Nor Shamsiah Mohd Yunus: DFIs of the future - maximising
development impact
Welcome remarks by Ms Nor Shamsiah Mohd Yunus, Deputy Governor of the Central Bank of
Malaysia (Bank Negara Malaysia), at the World Bank and Bank Negara Malaysia Forum on
Performance Measurement for DFIs "DFIs of the Future: Maximising Development Impact",
Kuala Lumpur, 9 August 2018.
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I would like to thank the World Bank for collaborating with Bank Negara Malaysia to organise this
important event as we think deeply about the future of development finance, especially on how
we can elevate the role of development financial institutions in Malaysia to achieve greater
development impact. This is timely as the country is charting its future direction.
History tells us that economic development is a collective responsibility. The success story of
Malaysia's development journey over the past six decades is a testament to this. Our goal has
always been to achieve sustainable and inclusive growth, consistent with the 2030 Agenda for
Sustainable Development advocated by the United Nations. Thus, the development priorities of
the nation and the materialisation of the 17 United Nation's Sustainable Development Goals
(SDGs) will be key for us over the next few years.
To this end, development financial institutions or DFIs in short, play a very crucial role. The first
DFIs in Malaysia were established in the 1960s and 1970s as specialised financial institutions
with specific mandates to develop strategic sectors, spanning agriculture, infrastructure, small
and medium enterprises, export-oriented and high-technology industries.
Since then, DFIs have contributed to the economic transformation of Malaysia and helped to
reduce inequality. For example, through them, the unserved and underserved segments of
society have increased access to financial services. Rural communities have benefitted from
microfinance initiatives and agent banking services. Last but not least, DFIs have contributed to
macro-economic stability through the provision of counter-cyclical financing during periods of
financial instability.
The strategic role of DFIs make them well placed to contribute to the development priorities of
the nation, and assist in the materialisation of the SDGs. Specifically, DFIs can play an important
role in contributing to the advancement of the following SDGs: no poverty, zero hunger, good
health and well-being, quality education, clean water and sanitation, affordable and clean energy,
industry, innovation and infrastructure, reduced inequality, sustainable cities and communities
and climate action, amongst others. Thus, as institutions designed with developmental mandates
in mind, DFIs are primed to serve the greater good. For Malaysia, the developmental story is not
over as we seek to transform our economy into a high income nation while ensuring no one is left
behind. The task ahead of us is challenging, but it is not insurmountable.
As such, the stakes are higher than ever. In this environment, it is important for DFIs to ensure
that they remain relevant. The urgency for change remains high, as shifts in the global economic
and social landscape continue to create risks and unforeseen externalities that may dampen
growth. Thus, the focus on building resilience, creating building blocks to address financial
instability, boosting national competitiveness, strengthening human capital, inculcating
sustainable consumption and increasing productivity, will be paramount in shaping our success
ahead.
With all these in mind, I will put forward three points in my remarks today, relating to the business
models, performance and regulatory framework for DFIs.
Key Message 1 - Re-engineer business models of DFIs
First and foremost, for DFIs to contribute effectively to the development priorities of the nation, it
is important for each DFI to ensure their long term financial sustainability. Without this foundation
of continued financial health and strength, DFIs will not be able to contribute meaningfully as
there will be constraints and limitations in executing their objectives. As policymakers, Bank
Negara Malaysia envisions an environment where DFIs are financially independent from the
Government with enduring business models that can continue to deliver positive benefits to the
economy and broader society. Over the long-term, DFIs should not be dependent on fiscal
support to deliver their mandates and hence, will need to diversify their sources of funding to be
sustainable in the long run. What we should seek is not short-term fixes but enduring business
models that will deliver positive impacts to the economy and society as the economic landscape
changes.
At the same time, business models for DFIs should be firmly grounded on strong governance
and a culture of professional management. Good governance underpins any successful
business model and it is of utmost importance that DFIs follow best practices that promote
integrity, transparency and accountability. To achieve this, DFIs should strive to strengthen
behaviour and risk culture within the organisation. Strong governance entails crafting well-defined
mandates that will insulate the organisation from undue external interference. Focus should also
be given to foster a culture that welcomes active debates and critical thinking at all levels of the
organisation to guard against groupthink. Last but not least, to sustain effective and high
performance, continuous upskilling of the board, senior management and staff is crucial to be
able to seize opportunities and overcome challenges as they arise.
While the DFIs of today have grown in size and outreach, there remain opportunities for them to
maximise their full potential. Innovation is lacking in developing diversified financial products that
are tailored to meet the specific needs of targeted sectors. This is compounded by their limited
capacity and capability to manage the potential risks arising from financing high risk sectors due
to information asymmetries.
DFIs should aim to become the centre of reference for new growth sectors and emerging
markets and develop expertise in risk assessment and management of high risk projects in
those sectors. Underlying the strategies for a good business model is the need for DFIs to
strengthen research and analytical capabilities to address their lending capacity by developing
innovative solutions. Given the digitalisation of finance and proliferation of technology in financial
services, DFIs need to remain at the frontier of these developments. This could include
leveraging on big data and forging partnerships with technology firms to develop digital solutions
at lower cost and increased efficiency.
At the broader level, the development finance architecture should also shift to be more effective
in channelling resources and catalysing private investment to developmental oriented projects
and initiatives. Whilst most DFIs have been self-sustainable for the past few years, DFIs will
need to diversify their sources of funding and ensure that the structure of liabilities is appropriate
for the assets that they hold to be sustainable in the long run. DFIs cannot be dependent on fiscal
support to carry out their mandates. DFIs should aim to have strong competitive position on new
growth sectors supported by a sustainable strategy and management execution capabilities.
Last but not least, DFIs are required to continuously review their institutional fit and business
models to increase their development impact while remaining financially sustainable. Effective
DFIs should also be able to act as catalysts to promote private sector investments and support
economic growth.
One example of a financially sustainable business model is demonstrated by the experience of
Nacional Financiera (NAFIN) as an enabler to Mexico's aspiration to combat climate change
through the Renewable Energy Financing Facility, or REFF. As REFF provides risk mitigation
mechanisms such as guarantee and insurance in addition to financing, it has attracted the
private sector as co-investors and guided the financial institutions to develop capacity in risk
management of renewable energy projects. This demonstrates that with in-depth understanding
of the sectors they are serving, DFIs can design solutions which achieve the desired impact,
whilst crowding in private capital.
Key Message 2 - Performance measurement framework anchored on developmental
objectives will ensure alignment of business strategies to deliver the highest value
My second point relates to adopting a performance measurement framework for DFIs that is
anchored on development objectives. This is to ensure alignment of business strategies to
deliver the highest value to society.
DFIs play an important role in bridging financing gaps by participating in markets not adequately
served by the private sector. These are often developing sectors and markets which are
characterised by high risks and uncertainties. Therefore, by extension, we cannot evaluate DFIs
using mere financial indicators as they are not adequate to capture the contributions of DFIs to
the wider economy and growth of the nation. DFIs must also be measured by the additionalities
they create.
In my view, a DFI can be deemed to be successful when its participation addresses market
failures and brings high value addition by:
(a) Influencing project design and delivery in a way that will generate employment, increase
income levels and welfare of targeted sectors, expand tax revenues and multiply economic
spillovers;
(b) Crowding in or attracting private investments or financing in new growth sectors/markets
through innovative financial structures; and
(c) Creating an enabling environment for economic segments to flourish by actively contributing
to the sound design and implementation of public policies.
The difference in measuring the success of the DFIs means that it is important to have a
structured and comprehensive performance measurement framework. This framework must be
anchored on developmental outcomes to create strong incentives for strategic alignment to
achieve greater development impact.
For example, the BancoEstado of Chile has for the past 4 years published integrated reports
which are called the "Social Footprint of BancoEstado". They showcase the achievements of the
Bank's development impact in terms of meeting the SDG agenda. BancoEstado embeds
relevant SDGs and developmental KPIs in their performance measurement framework. They are
then hardwired into key decision making processes to ensure productive and effective allocation
and distribution of resources aimed at meeting the development objectives. Similarly,
performance measurement of development impact is the backbone of FinDev Canada, where
their success is not only measured by financial sustainability but whether they also improve the
lives of those impacted by the businesses they support.
On this note, I would also like to mention that sustainable and impactful financial solutions are not
reserved exclusively for DFIs. The whole financial sector has a professional and civic
responsibility to advance the sustainability and inclusion agenda. This responsibility includes
upholding the fiduciary duty of financial institutions to preserve the trust, integrity and confidence
in the financial system. By being responsible citizens, financial institutions will go a long way to
repair the trust deficit between the industry and the public brought about by bank failures and the
numerous cases of market misconduct, manipulation and scandals.
To this end, Bank Negara Malaysia has pioneered the measurement of development impact to
complement financial performance by implementing the Value-based Intermediation (VBI)
Scorecard with selected banks. The VBI scorecard contains components of qualitative and
quantitative measures of impact to cultivate an impact-driven mindset and drive improvement
within the banking industry. We hope that this will be a stepping stone to enhance the contribution
of the financial sector to public welfare.
In summary, as the old adage correctly points out, "If you can't measure it, you can't improve it."
Hence, the accountability and effectiveness of DFIs need to be measured through a robust,
structured and comprehensive performance framework. This two-day Forum is dedicated
towards realising this outcome. Challenges in measuring performance and collecting credible
data that will best quantify the development impact will be discussed to identify workable
solutions drawing from the experience of other leading international DFIs.
Key Message 3 - Enabling regulatory and policy environment to support DFIs in realising
their full potential
My third and last point relates to the regulatory framework to support DFIs in realising their full
potential. An appropriate regulatory and policy ecosystem is crucial to nurture a culture of
innovation that will support the achievement of development impact within the DFIs.
Bank Negara Malaysia is committed to cultivate this through the application of proportionality in
our regulations. The concept of proportionality is related to the application of differentiated
prudential requirements for institutions of varying sizes, systemic impact and complexity in order
to avoid excessive compliance costs. These costs may be burdensome and disproportionately
high to smaller institutions. The application of proportionality can take the form of reduced
reporting burdens or simplified rules for some institutions. Proportionality however, does not
necessarily mean less stringent regulations. For some institutions, it may mean lower leverage,
additional safeguards and prudential measures. Thus, proportionality entails an adjustment to the
complexity of the rules taking into account the risks and externalities posed by financial
institutions. It is important to understand that this does not necessarily result in a lower degree of
stringency.
This practice is not entirely new as we have been practising proportionality in regulating DFIs.
This is reflected in prudential regulations on capital and liquidity which are applied to DFIs as well
as corporate governance and financial reporting requirements.
Moving forward, this application of proportionality will be further enhanced to reflect
developmental outcomes. The Bank is refining its methodology for DFIs to support greater
differentiation at the individual institution level based on the nature, size, complexity and most
importantly, the unique roles and mandates of each DFI. Prudential and conduct standards
applicable to DFIs will also continue to be renewed and adapted where relevant. The balance that
we aim to strike can only be achieved if DFIs also lift their game to ensure strong internal
controls and risk and performance management.
In addition to proportionality, a related issue is the need to review the overall DFI landscape in a
holistic manner. An important step towards steering the DFIs forward will be to conduct a review
on the mandates of the DFIs. Since the establishment of the DFIs in Malaysia more than four
decades ago, their mandates have remained largely unchanged.
Periodic mandate reviews are important especially in a country like Malaysia where there is rapid
economic growth and structural change as the country moves from one stage of growth to
another. Mandate reviews will not only identify gaps within the economy that DFIs can play a
meaningful role, but to reduce areas which overlap with each other and other players in the
financial sector. For the immediate future, there are pockets of financing gaps particularly in the
new and emerging sectors that the DFIs could support. Examples of these areas are: the high-
end services and advanced manufacturing sectors, as well as knowledge or technology-based
sectors including green-tech and biotech industries. These are key drivers that will accelerate the
transformation of Malaysia into a high-income economy in a sustainable and inclusive way.
Last but not least, as part of the holistic review, we should be prepared that some DFIs may have
to "graduate" into the mainstream legal and regulatory landscape of the Malaysian financial
system. This would mean that they may no longer be placed under the Development Financial
Institutions Act. This is a positive development as it reflects the maturity and success of the
institution in delivering on its developmental mandates.
In conclusion, the progress of the nation is a collective responsibility. All of us have our own part
to play. Our roles may be different but we share a common vision towards a shared, inclusive
and sustainable prosperity for all.
For all of us gathered here today, this outcome is crystallised in the vision for DFIs to lift the
growth and development of Malaysia. For this to happen, DFIs need to ensure that they are
financially sustainable, possess the agility to support the existing and new economic drivers, and
constantly measure their performance and contribution in an appropriate performance
management framework.
As DFIs will continue to be at the forefront of efforts to meet the SDG goals, I hope that the next
two days will sow the seeds for individual and collective actions that will both transform DFIs and
increase their development impact.
With this, I wish all of you a productive forum.