Adnan Zaylani Mohamad Zahid: Address on sustainable finance
Address by Mr Adnan Zaylani Mohamad Zahid, Assistant Governor of the Central Bank of
Malaysia (Bank Negara Malaysia), at the ADFIM Webinar on Sustainable Financing, 04 August
2021.
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Thank you to the Association of Developmental Financial Institutions of Malaysia for organising
this webinar. I am honoured to be invited to deliver this keynote address. Certainly, the theme of
this webinar is highly current and crucially important. And it looks to grow even more so as we
weather through this unprecedented health crisis and economic downturn.
Acknowledging the diverse audience and role of DFIs in advancing the sustainability agenda
The economic challenges are many and the economic fallout of the crisis are deep and in some
cases worsening. At the global level, some of the forecasted statistics are staggering.
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The global economy is projected to suffer losses up to $8.8 trillion ;
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As many as 150 million will be pushed into extreme poverty by 2021 ;
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Global unemployment would exceed 200 million in 2022 ;
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Women make up 39% of global employment but account for 54% of overall job losses ; and
More than 50 million people were doubly hit in 2020 by climate-related disasters in addition to
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the threats due to COVID .
Most of these indicate an expected regress in our sustainability agenda. On the other hand, there
are claims that the climate has benefitted during this crisis but it has come about in a far than
ideal situation with such high human and social costs. Indeed, as these costs look set to
accumulate further with the ongoing crisis, there is much for us to do.
Most of this, naturally will be led by government. A whole of government approach, whole of
nation, is absolutely necessary in dealing with the challenges. Development Financial Institutions
(DFIs), as instruments of policy and agencies of government, will thus have a critical role to play,
in particular to deal with the economic and financial challenges faced by businesses in the
economy. We are well familiar with the role of DFIs as complementing the market-based and
commercially driven financial institutions. This already calls for DFIs to adopt a balanced
approach to financing, promoting and supporting public interest or development initiatives. Some
would involve higher risks in particular in new ventures or industries or financing those who, at
the margins, are unable to obtain financing under normal commercial terms from financial
institutions. All this while at the same time, managing risks and ensuring long term financial
sustainability. Let's not forget DFIs are also generally required to make a reasonable return on
capital and are answerable for the use of public funds.
In this crisis, we have also emphasised a need to act countercyclically - that is to continue
extending, even expanding financing - when most commercial driven financing takes a highly risk
averse approach. In 2020, Malaysian DFIs rose to this challenge. Financing outstanding by DFIs
grew by 7.7%, outpacing the commercial banks growth of 0.8%. Since 2020, DFIs also
administered more than RM1 billion of funds for the government to the underserved groups of
businesses and facilitated about RM36 billion of Repayment Assistance restructurings to nearly
270 thousand individuals and businesses.
All this is commendable. But while supporting the economic recovery will continue to be a top
priority in the near term, as institutions designed with developmental mandates, DFIs ought to
embrace sustainability as their existential purpose. One could argue that the developmental
mandates of DFIs, which preceded the foundation and adoption of the sustainability goals had
already reflected them. Ending poverty, zero hunger, reducing inequalities, gender equality,
industry and economic growth, climate and environment and others are by and large, goals and
sectors that DFIs are already involved in. They are not new to DFIs. However, by embracing
sustainability, this would heighten the purpose and sharpen that focus for DFIs to enhance the
delivery of these mandates and play a key role within the system to support our economy
towards a better future. This brings me to my first key point.
DFIs can help re-shape the economy towards prioritising the adoption of sustainable agenda as
part of the post-pandemic rebuilding efforts
DFIs, can help re-shape the economy through sustainable finance as part of the post-pandemic
rebuilding efforts. This entails using financing to nudge businesses and consumers to adopt
practices that promote resilience and good governance while growing sustainably and protecting
the environment. The need for this is undeniable and inevitable. Increasingly, we see more of
Malaysia's industries and companies face scrutiny and challenges in their international business
due to unsustainable and questionable practices.
As an example, let's consider the palm oil industry. This has been one of the largest industries
that has contributed immensely to the country's economy for quite some time. Yet, it's an
industry that needs to overcome real and perceived unsustainable practices and reduce its
impact on the environment. If left unaddressed, this could threaten the long-term viability of this
sector, and threaten domestic employment and industry. Palm oil players need to transform
many aspects of their operations to achieve sustainability, and DFIs can play a catalytic role in
this transformation.
Firstly, DFIs can prioritise financing agritech to enhance the climate resilience of the palm oil
industry, promote trust in terms of product origin and upscale the value chain of palm oil.
Some examples of these technologies are; blockchain application which can improve
traceability of palm oil inputs and contributing towards better acceptance of palm oil produce
from Malaysia; precision farming which benefits the environment through more targeted use
of inputs that can reduce wastages from excess applications; as well as financing new
growth areas that Malaysia is developing competitive advantages in, such as biodiesel and
green oleochemicals.
Secondly, DFIs can consider providing sustainability-linked loans to encourage smallholders
to work towards adopting relevant sustainability certifications such as RSPO and MSPO. As
more plantations embrace sustainability practices, this will enhance the industry's
international reputation and may even elevate Malaysia to be a global leader in sustainable
palm oil. At the same time, the income and livelihood of smallholders would also improve as
their outputs benefit from better market access upon being certified. DFIs could consider
adopting the Value Based Intermediation Assessment Framework or VBIAF sectoral guides
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on palm oil , developed by the Islamic financial industry which provides guidance on
overlaying credit or investment decisions with ESG considerations.
Thirdly, DFIs can onboard or nudge plantations to work towards enhancing the living
conditions of estate workers by incorporating this as part of the credit assessment process.
This ensures palm oil plantations meet the basic needs of workers i.e access to safe
drinking water and proper housing.
This is a specific use case where sustainable finance can contribute towards strengthening
Malaysia's sustainable economic growth but in order to execute this well, DFIs need to work with
other partners across the public and private sectors, which leads me to my next point.
DFIs should be creative in designing innovative funding structures and solutions that leverage on
the capacity of the private sector and knowledge from other partners, including peers and the
Government.
DFIs are often constrained by the size of their balance sheet or capital and take on outsized risks
in specific sectors in serving their mandates. On the other hand, the private sector may have
larger financial capacity but is traditionally more inclined to support low-risk and well-served
customers, whilst high risk customers are either left out or are charged quite expensively to
buffer for uncertainties.
In overcoming these challenges, DFIs ought to collaborate with other entities in mobilising capital
and diversifying risk across different institutions, thus providing an opportunity for the private
sector to participate in these segments within the comfort of their risk tolerance. In parallel, DFIs
need to continuously build their internal expertise and deepen their understanding of the sectors
or segments through regular engagement with the industry, as well as enhance industry
analysis, leveraging on access to data within the government. This would augment DFIs'
credibility to lead and crowd-in the private sector towards participating in innovative funding
structures.
There are two noteworthy solutions that DFIs may wish to find ways to adapt to the local context:
Firstly, a risk-sharing facility that can catalyse private capital. This entails offering
instruments that enhance the private sector's willingness to finance high-risk segments. For
example, USAID partnered with the Medical Credit Fund (MCF) in Africa in providing USD 1
million catalytic first-loss capital which successfully drew in USD 17 million debt financing
from impact investors. MCF, in turn, worked with African financial institutions to provide
loans and technical assistance to healthcare SMEs in providing quality healthcare services
as well as ensuring business sustainability.
Secondly, the use of blended finance while offering financing instruments that promote
customer resilience. Blended finance typically involves mixing different sources of funds to
reduce overall borrowing costs. With the lower cost of funds, DFIs may wish to explore
offering instruments that can either enhance the bankability of customers or lower the
financing cost for customers. During the pandemic, the British Business Bank (BBB)
administered a blended equity financing model to support start-ups that may otherwise be
shunned by commercial banks. Under this model, eligible start-ups received a convertible
loan with a matching amount based on equity raised prior to the pandemic. The convertible
loans will be converted into equity upon exit or maturity with no repayment expected
throughout the tenure.
Closer to home, one of the Malaysian DFIs has recently made headway in sustainable finance
through an inaugural issuance of sustainability Sukuk. The Sukuk has been well received by the
market, oversubscribed by more than 3 times, with the proceeds going towards supporting the
Government's sustainability goals by financing SMEs involved in green projects identified under
the Green Technology Master Plan Malaysia. Other DFIs are also preparing to issue more
sustainability Sukuk which will also deepen the sustainability bond market in Malaysia. This
development augurs well for the creation of a vibrant fundraising market that will better support
the economic recovery and financing of sustainable and impact projects.
Frameworks are in place to facilitate the adoption of sustainable finance by FIs (climate change
and principle-based taxonomy, Performance Measurement Framework (PMF) and Value-Based
Intermediation (VBI))
My third point is that various frameworks are now being put in place to empower DFIs in
sustainable finance, and DFIs can already step up efforts in this space. For example, BNM's
climate change and principle-based taxonomy facilitates all FIs to be part of the driving force that
promotes orderly transition towards a low-carbon future.
Other frameworks focus on creating incentives that would shape DFIs' behaviour to be more in
tune with their developmental roles. The adage "what gets measured gets managed" reflects the
importance of building a structured and holistic measurement framework for DFIs. This will
support DFIs to pursue national economic and social well-being while simultaneously support an
orderly transition of the economy towards achieving sustainability goals. In this, it is particularly
pertinent for DFIs to advocate accountability, transparency and efficiency since DFIs are also
public institutions.
Towards this, DFIs that are part of the Value Based Intermediation or VBI community are
encouraged to apply impact-based disclosure on value-based practices and financial solutions
contributing to the triple bottom line (people, planet and prosperity). Institutions are required to
disclose an optimal set of information to stakeholders with an objective to generate intended
market discipline and promote stakeholder activism.
Similarly, the Performance Measurement Framework or PMF is anchored on the concept of
additionality creation by DFIs. Additionality is defined as the positive impact attributable to DFIs
beyond purely commercially-driven considerations, and this resonates well with the intent of
sustainable finance. Under the framework, an achieving DFI creates additionality by addressing
market failures and creates values for the economy.
This could be in generating employment, increasing income level as well as creating
economic spill-overs for local communities;
It could also be in successfully mobilising private investments or financing to support
strategic or underserved sectors or markets through innovative financial instruments; or
Creating an enabling environment for their customers to flourish by actively contributing to
the sound design and implementation of public policies.
During this journey of PMF, one of our Malaysian DFIs has been piloting an impact assessment
framework that was jointly developed with the World Bank, that provides a holistic and structured
end-to-end assessment which includes accounting for selected ESG aspects. This DFI has
reported some preliminary 2020 results wherein 2,600 jobs were created and an estimated 2,628
GWh of clean energy was produced, among other reported impacts. We look forward to other
impacts and achievements garnered through the delivery of sustainable finance.
A paradigm shift that fosters collective action and cultural change is the impetus to a successful
implementation of sustainable finance.
Finally, it's worth reminding that while regulation can be an important driver in elevating and
mainstreaming sustainable finance, it is the sum of many parts which can truly create a seismic
change. DFIs should look for like-minded partners across the public and private sector to
collectively advance the national goals of achieving sustainable development. We see industry
collaboration and collective action as a critical component of achieving higher, wider and more
impactful societal and economic goals. This is evident through the work done under VBI where
several DFIs are part of the community of practitioners or COP. The COP pools resources and
expertise, enabling members to accelerate learning as well as drive several common initiatives
together such as the issuance of VBI sectoral guidelines.
Another important driver for sustainable finance is the need for it to be institutionalised and
embraced throughout the organisation, with clear leadership or a tone from the top. This will
ensure that a clear message resonates throughout the organisation of the commitment and
intent that can then drive organisational initiatives, supported by the necessary infrastructure and
systems to create change.
With that, I wish you all a productive webinar and all the best in this important journey.
www.worldbank.org/en/news/press-release/2020/10/07/covid-19-to-add-as-many-as-150-million-extreme-poorby-2021
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news.un.org/en/story/2021/06/1093182
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www.mckinsey.com/featured-insights/future-of-work/covid-19-and-gender-equality-countering-the-regressiveeffects
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public.wmo.int/en/media/press-release/climate-change-indicators-and-impacts-worsened-2020
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aibim.com/contents/upload/VBIAF_Sectoral_Guide_Palm_Oil_Public_Consultation.pdf