Muhammad bin Ibrahim: Developing Malaysia's financial sector for the
future
Keynote address by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia
(Bank Negara Malaysia), at the Future Finance Conference 2016, Kuala Lumpur,
23 September 2016.
* * *
This conference gathers the leaders of the industry to discuss opportunities and develop
substantive ideas for the development of our financial sector relevant to Malaysia's future. In
the weeks leading up to today, some ideas have been exchanged among us and further
refined. It is our intention that the industry can come to an understanding on implementing
substantive and collective solutions to the four subjects that we had identified: going beyond
access to promote financial inclusion, creating opportunities for underprivileged children,
financing the new economy and improving insurance penetration. We will also have the
opportunity to hear from international speakers and financial technology (fintech) companies
on how the world around us is changing, and how the financial industry will need to evolve
with it.
Part I: Progress and achievements so far
Five years have now passed since the Financial Sector Blueprint was released in 2011, with
the clear vision of creating a financial system that can navigate Malaysia's transformation
into a high-value added, high-income economy.
As the title of the Blueprint "Strengthening the Future" suggests, the goal was to move the
financial system towards higher levels of stability, efficiency and competitiveness in the
financial sector to power the economy of tomorrow. Judging by the financial data, we are
pleased to note that the financial sector is steadily advancing towards these goals.
We have significantly strengthened our legal and regulatory foundations for a safe and
stronger financial system with the enactment of the Central Bank of Malaysia Act 2009, and
the Financial Services and Islamic Financial Services Acts of 2013. We have continued to
update our prudential guidelines in line with international standards, a contributory factor in
supporting the regional and global expansion of our financial institutions. The changes that
we had made also ensured a highly resilient banking and insurance sector amid much more
challenging conditions. The capital buffers of banks and insurers today collectively stand in
excess of over RM140 billion above the regulatory minimum levels.
Ongoing efforts of financial institutions to strengthen risk management, governance structure
and a strong focus on effective supervision further reinforce the strength of our financial
system. Collaborative efforts between the industry and the Bank had resulted in significant
investments to build a strong talent pipeline for the financial services sector, including the
transformation of the key industry professional bodies and training institutes.
At the same time, the financial sector has continued to play its intermediary role in financing
the economy, in particular the SMEs. As at end July 2016, financing by the banking system
to businesses and SMEs stood at RM533 billion, growing at an average annual rate of 9.9%
between 2011 and 2015. Banks remain the largest financiers to SMEs, and this relationship
is expected to remain, thanks to the high approval rates of close to 80%.
In Islamic finance, the introduction of investment accounts and the subsequent
operationalisation of the Islamic bank-backed Investment Account Platform (IAP) will further
expand access to financing for a wider cross-section of businesses with different profiles and
at different stages of development. The industry is making encouraging headway in
introducing more diverse products and services in the financial system. For example, the
successful migration of deposit products into investment account which now constitute 10%
of all Islamic funding in just over a year since Islamic banks were required to clearly
distinguish between principal guaranteed and investment accounts consistent with Shariah
principles.
Also important has been the development of a stronger consumer protection framework and
more inclusive financial system. Earlier this week, over 500 policymakers and industry
participants from 30 countries were in this building to address the immense challenge of
reaching more than 2 billion adults worldwide who remain excluded from the formal financial
system. At that forum, a point was made that, it is an important moral obligation for all of us
to do more, to help the millions who are still living in abject poverty or those who are highly
vulnerable to financial hardship, with no means or opportunity to change their circumstances.
Financial inclusion has also received greater attention by global leaders, including the
international standard setting bodies which has considered the important characteristics of
financial inclusion in formulating global standards. Malaysia continues to play an active role
in this aspect.
We have achieved important strides since the release of the Financial Inclusion Framework
in 2011 which outlined strategies to promote greater financial inclusion over the coming
decade. The level of financial inclusion in Malaysia as measured by the Financial Inclusion
Index has risen significantly from 0.77 to 0.90. Today 97.4% of mukims in Malaysia have
financial access points, reaching out to 99% of Malaysia's population. Agent banking in
particular, has been a highly effective game changing initiative in expanding financial
accessibility while protecting the integrity of financial transactions.
In the insurance and takaful sector, we have also carefully laid the ground for wide-ranging
reforms that are ultimately aimed at increasing insurance penetration and reducing the
protection gap among Malaysians. The detariffing exercise is set to fundamentally change
the general insurance business in Malaysia. In our effort to chart the growth and
development of the industry over the next 10 years, we have established an Insurance
Development Department that will serve as the primary reference for the insurance industry.
I also wish to highlight the important role played by development financial institutions in
contributing to the inclusion agenda, which includes participation as agent banks as well as
supporting the development of SMEs, the agricultural sector and co-operatives.
To further improve the operational efficiency and resilience of these institutions, amendments
to the Development Financial Institutions Act were made and came into effect in January
2016. The amendments further strengthen important areas such as governance and
consumer protection. The strengthened legislation will ensure that development financial
institutions can better contribute to the next phase of Malaysia's socio-economic
developments, building on achievements over the past decade.
Finally, the Malaysian financial system has become more regionally integrated to support
stronger economic and financial linkages with our strategic trading partners. This has been
characterised by the push for regional economic and financial integration in ASEAN, which
includes the continuing proliferation of local currency settlement arrangements with banks
serving as key enablers in these mechanism, and the deepening of regional financial
markets.
Greater banking integration within the ASEAN region is gaining traction under the ASEAN
Banking Integration Framework, with attention now turning to the formulation of a similar
framework for insurance integration. Malaysia's commitment to support
multilateralcooperation and development is also reflected in the international organisations that have
chosen to base their headquarters or offices in Malaysia, including the World Bank, the
Alliance for Financial Inclusion and the Islamic Financial Services Board.
This will benefit the country, by enriching the domestic talent pool, building intellectual
capacity, and originating research and policy recommendations, that address today's key
financial and economic challenges, and placing Malaysia as a centre of excellence for
training and capacity development. It would also benefit many countries where member
countries will be able to share experiences in developing their economy.
Part II: Reassessing our position - are we heading in the right direction?
These developments that I outlined above have enhanced the breadth, depth and resilience
of our financial system. It is important that we continue to stay the course to reinforce these
core strengths of our financial system. More work still lies ahead to achieve specific
outcomes that were envisioned in the Blueprint. In Islamic finance, encouraging greater
product diversity supported by strong institutional capacity remains critical to increase the
share of Islamic banking assets to 40% of the banking system by 2020. Similarly, insurance
and takaful penetration, currently around 5% of GDP, remains low. This is compounded by
an enormous protection gap ranging between RM550,000 to RM723,000 per household. A
focus on consumer education, product development and underwriting capabilities, alternative
delivery channels and service quality remains important to increase penetration.
The Malaysian financial sector has achieved a significant milestone in facilitating the
country's cross-border linkages with other economies. Yet, there remains vast potential for
our onshore financial institutions to support the growing financing needs of domestic and
foreign corporates operating in Malaysia.
For example, over the last five years, offshore corporate borrowings have risen to
RM233 billion or 19.7% of GDP. From a macroeconomic perspective, total offshore corporate
borrowing remains lower relative to the position observed during the Asian Financial Crisis at
47.1% of GDP. Furthermore, these borrowings were largely hedged, either naturally through
foreign currency earnings or through the use of financial instruments. The bulk of these
borrowings reflected intercompany loans extended by the parent of multinational companies
operating in Malaysia, which tends to be more favourable in their terms and are more flexible
on requirements for collateral and borrowing tenures. In sum, the macroeconomic prognosis
of our offshore corporate borrowings suggests that they are manageable and within prudent
levels.
On the other hand, when viewed from the perspective of banking and financial opportunities,
onshore banks and financial institutions could do more to tap this opportunity. Onshore
banks would need to increase competitiveness by increasing its skill and strengthening
capacity and offering innovative and tailored financing solutions, while at the same time play
an important role in helping businesses manage the attendant risks from these transactions.
This requires more discerning credit assessments of prospective borrowers and competitive
financial solutions.
By itself, the banking sector will however not be able to cater for all the increasing and
expanding needs of the economy of the future. This is precisely why we need to develop the
role of market-based financing institutions as a new source of funding.
Niche institutions such as factoring and leasing companies, angel funds and alternative credit
providers of various industries such as motor, housing and consumer retail sector can play
an important role in contributing towards providing consumers with greater funding choices.
There, however exist a high bar and strict preconditions that must be met before this funding
model can take root and flourish. The presence of a strong regulator, a sound and resilient
supervisory and regulatory framework as well as robust consumer protection statute are
some of the critical foundation required to ensure these institutions 'clear the hurdle' to
become a viable source or financing and benefit our economy. The ultimate aim remains in
protecting consumers' interests, preventing predatory practices, managing debt levels,
including high household debt, and preventing borrowers from falling into financial hardship
due to inability to service debt.
At the same time, we must not ignore important changes in the global and domestic financial
landscape that will affect current and future priorities to deliver a financial system that
effectively serves our economy. One of the most significant changes has been the
commoditisation of financial services. This has been largely driven by technological
advancements, enabling financial products and services to be delivered by a broader set of
institutions while driving lower margins for traditional providers such as banks and insurance
companies. These "disruptions' introduce new ways of interacting with consumers as well as
changes to the nature of financial intermediation itself. The implications are far reaching and
call for a re-thinking of business models and growth strategies, regulatory frameworks and
customer relationships.
The global economy and financial systems have also become more interconnected. While
this development augers well for businesses and trade, it also dramatically compounds the
economic and social costs of financial failures. At a macro level, low to stagnant economic
growth has become a 'new normal'. Growth in the developed economy is still anaemic and
below pre-recession levels. Depressed long-term interest rates have impacted net interest
margins for banks and investment income for insurers. With projections for a sustained
period of low growth, traditional growth models and strategies are coming under increasing
pressure, with focus turning to new engines of growth.
Bank Negara Malaysia is moving on a number of fronts in response to these developments.
To support financial innovations and new business and growth models of financial
institutions, we have recently introduced a discussion paper on the regulatory sandbox that
provides a collaborative opportunity for fintech firms, financial institutions and the Bank to
evolve responsible innovations and sensible regulation. The final policy document on the
regulatory sandbox is targeted to be issued by early October 2016. Later today, you will also
have the opportunity to see some of these solutions and consider how they can complement
your own businesses.
We are also working with the Government to introduce consumer credit legislation that will
provide consistent protection to businesses and households that deal with financial
intermediaries that are not licensed financial institutions. Appropriate arrangements are also
being considered to drive and support the development of alternative financing vehicles to
serve the financing needs of small businesses.
To address an increasingly interconnected domestic and global financial system, we are
coordinating the development of a recovery and resolution framework with Perbadanan
Insurans Deposit Malaysia (PIDM). This is a multi-year project and an important priority of
the Bank to ensure that financial institutions are well prepared to manage potential stress,
and to preserve the broadest options for managing any failure of a financial institution with
minimal impact on financial stability. The Bank and PIDM will be initiating a series of
engagement sessions with the industry from early next year to share more details on this
work and how it will affect your institutions.
Part III: Reinventing the future - financing growth and innovation
We are entering a new era of economic development of unprecedented nature, one of the
most important roles of the financial sector will be financing innovation and supporting
businesses in managing the associated risks. Competing objectives and the obligations of
financial institutions to depositors and policyholders have suggested that this role is likely to
be more limited for traditional financial institutions. However, there are growing prospects for
financial institutions to support innovation without compromising the overriding obligations to
safeguard deposits and claims by policyholders. Two notable developments have supported
this.
The first is the evolution of a more comprehensive ecosystem for innovation. This includes
incubator programmes that are proving to be highly successful in helping entrepreneurs
commercialise ideas and scale up companies.
Such programmes can significantly reduce the cost of innovation for firms, and risks for
financiers and risk managers such as insurance providers. Malaysia also has in place
welldeveloped institutions that can play a key role in partnership with financial institutions to
support innovative financing solutions. These include the Credit Guarantee Corporation,
Cagamas and SME Corporation.
Second is the increasing opportunities presented for financial institutions to develop models
to evaluate risks associated with innovative ventures by making use of technology and big
data. This needs to be further complemented by broader efforts to develop valuation
standards and strong protections for intellectual property.
The financial industry should organise itself to advance such efforts in coordination with
professional bodies and authorities to open up wider avenues for financing innovative
businesses in Malaysia.
In the final analysis however, a larger role for financial institutions in financing growth and
innovation demands a clear, strategic focus on enhancing the organisational capacity to
promote innovation. It cannot be achieved with incidental measures and half steps. Financial
institutions must be able to effectively mainstream innovation into their operations - across
all parts of business, from developing innovative financial and risk management solutions,
strengthening learning on innovation within the organisation and reviewing operational
models and policies to support responsible practices that promote innovation. As earlier
alluded to, the industry must also take a more active role in creating the conditions for
innovative finance and insurance to be viable, working with legislators, policymakers, valuers
and incubators. It is high time that the industry associations devote a sustained focus with
dedicated resources to lead this effort.
Innovations must be firmly anchored in a mentality that has the public interest in mind, and
customers at the core. Just as innovation propels the financial sector forward, as custodians
of public funds, it is trust and integrity that prevents a gulf from forming between finance and
real value creation. This not only serves to build public confidence in the financial system, but
places finance firmly back in service of society. We ought to aspire for the banking and
insurance industry to be the pride of Malaysian, for its professionalism and integrity.
If innovation is the source of future prosperity, then financial solutions that promote
innovation must surely be its cradle. Over 120 years ago, Thomas Edison banked on his
famous invention, the incandescent light bulb, to obtain financing for his start-up, General
Electric, which went on to become one of the most enduring and successful global
conglomerates of our time. More currently, 18 banks and fund managers have invested
USD170 million in Symphony, a secure messaging platform which is being touted as the
"Whatsapp" of the financial world. Innovation such as this might or might not work but
experimenting new solutions always involve risks and we have learnt that it is an imperative
for any economy to grow to the next level of progress. Many other examples of our era exist
- each one illustrating the promise of innovative industries that have the potential to create
high-skill jobs and new economic opportunities that contribute to growth and development.
Let this future finance conference serve as an opportunity for us to critically reflect on the
actions that we can take individually and collectively to reinforce existing foundations, and
build new ones for sustainable growth in the new economy. The future is in our hands, let us
shape it to the advantage of the industry and the nation.