Zeti Akhtar Aziz: Reflections on financial reform - Malaysia's experience
Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara
Malaysia), at the 2013 China Business News (CBN) Annual Meeting and Finance Summit
"Reflections on financial reform - Malaysia's experience", Beijing, 8 December 2013.
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It is my honour and pleasure to be invited to speak at this 2013 China Business News
Finance Summit. As the globalisation of finance intensifies, the world is becoming
increasingly more inter-connected and integrated. This has largely been due to the trend
towards increased financial liberalisation by most parts of the world. It has been maintained
that such deregulation and liberalisation would facilitate the development of more efficient
and robust financial systems and that it would result in a more efficient allocation of financial
resources across borders. While such financial liberalisation may indeed bring such wide
ranging benefits, it also brings with it increased risks that needs to be effectively managed.
It was for these reasons that Malaysia adopted a conscious effort to put in place the financial
and economic pre-conditions so as to enable us to benefit from such financial reforms
involving the deregulation and liberalisation of our financial system. Allow me to share our
experience in pursuing this agenda. Following the Asian Financial Crisis, Malaysia embarked
on strategies for an orderly development of the financial sector. Focus was first placed on
strengthening the institutional capacity of the domestic financial intermediaries so as to
narrow the performance gap between the domestic and international financial intermediaries.
In parallel with this was the intense effort to develop the domestic bond market.
During this phase of the development of the financial system, significant advancement in the
banking sector was made in terms of capitalisation, risk management and governance
practices, delivery channels and in human capital development in the industry. This paved
the way for the interest rate reform to move to greater market orientation, thereby supporting
a more efficient pricing of financial products and services. The more competitive environment
that it generated also became an important driver of productivity gains, customer centricity
and innovation in the financial system.
Equally important, was the attention that was given to the development of a deep and vibrant
domestic bond market as an alternative channel for the efficient raising of funds, particularly
by the corporate sector. The development of the bond market has enabled better matching of
long-term projects with long-term funds, and by reducing the over-reliance on the banking
system, it has contributed significantly to financial stability. Among the institutions that was
established to support the development of the domestic bond market was the establishment
of the domestic rating agencies and Cagamas, the mortgage corporation. The Malaysian
bond market has since evolved to become the largest in South East Asia to now account for
110% of GDP. This market has since been liberalised to allow foreign corporations to raise
funding in both domestic and foreign currency. In these recent few years, there has been a
number of successful Reminbi bond issuance from our market to finance investment
opportunities in China.
Various other key financial infrastructures were also put in place to enhance the efficient
functioning of the intermediation process of the overall financial system. This included the
infrastructure to support robust payment and settlement systems. In 2012, we introduced
onshore settlement of Reminbi transactions in our real time gross settlement system
RENTAS via a local onshore settlement institution. As part of the development of our
domestic financial infrastructure the Malaysia Deposit Insurance Corporation was establish to
provide a comprehensive deposit insurance and insurance benefit system for the banking
and insurance sector. This institution not only imposes discipline for risk management by the
financial institutions through the imposition of differential premiums based on the risk profile
of institutions, but it also is the resolution authority in the event of failure of a financial
institution.
Underpinning the financial sector growth was also the development of a more robust
surveillance, regulatory and supervisory framework. As the Malaysian financial system
evolved to become more complex, sophisticated and diversified, the regulatory and
supervisory approach has correspondingly evolved from detailed and prescriptive rules to a
risk-based approach that combined greater supervisory judgment and intensity with
highlevel principles of sound practice. This is complemented with effective surveillance that is
forward looking and focused on addressing the risks to overall financial stability.
This decade has also seen the modernisation of the legal framework, that has included the
enactment of two comprehensive laws this year to govern the financial sector under a single
legislative framework for the conventional and Islamic financial sectors. The implementation
of these laws have strengthened Malaysia's financial sector by providing a consistent
approach to regulation and supervision and enhancing the Central Bank's power to take
timely intervention actions in relation to financial intermediation activities that occur outside
the banking system. Following the global financial crisis, such shadow banking systems have
come under greater regulatory scrutiny. Specifically, regulators have been concerned with
the scope that exists for non-bank financial institutions to perform financial intermediation
activities in a way that replicates the systemic risks associated with banking activities, without
being subjected to the same rigor of regulation and supervision that is applied to banks.
In this recent decade, the strengthened institutional arrangements in Malaysia to promote
financial stability have contributed towards addressing this important gap. They include the
establishment of an oversight authority for credit cooperatives, and provisions for the
Malaysia Deposit Insurance Corporation to extend temporary deposit insurance coverage to
instruments of non-bank intermediaries that are similar in nature to deposits. Also important
has been the significant strengthening of inter-agency coordination arrangements to address
potential regulatory gaps. The new legislation has also improved the ability of the Bank to
respond to financial stability risks that can originate from shadow banking activities, including
to issue orders requiring such intermediaries to address any risk identified which could
threaten financial stability. A Financial Stability Executive Committee chaired by the
Governor, which includes the Treasury Secretary, heads of key regulatory authorities and
independent parties as its members may impose macro-prudential measures on these
non-bank financial institutions to prevent the build-up of financial imbalances from this sector.
With these necessary preconditions firmly in place, Malaysia embarked on a gradual and
sequenced approach towards liberalisation and internationalisation. In 2005, Malaysia
migrated to a flexible exchange rate regime at the very same moment that China did. It has
provided Malaysia with greater flexibility to adjust to changing structural conditions in the
region and the global economy. This has been reinforced by the progressive liberalisation of
foreign exchange administration rules which have enhanced business competitiveness and
facilitated larger volumes of trade and foreign direct investment flows. This has generated
greater two way flows in the foreign exchange market and thus promoted orderly conditions
in an environment of highly volatile capital flows. In the financial sector new licences and
foreign equity interests in the banking and insurance sectors have now moved beyond the
prescription of hard limits, to assessments based on the prudential and in the best interest of
Malaysia criteria.
In building a stable and resilient financial system, the Central Bank has accorded greater
emphasis on financial inclusion. This has included enhancing access to the unserved sectors
as well as the introduction of highly innovative delivery channels such as retail outlets and
post offices as third-party agents to widen the outreach of financial services. These have
worked in tandem to ensure that all members of society, including the most vulnerable
groups, have the opportunity to participate in the formal financial system. Concurrently,
continuous efforts are being undertaken to promote consumer protection and education, in
order to ensure fair and responsible market practices and conduct, and that consumers are
better equipped with the necessary financial knowledge to make informed decisions.
Recognising that the development of the financial sector also depends on the availability of
high quality and skilled talent, focus was accorded to the development of human capital
through the introduction of institutional arrangements to provide comprehensive education
and learning programmes for the financial services industry. Towards this objective, the
Central Bank oversaw the establishment of differentiated platforms to meet the diverse
needs of financial services professionals, from the entry to middle management, specialist
and leadership levels. These include the setting up of programmes and institutions such as
the Financial Sector Talent Enrichment Programme, the ICLIF Leadership and Governance
Centre and INCEIF, the global university of Islamic finance.
Malaysia's imperatives for growth and stability moving forward
Our next phase of transformation will continue to promote inclusive access to financial
services, encourage the development of the range of financial institutions, products and
markets that will facilitate and drive the development of new domestic sources of growth, and
accelerate Malaysia's regional and international connectivity. The use of technology will also
be leveraged in this new environment, to enhance the efficiency of financial transactions
through electronic means. The implementation of these strategies will also be accompanied
by an effective regulatory and supervisory regime that is appropriate for a more regionally-
and internationally-connected financial sector.
There has been tremendous payoffs from the development of our financial system, its
restructuring, rationalisation, deregulation and subsequent liberalisation. During the recent
global financial crisis our financial system has remained resilient. Credit flows to support the
economy was never disrupted. Despite the massive and highly volatile capital flows,
Malaysia was able to intermediate these flows. There continued to be orderly functioning of
the financial markets and the overall financial system.
In conclusion, the outcome and success of any reform strategies will depend on the
prevailing circumstances and the state of readiness of the financial system and the overall
economy. As China undertakes its own reforms, it has every potential to emerge stronger
and to continue its economic success that is now a well recognised milestone of this century
and for the years to come.