Muhammad bin Ibrahim: Future banking: reimagining banks - driving
transformation and innovation
Keynote address by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia
(Bank Negara Malaysia), at the ASLI (Asian Strategy & Leadership Institute) 20th Malaysian
Banking Summit, Kuala Lumpur, 26 May 2016.
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It is my pleasure to be here at ASLI's 20th Malaysian Banking Summit. The theme "Future
Banking: Reimagining Banks - Driving Transformation and Innovation" is especially relevant
in light of the significant changes taking place in the banking industry and wider economy.
The new world ahead
The financial crisis may have struck almost a decade ago, but has left in its wake a
profoundly transformed landscape. With global economic growth remaining slow and uneven,
it is increasingly clear that this is no mere downturn in the business cycle, but a realignment
of the world economic order. Structural reforms continue to take place in many advanced and
emerging economies albeit at varying pace across countries. Such reforms are critical as this
will contribute towards enhancing future growth prospects. In an environment of weak
growth, authorities face considerable challenges in managing the immediate effects of some
of the reforms. The limits of monetary policy under unorthodox and unprecedented policies
continue to be tested in a number of economies, with outcomes that still remain debatable.
Broader forces of change are also underway. Of significance is the accelerated pace of
technological change, driven by increased processing power and connectivity. Across
various sectors, disruptive technologies are rapidly expanding the horizon of economic
opportunities while challenging existing business models. In the case of banking for instance,
we have already seen greater competition from new entrants amid the emergence of fintech.
Rapid urbanisation, which is more pronounced in emerging markets, and demographic
changes such as an ageing population are other key trends which have major implications on
economic and socio-political conditions. At the same time, there is a growing appreciation for
the far-reaching impact of climate change, giving rise to calls for more sustainable growth
models and innovation.
All these developments that are taking place in the banking industry today have created an
environment much different from the one prior to the crisis. And together with the
implementation of the post-crisis global regulatory reforms, which remains a key priority, their
implications require careful and deep thinking as banks plan for the future.
Domestic policy continuity and priorities
Our banking industry is facing the current rapidly changing and challenging economic
environment from a position of strength, following the successful reform measures that were
implemented. Given the high degree of openness of the Malaysian economy and the
increased integration with the international financial system, external developments have
continuously affected our domestic economy. But the economy has been able to weather
these challenges and have remained on a steady growth path of 4 to 6% over the past five
years.
In recent quarters, economic growth, however, has moderated. This was attributable to a
number of external and domestic shocks affecting the economy since late 2014. The major
policy reforms such as the implementation of the GST also saw households and businesses
adjusting their spending. As we move forward, these shocks will gradually dissipate and
growth of the Malaysian economy will improve. Further support is also forthcoming in the
form of Government measures to increase disposable income; thus, facilitating households
and firms' on-going adjustments. The assessment is therefore for the economy to grow by
4 to 4.5% for 2016. Importantly, our financial system remains resilient and supportive of the
economy. It is important to recognise the underlying reasons for the resilience of the
Malaysia economy. This resiliency has been as a result of the continued strength of our
fundamentals and the successful reforms and structural adjustments we have undertaken
over the last decade.
Three changes to the economy have been particularly instrumental. Firstly, the structure of
the economy has become more diversified and over-reliance on any particular industry has
been mitigated. Secondly, growth has also become more balanced, driven by continued
private sector activities with imbalances and excesses kept in check through keys measures
implemented by the Government and Bank over several years. This has been complemented
by crucial fiscal reforms that, while having short-term costs and being very unpopular,
ultimately put the economy on a more sustainable growth path. Third, is the continued
strength of our external position. This can be seen from our high level of international
reserves, the manageable level of external indebtedness and the continued surplus in the
current account balance.
Together with the greater flexibility of our exchange rate, this has strengthened the capacity
of our economy to cope with external shocks and ensure that financing to the private sector
is not interrupted.
Going forward, continuity in Bank Negara Malaysia's financial sector policies will be
preserved. We will continue to strengthen our prudential regulatory framework in line with
global standards, while introducing new developmental initiatives and maintaining a strong
focus on the fair treatment of financial consumers. Following transformational measures
taken in the past few decades to significantly strengthen the financial system, the banking
industry in Malaysia is managing this transition from a position of strength. The capitalisation
of the banking system is at its highest level of 16.5%. The combined excess capital of banks
above the regulatory minimum level stands at over RM120 billion. The banking system
Liquidity Coverage Ratio is also comfortably above 120% against the current regulatory
minimum of 70%. This strong position has been an important element to facilitate orderly
adjustments in transitioning towards global standards without disruptions to financial
intermediation, thus ensuring the smooth flow of financing to the economy.
To enhance Malaysia's growth potential, several initiatives had been identified that will help
boost productivity, improve the income-earning potential of Malaysians and expand
opportunities in new markets. Building from Malaysia's leading position as an international
Islamic finance centre, efforts to promote the sustainable growth of Islamic finance supported
by a dynamic ecosystem will create opportunities for high income employment. At the same
time, ASEAN integration remains high on Bank Negara Malaysia's agenda.
Meeting the e-payment targets that Bank Negara has set is also vital to enhance our
economic efficiency, competitiveness and productivity. And we will continue to direct efforts
at ensuring that all Malaysians can participate effectively in the financial system. Bank
Negara will also continue to work with the Government on a range of economic priorities to
sustain the Malaysian economy on a steady growth path. This includes the continued support
and development of SMEs, and improvement in access to affordable housing. An area that
demands greater attention and coordination going forward is the 'sharing economy'. We have
already seen how the likes of Uber and AirBnB have changed the business model of the
transport and hotel sectors, and enhanced the earning potential for asset owners, lower
costs for users, and drive innovation and service quality improvements among incumbent
providers. They can also bring important benefits for the environment through the reduction
of wastage and control of over-consumption. Similar innovative trends are also emerging
within the banking and finance sector. To reap the benefits of technological advancements,
the Bank will work closely with relevant agencies and innovators in this space on new ways
of delivering new products and services.
I would like to take the opportunity this morning to talk about some of the measures that
Bank Negara Malaysia is taking to support growth in the financial services sector, encourage
innovation and strengthen resilience. My remarks will touch on the areas of regional financial
integration, fintech development, systemic focus on regulation, governance and the role of
banks in ensuring an inclusive financial system.
Advancing regional financial integration
The ASEAN Banking Integration Framework (or ABIF) that was finalised last year was a
significant milestone towards greater ASEAN integration. An agreement forged between
10 key economies at different stages of economic and financial systems development is in
itself a remarkable achievement. This is in sharp contrast with recent global trends. In the
decades leading up to the 2007 financial crisis, global financial integration took
unprecedented strides forward as capital markets and banking systems expanded and
diversified, increasing the mobility of capital. But of late, there has been a reversal of this
trend. A recent study by McKinsey found that following the crisis, banks globally have shed
$722 billion in assets and operations, of which almost half were foreign-based. Cross-border
flows have also declined significantly, remaining at 60% of pre-crisis levels. To some extent,
this is expected as markets undergo corrections and new regulations were introduced to
address weaknesses in existing models for integration. The crisis has led to forces of change
that are creating two diverging paths ahead: greater fragmentation of finance as operating
structures adopt a narrower and more domestic focus, or a move towards alternative, more
sustainable approaches to integration. ASEAN integration however, has adopted sustainable
approaches to integration and continued to gain momentum. Importantly, this has been
pursued in tandem with the need for greater private sector integration, thereby supporting a
natural path of evolution for the region's financial sectors and overall economy.
As a whole, this has resulted in a measured approach to integration, mindful of different
needs of member countries and supported by regional frameworks and bilateral
arrangements. In doing so, risks are also better managed by preserving a strong focus on
strengthening prudential frameworks and capacity developments and giving economies more
time to adjust to new circumstances. With more than 600 million people, with a combined
GDP of USD2.5 trillion and a burgeoning middle class, ASEAN holds enormous potential for
economic growth for member countries. We expect that intra-regional trade will flourish and
consequently sources of growth and trade will become much more diversified.
Since the finalisation of the ABIF, Bank Negara Malaysia has signed three Heads of
Agreement (HOAs) with Indonesia, Thailand and the Philippines, paving the way for banks in
the four economies to expand their presence and contribute towards regional growth. Bank
Negara has also actively pursued initiatives to develop a viable regional cross currency
market to support trade and investment by expanding the availability of multiple choices of
currencies that businesses can use for trade and settlement. Malaysia and Thailand recently
established the first cross-currency settlement and clearing arrangement between two
ASEAN countries, following similar arrangements with China and South Korea. Moving
forward, Malaysia remains committed to regional efforts to advance financial integration. This
will be guided by the ASEAN Economic Community Blueprint 2025, which focuses on the
three key pillars of financial integration, financial inclusion and financial stability in the region.
Facilitating fintech developments
I am pleased today to announce that Bank Negara will introduce a framework for fintech
firms to test innovations in the financial services operational environment. Earlier this month
at the Global Islamic Finance Forum, I spoke briefly about the work that Bank Negara
Malaysia has undertaken with respect to fintech. Indeed, Bank Negara has long recognised
the power of technology in driving the financial sector forward. Over the years, banks have
harnessed the power of technology to reap significant benefits. Bank Negara has supported
this development on many fronts including in the areas of payments, internet banking, agent
banking, Islamic finance and money exchange and remittances. Fintech will be a new
addition to the list.
Fintech developments such as blockchain, artificial intelligence and biometric applications
are now expanding the frontiers of banking. Because of the profound implication of new
technology, we require a re-think of the regulatory framework in addressing consumer
protection and market conduct issues as well as the technological impact on the orderly
functioning of financial markets. We expect that the framework would enable fintech firms to
provide regulated financial services directly to the public, or in partnership with financial
institutions, and to operate under more flexible regulatory arrangements. We take
cognisance that some innovations cannot be achieved within existing regulatory parameters.
Nonetheless, to protect the interests of consumers, this will be subject to certain safeguards.
The innovation must provide a clear benefit to the general public or financial industry. A firm
that operates within the framework must also commit to observe reasonable standards of
service, transparency to customers, appropriate funding and reporting requirements. These
are not meant to stifle the creative process at play, but rather facilitating an orderly process
while protecting consumers interests and maintaining market confidence.
The Bank also expects the framework to deliver a number of key benefits. It will provide
regulatory clarity for fintech start-ups, and for banks and consumers that use their services. It
will also lower barriers to entry and accelerate the time-to-market for productive innovations.
Our aim is therefore to support fintech firms that go on to upscale their activities, and aid
fintech firms to better anticipate and adjust to appropriate regulatory expectations.
Strengthening the systemic focus of regulation
Bank Negara Malaysia's regulatory and supervisory framework will continue to reflect the
increasing focus on systemic risks. This addresses a key lesson from global financial crisis -
that greater attention needs to be directed at identifying and managing systemic risks that
arise from interactions between financial institutions and markets, and their collective impact
on the broader financial system.
As interlinkages within and beyond the Malaysian financial system deepen, the sources of
potential vulnerabilities and shocks can be amplified, with larger and more complex
institutions posing greater risks to system-wide stability. Bank Negara Malaysia's prudential
standards and the intensity of our supervision will be more differentiated going forward to
reflect these risks. In recent months, we have issued two standards on operational risk and
compliance.
These standards reflect the differentiation by setting higher expectations for larger and
systemically important financial institutions. Bank Negara is also assessing options to ensure
that systemically important institutions have adequate capital buffers; that their capital is
proportionate to the risks posed to the broader financial system and the possible costs of
failure. In addition, we are progressing work in coordination with PIDM to develop an
effective resolution and recovery framework. Banks are expected to continuously assess and
identify critical functions from a systemic perspective within their operations, and prepare
contingency and recovery plans to preserve those functions under a stress scenario. Bank
Negara will engage the banking industry to share more information on this initiative, including
our implementation approach. A concept paper on this will also be issued for comments.
Raising the bar on governance
Finally, we will continue to raise the bar on governance. The role played by governance
failures in the recent crisis is well documented, particularly in respect of incentive systems,
accountability structures and controls. More broadly, there is also a strengthened emphasis
on the softer aspects of governance such as behavioural norms, corporate culture and
ethics. We should not forget these lessons or else history will repeat itself.
Malaysian financial institutions should be the gold standard for good governance practices.
Because of their important role within the economic system, banks have the added
responsibility of maintaining public trust and confidence.
In addition, we also expect the banking industry to take the lead in promoting good
governance practices more broadly across corporate Malaysia, through financing and
investment activities, or professional advice to clients. An important regulatory priority for
Bank Negara in this regard is to align incentives with a sound risk culture and ethical
conduct, underpinned by effective independent oversight by the board. On this, Bank Negara
recently published several proposals to enhance the corporate governance framework for
financial institutions in Malaysia to address these issues. While proposals on board
composition appear to have generated more attention in the media, the most significant
enhancements actually relate to expectations for the board and senior management to set
the right "tone from the top", and the explicit responsibilities placed on them to play a more
critical role in shaping the core values and culture of the institution. This includes expanded
requirements on compensation practices and disclosures to strengthen market discipline.
Banks must also put in place a transparent whistleblowing policy that enables the escalation
of concerns without the risk of reprisal.
Good governance is ultimately driven by a workforce that is committed to the highest
standards of knowledge, competence and conduct. Competition for talent in the financial
industry has intensified greatly, in an environment where public opinion of banks globally is
also at an all-time low following the last crisis. Recent trends among graduates of leading
business schools worldwide indicate a shift towards other well-paying alternatives to careers
in banking, notably to technology and consulting firms. According to the Financial Times, the
popularity of banking as a career has dropped 41% since 2008. Globally, banks' reputations
have also been dented to varying degrees by poor quality of service, staggering control
failures and misconduct.
The professionalisation of the banking industry is therefore critical to strengthen the talent
pipeline, while restoring and maintaining public trust in the banking industry. An important
step in this direction is the transformation of Institut Bank-Bank Malaysia (IBBM) into the
Asian Institute of Chartered Bankers (AICB) as the professional body for bankers and the
Asian Banking School as the education service provider. The AICB plays a key role in
spearheading the vision of professionalising bankers through the development of
professional qualifications, a specialised certification track to support continuing professional
development and a membership framework that subjects members to a strict code of
conduct, professionalism and ethics. The prestigious Chartered Banker qualification, for
example, aims to provide comprehensive education on banking to support sound judgment
and decision-making. The industry should therefore take full advantage of these
opportunities to build a solid team of professional bankers that are able to perform effectively
in a rapidly evolving landscape.
Fundamental role of banks to support inclusive financial participation for all
It is important to bear in mind that growth in financial services must also serve to enhance
economic opportunity for all. Since the establishment of the Financial Inclusion Framework in
2011, major inroads have been made in widening the accessibility to financial services in
Malaysia.
Agent banking has been a key strategy to improve access, particularly in the rural areas.
92% of our population has some form of access to financing. Moving forward, expanding
public access to financial services will remain important for the remaining 8% of the
unbanked population in Malaysia. There will also be greater emphasis on the quality of
services provided.
The social impact of greater financial inclusion is significant as it helps improve people's
lives. In this respect, banks have a critical role to play to make it easier for people to save,
make payments and obtain affordable loans to improve standards of living and build more
resilient communities. It would be a remiss to talk about the future of banking without
embracing this very fundamental role of banks.
As our economy becomes even more financialised, it is important that banks strike a balance
between legitimate profit-seeking goals, and their responsibility to provide the public with full
and fair access to financial services. Some banks today are still falling short of expectations
to offer basic banking services to the people who only need such services. We have
observed poor communications by the front-line staff of such banks on the basic banking
products which must be offered by all banks. In some cases, prohibitive conditions are
attached to the opening of basic banking accounts in clear violation of Bank Negara
Malaysia's requirements. This must change. In offering basic banking services, banks should
also leverage on technological advancement that can support inclusive finance initiatives.
These include adopting more innovative delivery channels, leveraging on big data to reach a
wider community and to offer suitable products that are priced affordably.
Concluding remarks
The world as we know it is set to change dramatically just as it had over the last few
decades, except that future changes will happen at a much more rapid pace, and in sectors
where we least expect it. The ability of banks to adapt will be critical to its relevance. More
likely than not, banks that are agile and have absolute clarity on their value proposition for
their customer, society and wider economy, will be the ones that will endure. Banking as we
know today will no doubt change in form as the future takes shape. What is more important
that the core purpose of banking remains intact - that is to provide reliable passage for
resources to move to productive use, including under the most challenging conditions.
I thought I would close these remarks by quoting Machiavelli 'There is nothing more difficult
to take in hand, more perilous to conduct, or more uncertain in its success, than to take the
lead in the introduction of a new order of things'.
Ladies and gentlemen, the future is about a new order of things.
Thank you.