a drag on the economy and the overall development agenda.
Broader confidence can also take a hit on suspicion of undue preference in extending financing,
making it more difficult to mobilise resources for development.
The critical appraisal and monitoring functions are largely shaped by the strength of its corporate
governance. These require competent and professional boards to be installed, clear rules of
engagement with their stakeholders, and stronger performance management standards that are
aligned with development outcomes.
Expectations and directions for Malaysian Development Financial Institutions
I would also like to share some reflections on expectations and directions for development
financial institutions in Malaysia
I am well aware that development financial institutions around the world, including in Malaysia,
face unique challenges. In many ways, they have to manage and balance responsibilities that are
substantially more complex than institutions with narrower profit-making mandates.
In Malaysia, these institutions have embarked on initiatives over the last decade and a half to
build greater financial resilience and stronger foundations for sound management. This has
enabled them to pay an important counter-cyclical role during downturns, and to support
economic activity in targeted segments.
However, more effort is required on critical appraisal of their development impact. It is much
needed to sharpen the development focus, redirect and amplify the impact of financing activities.
It will also provide the impetus for them to focus on other interventions that can increase their
impact.
We intend to work with their leadership and other stakeholders in Government in the coming
months to address a more focused delivery of mandates. In this respect, improving performance
measurement frameworks and increasing transparency in the operations will be important areas
of focus. We need to measure the right things, measure outcomes that matter and measure
mandates that are relevant. This needs to be driven by a clear vision and strong leadership, and
uncompromising governance.
We expect our development financial institutions to operate with the highest level of
professionalism and integrity at all levels of the organisation. Indeed, we expect that given their
mandates, they would lead in demonstrating how commercial principles can be fully reconciled
with responsible finance and public interests.
There are many instances where development financial institutions can play a catalytic role in
economic development. They can open new frontiers in discovery and exploration; accelerate
poverty eradication and mitigate global climate change.
This ought to be a noble aspiration. We share a common vision for them to contribute towards
the growth potential of our economies and consequently improve the wellbeing of the people.
We have an excellent program ahead to help us move in this direction. I hope it will sow the
seeds for individual and collective actions that will both transform development financial
institutions and enhance their impact.