Muhammad bin Ibrahim: Scaling up excellence - creating opportunities
while mitigating risks
Keynote address by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of
Malaysia, at the Regional Conference on Money Services Business "Scaling up excellence -
creating opportunities while mitigating risks", Kuala Lumpur, 19 May 2014.
* * *
I'm glad to be here with you today to join Mr Mathew A. Verghis in welcoming you to this
regional conference on money services business. On behalf of Bank Negara Malaysia, I
would like to thank the World Bank, the Malaysian Association of Money Services Business,
and the International Association of Money Transfer Networks who partnered with us in
organising this event. This conference aims to bring together regulators and industry players
to review developments in the money services business industry at a time when there are
significant changes occurring in the financial industry. In many countries, money services
business plays an important role in complementing banking institutions to provide financial
services to the community, in particular, the unbanked and small business communities.
Given the forces of change that are reshaping the financial industry, it is timely to consider
how these forces impacted the expectations, opportunities and challenges for money
services businesses.
The money services business industry contribute to an important purpose in our
communities. They provide financial services to segments of society in both the developing
and developed world that do not have access to basic banking facilities and services.
Increasingly, money services business provides and support tourism, business travel and
cross-border trade activities in a more globalised world economy. According to a World Bank
report, it is estimated that nearly 1 out of 7 persons is a migrant, reflecting the large and
diverse diaspora community in the world today.
Worker remittances to developing countries were in excess of USD400 billion last year and
represent a key source of external resource flows. These flows support economic growth in
developing countries, far exceeding official development assistance. More than USD 1 trillion
was spent on global business travel expenditure in 2013 and more than 1 billion in
international tourist arrivals are recorded each year. In 2013, business activities supported
world trade volume of over USD 23 trillion. All of these developments have created new and
greater demand for remittance, currency exchange and other financial services that can be
offered by money services businesses.
The industry itself has also become more diverse. Advancements in technology have
enabled new business models, offering new product and service, innovations and forming of
new alliances. These enhancements have the potential to further lower cost and increase
convenience to consumers. Global money services companies exist alongside niche and
smaller companies that focus on serving local communities. This has fostered competition
and helped to fill market gaps. Today, money services are provided through a network of
branches and agents of money services entities, retail outlets, post offices, banks and mobile
channels.
Operational standards are also diverse across entities. Operational systems and controls,
including mechanism to protect consumers' interest and prevent criminal activity, can vary
considerably between entities and jurisdictions. With typically hundreds or more money
services entities in most countries, such diversity presents a unique set of challenges for
money services businesses and regulators seeking to put in place the necessary frameworks
to manage and mitigate risks associated with the business.
In the more recent period, money services businesses have been confronted with increased
challenges from heightened global concerns with crimes committed cross-border and
transnational money laundering. The cash-based nature of MSB transactions, global reach of
remittance networks, and customer verification processes, if not properly managed would
render MSBs susceptible to money laundering threats. Heightened regulatory scrutiny over
money laundering controls and heavy penalties meted out by regulators might prompt banks
to review their relationships with MSB companies. Some banks have withdrawn banking
facilities provided to MSB companies, creating significant difficulties for large numbers of
MSB companies that are doing legitimate business. On the other hand, as the bar is raised
for MSBs to strengthen AML procedures, there is a concern over the unintended
consequences that this might exclude certain segments of society from access to the formal
financial system. Worse, it pushes more transactions to the informal or illegal channels. I
raise these observations to highlight two points which I thought are relevant to this
Conference.
First, MSB has an important role in supporting an inclusive financial system and facilitating
economic transactions that add to growth and prosperity. However, this role has not been
fully exploited. For example, there are still significant number of businesses and migrant
workers who still prefer informal remittance channels as their choice. It is timely for MSB
providers to reassess their products and services in terms of cost, speed, convenience and
trusts so that we can draw this group of users away from the informal channels.
I believe innovation is key to achieve this and it has to be facilitated by a regulatory
framework that is facilitative.
Second, global and national efforts to address risks associated with the financial proceeds
from criminal activity have turned the spotlight on the MSB industry. The industry's long term
prospects and its contribution to socio-economic development could be undermined if these
risks are not properly understood and sensibly managed. The industry may choose to ignore
such risks; regulators are inclined to exaggerate them; customers complain about the
inconveniences caused by risks mitigants; and criminals exploit them. The regulatory
community and the industry present here today have a responsibility to bridge these gaps in
a way that protects the industry from abuse for criminal purposes and the integrity of the
financial system and undermine the legitimate expectations by users of financial services.
There are 3 areas which we should focus collectively and try to find suitable solutions.
First, both regulators and MSB players need a strong knowledge base to enable us to
respond effectively to risks inherent in the money services business. The implementation of a
risk-based approach to counter money laundering requires a solid understanding of the
sources and nature of risks that can arise in the business, and how these risks are changing
over time as new products, business models and delivery channels are introduced into the
market.
The better we understand the risks, the more likely we will be able to respond to the risks in
an intelligent and proportionate manner, that balances risks with the objective of preserving
inclusive access to money services. In all these efforts the key is collaboration.
As expectations continue to increase for MSBs to meet higher standards of compliance and
risk management, the industry has much to gain by coming together to build expertise and
capacity through training, sharing of best practices, and a deeper level of engagement with
the regulators. The industry also need to collectively weed out the bad apples among their
midst. Similarly, the cross-border dimensions of money services business also underscore
the benefits of greater cooperation and collaboration among regulatory authorities to share
knowledge, intelligence and experiences that can contribute towards strengthening the
effectiveness of regulatory regimes governing the MSB industry.
Secondly, we need to have an effective system of incentives working together to encourage
the desired behaviours. Ultimately, this will come down to clear and sensible rules, and
credible enforcement. A well-designed and balanced regulatory framework that
commensurate and proportionate with the risks, structure and characteristics of the industry
is important to create an enabling market for MSB services. For example, in the case of
Malaysia, an important strategy for keeping regulatory cost low is the introduction of the
principal-agent arrangement. Under this arrangement, the principal provides support to the
agent in the form of infrastructure, systems and control frameworks as well as ensuring
compliance. This has preserved access and minimized dislocations for smaller players that
were not able to meet higher regulatory expectations.
Another important area is the need to have a strong and effective enforcement. Where an
entity has failed to meet regulatory requirements, the consequences of regulatory sanctions
must be clear and credibly enforced to deter abuses and instil a strong compliance culture. A
strong incentive structure must be in place in which those who do not follow the rules are
held accountable, and those that follow the rules are treated fairly, given the opportunities to
further expand their scope of business and are not competitively disadvantaged.
It should come as no surprise therefore that regulatory authorities are taking stronger
enforcement actions - some of the strongest we have seen to date - against multi-national
financial institutions for failures to implement effective AML/CFT controls. This reflects the
desire of regulators to ensure that appropriate incentives are in fact in place to check abuse
and safeguard financial channels from being used to advance criminal activity.
The last area that I would like to mention is a focus on promoting and expanding the
professionalism of the money services business, lifting the negative perceptions associated
with the industry. MSB players should constantly strive to be a responsible corporate citizen
by providing quality services with the highest level of integrity. This would mean being
honest, ethical and have good compliance culture. This foundation can provide important
context and confidence to build and maintain a good reputation of the industry, which
ultimately will generate public confidence in the industry and to protect the integrity of the
broader financial system.
The key priorities should include strengthening the competencies of individuals working in
the industry, setting industry standards for the professional conduct of business and putting
in place programs that help companies making the transition to better managed businesses
that meet professional and compliance standards. We have seen that in some countries, as
part of strengthening industry arrangements. The industry associations have become
effective partners to the regulators to raise the standards of professionalism of the industry.
During the course of this Conference, regulators and practitioners will have the opportunity to
share how we have approached these priorities. In Malaysia, we have given significant focus
to these priorities and have set in motion an ambitious program to achieve this
transformation.
Important progress has been achieved and we are committed to maintaining this momentum.
At the end of the day, the vision is an industry that is trusted by those who use its services,
untainted by crime and abuse, and exemplary of honest, responsible and upstanding
corporate citizens. Experience and history have shown us that, these preconditions made
business sense and over the long run ensure the sustainability of the industry.
The theme of this Conference, "Scaling Up Excellence - Creating Opportunities while
Mitigating Risks" appropriately sums up the challenges we face today in the MSB industry.
Rapid change is the new normal in today's dynamic world. The global interconnectivity, the
impact of regulatory changes and new technologies are all combining to transform the
landscape of the MSB industry, not just within the region, but also internationally. Success for
money services businesses in today's challenging environment will hinge on the ability to
adapt to new demands, while making the most of new growth opportunities that come with
change.
I take recognisance that among the countries represented here today, we all face somewhat
different challenges and we are likely at different stages of action. I know with certainty,
however that we all agree inaction is not an option as the world changes around us. I hope
that this Conference will encourage us to move forward with greater confidence and
determination, equipped with deeper knowledge and a better appreciation of the priorities
that we need to manage and the paths that we can take to achieve our shared objectives for
the industry.
On that note, it gives me great pleasure to open the "Regional Conference on Money
Services Business". I wish you productive discussions over the next 2 and the half days. To
our overseas guests, let me welcome you once again to Kuala Lumpur and I hope you will
bring home pleasant memories of your brief stay here.