Zeti Akhtar Aziz: The Malaysian banking industry - gearing up for excellence
Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Malaysian
Banking & Financial Services Summit 2002 - "Gearing up for excellence", held in Kuala Lumpur,
20 May 2002.
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Ladies and Gentlemen,
The drive for excellence in the banking industry is a matter of priority, given that the well being of the
banking sector is integral to the health and prosperity of the Malaysian economy. The advanced
progress achieved in the restructuring and consolidation of our banking system in the recent year, has
provided us with the strong foundation on which to develop and strengthen further the banking sector
so that, it is better positioned to respond to the new and changing requirements of the economy and
better abled to become more efficient and competitive. The focus of our strategies has therefore
shifted from financial restructuring to that of capacity building and to ensuring the soundness and
stability of the system. In essence, our drive for excellence in this phase of our development of the
financial sector is to achieve an enhanced level of effectiveness and competitiveness in the banking
sector. The issue before the banking industry is therefore the strategies and actions needed to gear up
for this excellence.
Ladies and Gentlemen,
It is my pleasure to be here again at this year's Malaysian Banking and Financial Services Summit
organised by ASLI. This Summit indeed provides an opportunity for bankers and the private sector to
discuss the issues facing the banking industry. It is now just over a year since the release of the
Financial Sector Masterplan. It is therefore also a good time to undertake stock taking. Today, I would
like to take the opportunity to discuss the progress that has been achieved over the recent year. I
would also like to discuss some of the critical issues in the strategies that are being adopted by the
banking institutions in charting their strategic course to enhance capacity and capability to achieve
improved effectiveness and competitiveness.
During the period of slower economic growth in 2001, following the global downturn in the technology
sector, the banking sector clearly demonstrated its resilience and underlying strength. During this
period, domestic sources of growth was important in sustaining the economy. Access to financing in
this environment was therefore particularly important. The strengthened position of the banking sector
in terms of quality of portfolio, capitalisation and profitability enabled them to continue to perform their
intermediation function without disruption. The banking sector generally remained profitable and
financially sound during this period. At the end of this first quarter, the risk weighted capital ratio was
sustained at 12.5%. Profitability of the banking industry had also continued for the third consecutive
year since the Asian crisis. While profits for the calendar year 2001 was affected by the higher level of
provisioning during the year, the banking system has recorded a higher profitability of RM 2.4 billion in
the first quarter of 2002. This represented a 72.3% increase over the preceding quarter. It reflected the
lower loan loss provisions and the lower overhead expenses during the period.
Of importance is that financing activities during this period was sustained. Financing by the banking
system increased by 5.2% in 2001. Consumer credit extended by the banking system rose by 11.9%
supporting further the strong consumer spending. Similarly, loans for the purchase of transport
vehicles recorded a strong growth of 27.4% while loans for the purchase of residential property
expanded by 9.3%. There was also strong demand for loans by the retail sector reflecting the positive
response to the low interest rate environment and the fiscal stimulus measures to spur the domestic
economy. Loans disbursed to the manufacturing was also high accounting for 27.7% of the total loans
disbursed.
Important aspects of enhanced effectiveness and competitiveness of the banking institutions is
whether there is enhanced access, convenience, timeliness, and customised service, and whether the
treatment by the banker and the quality and price of the service has improved. The changing nature of
the industry has forced banking institutions to augment traditional product offerings with new products
and services designed to be more solution oriented. However, in most cases, there are barriers, or
reluctance, to phasing out the older products. The result is a widening of the total product array and
confusion for customers and amongst employees. Competition is forcing many banks to take a
defensive posture. In many instances, the banking institutions do not have the financial information
systems capable of measuring the true profitability of individual products and services. There needs to
be an ability to monitor and identify the products and customer relationships that may make a
questionable, or even negative, and those that contribute to earnings.
As customers become increasingly aware of alternative solutions, institutions will understandably feel
compelled to fill gaps in their offerings to maintain relationships. The critical success factor will be to
ensure that this is done at a profitable pricing point - and that the addition of new products does not
decrease the profit contribution of existing products and services. For these reasons, it will become
increasingly important to have a comprehensive product or service profitability measurement system.
A significant progress achieved in the recent year, is the enhanced network of delivery channels over
and above the network of branches throughout the country. Eight domestic banking groups are now
offering the full range of banking services through the internet. In addition, four foreign banks are
offering transactional internet banking services.
Malaysia has had significant foreign presence in our banking system since the 1880s. Unlike several
of the East Asian economies that have liberalised only recently, Malaysia has always had a significant
foreign presence that has represented an important benchmark against which the domestic banks can
be measured. While the domestic banking institutions have moved in a deliberate manner to build up
their capabilities to expand and provide new services, foreign banks have for the most part been able
to move much faster. The more innovative foreign banks have in fact continued to grow their business
despite the branching restriction. They are able to leverage on the research and development
initiative, expertise and off-the-shelf products or inherit new delivery systems already tested by their
parent banks. As such, the foreign banks have generally been better abled at identifying and reacting
to changes in the market much faster than most domestic banking institutions. They are able to open
new distribution channels that operate beyond the traditional delivery methods for financial services.
Using new delivery systems and largely relying on new technologies, foreign banks have generated a
more competitive environment for the domestic banks. Progress has nevertheless been achieved as
the gap between domestic banks and foreign banks in terms of return on assets has narrowed. On an
annualised basis, the ROA of the domestic banks has improved to 1.2% for the first quarter this year
compared with 1.5% for the foreign banks. The gap was 1.1 percentage points in June last year. More
importantly, the ROA of the top quartile of the domestic banks is even higher at 3%.
Ladies and Gentlemen,
In these competitive and challenging times, excellence in marketing capabilities, innovative and
efficient distribution network, product development capabilities and customer relationship and care
require the ability to harness these different competencies, formulate a coherent enterprise-wide
strategy, that is then executed effectively. For that to happen, banks have to look within their
organisations for the answers. Before resources are allocated, before a marketing direction and
strategy is established, before the organisation is restructured, the bank needs to decide what its
strategic business will be within the context of its markets - exactly what type of financial service
provider it will be.
As part of the efforts to enhance efficiency and thus alleviate the level of competitiveness, significant
strategies were initiated during the year. This included the consolidation, the rationalisation of common
functions and operations across institutions in the group, outsourcing of non-core activity and
leveraging on cross- selling of the products and services within the group. Following the consolidation
of the 54 domestic banking institutions into ten banking groups, there was significant rationalisation of
the wide range of common functions and operations across institutions in the group. Six banking
groups have also now leveraged on cross-selling of their products and services across institutions in
the group.
A further impetus towards achieving this would be the merging of the commercial banking and finance
company businesses in the banking group into one single entity. In this phase of development of the
financial system, the commercial bank in the banking group would hold two licences, a commercial
banking licence and a finance company licence. Under this arrangement, the domestic commercial
banking institutions would in addition to its banking business, be able to undertake finance company
business. Commercial banks would therefore be able to leverage on the opportunities presented by
the two licences to take advantage of economies of scale, diversify and strengthen their earning base
and create an enhanced market presence.
Other areas of improvement in respect of operational efficiency was in terms of the average core
system downtime which showed that for the first quarter this year, seven domestic banks did not
experience any computer downtime or disruptions in their payments system matching the performance
of the foreign banks. Of significance is that in the operations of the ATM networks where seven
domestic banks reported downtime of not exceeding 2 hours compared to four foreign banks. In terms
of turnaround time for retail loan applications, an indicator of customer service standards, during the
final quarter of 2001, the top quartile domestic banks took 2 days on average to approve a housing
loan application compared to 2.5 days taken by the top quartile foreign banks. Meanwhile, lost credit
cards were replaced within a day for both the domestic and foreign banks in the top quartile.
While the gaps in operational efficiency and productivity have improved, there remains great scope for
further improvement particularly in areas where the domestic banks are evidently behind the foreign
banks. For instance, productivity standards of the counter personnel as measured by the number of
counter transactions per counter employee for the domestic banks averaged approximately 5,000
compared with 11,000 for the foreign banks. Meanwhile, the number of domestic banks that did not
experience any disruption in their retail deposit and loan initiation systems is significantly lower than
that of the foreign banks. In terms of the time taken to approve new credit card applications it
averaged 8 days for the domestic banks compared with 6 days for the foreign banks.
As can be seen from the scorecard, the consolidation programme for the domestic banking sector was
a necessary pre-requisite to enhance the sector's capacity to compete. Size alone however, is not a
sufficient condition that will result in producing efficient and competitive banks and it does not offer
guarantee of success. Being a large bank is however, an important enabler to achieving enough scale
to be able to invest in cutting-edge technology and management systems and to attracting the talent
required to compete with the best players in the market. Domestic institutions need to be able to meet
the range of products offered by foreign competitors. But the larger scale and wider range of activities
will demand stronger management teams. With the completion of the merger programme in December
2000, the banking groups are at various stages in building up their management team and enhancing
corporate governance. A number of measures have been implemented to ensure that banking
institutions' Boards and key committees have sufficient representation of independent directors and
that the Boards are encouraged to appoint qualified professionals to run the banks. Towards this end,
Bank Negara has liberalised the remuneration package of the chief executive officers of banking
institutions and left it to the Boards to formulate appropriate packages to attract the necessary talent
and determine their remuneration package.
In the final analysis, a more competitive banking system should produce benefits to their customers
and the business in terms of easy access, quality choices and competitive prices. An indicator of the
improved level of competitiveness has been the narrowing of margins. During the year 2001, gross
interest margins of banking institutions have narrowed to 3.86% for the commercial banks from 4.3%.
This reflected the larger reduction in the average lending rate vis a vis the average cost of funds.
Competitive interest rates were particularly evident for mortgage and hire purchase loans reflecting
strong demand for credit for these sectors. The competitiveness of the domestic banks in terms of the
gross interest margin has also improved. The gap between the domestic banks and foreign banks has
narrowed from 0.92 percentage points as at the beginning of year 2000 to 0.69 percentage points as
at the end of 2001.
Ladies and Gentlemen,
Banks which do not make investments to take advantage of the new technology may find themselves
losing customers to the better-quality or lower-cost products of banks that do. Investing in IT however,
entails high cost and an uncertain payoff. The changes brought about by IT - new products, more
sophisticated customers, changing cost structures, and enhanced competitive pressures - have all
combined to transform the structure of the banking industry. And with further development of new
technology, the industry will likely continue to evolve. Advances in IT have also resulted in new
database technology and data-mining techniques that can expand the range of services that banks
may offer their customers. The winners will be those who are able to harness on the capability of ICT
in making strategic decisions - in terms of enabling better alignment of businesses, enhancing
organisational capacity and capability such as in risk management, and building better customer
relationships. Today, decisions on ICT investments demand a more thorough assessment, extending
beyond the cost implications, to include better human resource redeployment, more efficient work flow
process and system interface, expandability of the technology platform and the level of complexity to
users and customers.
As banking institutions continue to adopt greater sophistication in the application of ICT, efforts must
also be intensified to develop ICT-savvy employees and to increase customers' understanding and
acceptance of the new approaches. While the efficiency of electronic means of doing banking, such as
electronic kiosks and internet banking is valued, the need for personal attention cannot be ignored.
While being engrossed in the technology race this is a factor that should not be neglected. Banking
business after all is about cultivating relationships, which will become more challenging as customers
become more well informed and knowledgeable as they move up the income curve.
Ladies and Gentlemen,
In this period of rapid change, where change is the only constant, the successful organisations will be
those that are able to recognise and identify the forces of change and how it affects them and make
the required internal adjustments in response. This is by no means an easy task. Change mandates a
need to create a new organisational mindset, capable of identifying opportunities and responding to
them. Such organisations will be those comprising individuals with a clear sense of mission and
empowerment and in which every level of the institution is motivated and focussed on achieving a
consistent set of corporate objectives. In a service organisation, it will always be the type of talent that
is hired and retained that will make the difference. This is perhaps the greatest challenge facing banks.
The level of knowledge and expertise is vital to achieving excellence in providing the required
services. Currently, the skills and expertise are insufficient compared to the global providers.
In assessing how well a customer is served, quality is a key factor especially when dealing with
service operations. The role of quality, and its inter-relationships with operational aspects of a service
organisation has been expressed in what has been described as the "service-profit chain" as follows:
(i) profit and growth are stimulated primarily by customer loyalty; (ii) loyalty is a direct result of
customer satisfaction; (iii) satisfaction is largely influenced by the value of services provided to
customers; (iv) value is created by satisfied, loyal and productive employees; (v) employee satisfaction
results primarily from high-quality support services and policies that enable employees to deliver
results to customers.
Superior insights on customer needs will be an important advantage. This will involve recognising the
diverse needs of the different customer segments. There is now already a discernable change in the
pattern of customer behaviour. There is now an increasing shift towards a customer base that has less
need for the standard distribution systems for most banking services. "If you build it, they will come"
used to be the by-word for domestic banking institutions. A new branch would naturally attract new
customers. Now, while customer relationship is of vital importance, these needs to be addressed in the
context of the needs of the younger customers for retail services who do not want the "inconvenience"
of a branch. The preference is for services as much as possible over the telephone, ATM or Internet.
Writing cheques has become an inconvenience. This new generation of customers have their own
ideas of what a bank should be and successful banks need to respond to this change.
A further segment that will gain in importance is that of the small and medium-sized enterprises
(SMEs) given its growing significance in the economy. The main concern with respect to banking for
the SMEs is access to credit. Among the issues that have been raised is the quality of service
delivered in terms of accessibility, the lack of responsiveness, lack of understanding of their business,
poor branch level service, and poor turn around time. Other complaints have centered on the high
collateral demands and the general perception of a lack of willingness to extend financing by the
banking institutions. While the recent year showed an encouraging trend with loans to SMEs
increasing by 3.1%, the issue of the overall services provided to SMEs need to be enhanced. Bank
Negara Malaysia has undertaken a survey through the banking institutions on the SME profile and
requirements. This will represent an important database for the development of a comprehensive
framework for the development of SMEs initiated by Bank Negara. The survey findings will also be
useful for the banking industry in formulating its own strategic plans with respect to this segment. With
the advances in technology, banking institutions should be in a position to enhance access and quality
of service for the SMEs.
Ladies and Gentlemen,
The performance of the banking institutions is also being gauged from the perspective of the
shareholders. There are several significant issues affecting shareholders in the current environment.
The global trend is being driven partly by an increased focus by banks on the financial performance
and on the creation of shareholder value. In essence, the potential for growth lies in the value of their
investments. This would be the right thing to do in the interest of long-term survival. There are enough
examples of companies around the world that had lost track of the true reason for venturing into a
particular business and as a result, they find themselves no longer in the business. Despite narrowing
of interest margins and high costs, the banking industry has been able to increase their returns with
the average return to shareholders in 2001 being 14.5%.
Banks, like other companies in a free market economy, have a responsibility to generate returns for
their shareholders. It is in the interests of the community as a whole that they do so, otherwise we
could end up with a weak banking sector. But any company maximises shareholder value subject to
constraints. These may be imposed by laws and regulations, or by the expectations of society. This
means that if banks wish to preserve their reputation and the confidence of their customers, on which
ultimately the strength of their franchise depends, they should act in a way that is seen to be fair and
reasonable. To do otherwise, may in the long-term, be inconsistent with the objective of creating
shareholder value.
Ladies and Gentlemen,
Let me take a moment to say a few words on Islamic banking. Today, Islamic banking in Malaysia has
firmed its position as a viable and vibrant component of the banking system. Bank Negara Malaysia
has been in the forefront in providing the necessary and required infrastructure for the sector to grow
further. From a market share of virtually nil a decade ago, Islamic banking has captured more than 8%
of the assets of the banking system and is poised to reach 20% by 2010. We capitalized on the dual
banking system which we believed is the right approach, and we will continue to embark in this
direction. There are currently two Islamic banks and 33 conventional banks with Islamic windows
offering the full range of Islamic financial services, and the industry has recorded commendable
growth at an annual rate of 48% in terms of assets. At the end of March 2002, the assets mobilised by
the Islamic banking sector amounted to RM 59 billion. Deposits and financing mobilized during the
same period amounted to RM 48 billion and RM 30.1 billion respectively.
Islamic banking in Malaysia is now at the threshold of entering its next stage of development, to
expand on a global basis, to gain greater acceptance as an effective and efficient means of
intermediation and to contribute to the overall wealth creation. Policies and measures will be
formulated to not only increase the capacity and the capability of the Islamic banking players but also
to set the stage for Malaysia to be an active player in global developments in Islamic banking and
finance.
Ladies and Gentlemen,
New players, new technologies, the push to globalisation and continuing deregulation are still driving
change in the financial services industry. Productivity, service quality, customer satisfaction and cost
are key factors that drive the performance in a financial services organisation. In this uncertain world,
the drive towards excellence can only be realised if strategic steps are taken today to enhance
capability and capacity, thereby securing the well being of the banking industry and thereby the ability
of the industry to contribute to the overall economic prosperity of our nation.
On this note, Ladies and Gentlemen, I wish you a successful Summit.
Thank you.