Nor Shamsiah Mohd Yunus: Shifting tides - future of finance
Opening remarks by Ms Nor Shamsiah Mohd Yunus, Governor of the Central Bank of Malaysia
(Bank Negara Malaysia), at the MyFintech Week 2019 "Shifting Tides: Future of Finance", Kuala
Lumpur, 17 June 2019.
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I would like to welcome all of you to the inaugural MyFintech Week and Financial Industry
Conference hosted by Bank Negara Malaysia. This event is being held at a time that brings
together two important mileposts for the Malaysian financial services industry - the beginnings of
an exciting era of digitalisation and a new chapter in the development of the financial sector as
the current Financial Sector Blueprint approaches the end of its horizon in 2020.
"Shifting tides: Future of finance" was deliberately chosen as the theme of the event for a reason.
For much of history, human civilisation could not reasonably explain how ocean tides occurred. It
was only through the discovery by Sir Issac Newton and the dedication of scientists over many
centuries that we are able to understand it today.
Like ocean tides, the future of finance may be hard to fathom at the beginning. Yet it offers many
opportunities and risks. Perhaps most importantly, it also underscores the heavy responsibility
and ownership that we collectively bear to build a financial system that is safe, reliable and truly
serves the needs of the people.
In my remarks today, I will discuss what this entails in order to develop a financial system for all
Malaysians.
The world is undergoing dynamic shifts
The world around us is shifting dramatically. To understand this shift, we should pay attention to
five megatrends.
The first is the shift in global economic order with the rise of Asia, including the rising prominence
of ASEAN. The gravity of the global economy is moving to the East. Being the sixth largest
economy and home to around 650 million people, there is an abundance of opportunity, hope and
dynamism in this region. The financial sector will no doubt, be a key player in further catalysing
the growth of ASEAN countries.
The second is the risks brought about by climate change. Tackling climate change may be one
of the biggest challenges for humanity in building a sustainable and prosperous future. It could
lead to devastating, wide ranging and irreversible damage to our economy, society and the way
we live. Economic losses in itself could be very significant, as high as USD20 trillion. Insured
losses from effects of climate change have already increased five-fold in the past 30 years.
The third is the rising income inequality that can threaten the fabric of our society. Consider this.
The top 1% of the population has captured twice the global income growth of the bottom 50%
since 1980. Worse still, inequality has persisted despite large transfers of public to private wealth
in many countries.
The fourth is the rising populism and protectionist policies. This can be seen in inward looking
policies and anti-establishment views that have become more entrenched in parts of the world.
Slow growth, lack of economic mobility and erosion of trust in public and private institutions are
among the factors that are likely to have contributed to this. Like undercurrents before a storm,
these trends have far reaching implications for political, economic and social systems.
Last but not least, the fifth shift is the advancement of technology. This has and will continue to
dramatically alter the way we behave, interact and transact. Much has been said about the
benefits, but an increasing reliance on technology presents risks that we cannot ignore. This
includes issues of data privacy, discrimination or biases and also displacement of certain
segments within society. In the digital age, higher order risks of cyber-attacks and operational
disruptions are magnified in ways that we have yet to fully comprehend.
Calling for a financial system that is relevant, safe and socially responsible
These five megatrends and finance are deeply intertwined. While undoubtedly finance has helped
to power the economic rise of ASEAN, its role in contributing to an increase in climate risk and
inequality cannot be denied.
Therefore, as we consider the future of finance, we need to contemplate not only how these
megatrends may impact finance, but how finance itself can respond to and shape these trends in
more positive ways moving forward.
In my mind, this calls for a financial system that is relevant, safe and socially responsible.
Finance must be relevant to the needs of the economy. This means that it must offer suitable,
cost-effective and quality financial products and services for all segments of society. It must also
respond to the changing demographics and structure of the economy. For example, as we move
towards becoming a digital economy, the financial sector must accord adequate support to
innovative SMEs, such as those involved in e-commerce. Equally important, we must remember
that this imperative is not only for banks, but extends to the other parts of the financial sector.
Non-banks such as venture capital and private equity firms, as well as alternative financiers such
as factoring and leasing companies, have an equal stake in this and should also play a more
active role in financing the needs of businesses. The need to bridge the gaps between 20th
century finance and the 21st century economy is both compelling and urgent for the whole
financial sector as conditions remain challenging for the economy domestically and abroad. This
is also certainly not the only time that we will face such challenges.
To be safe, finance must not sow the seeds of its own destruction and not serve as an amplifier
of risk to the economy. The ability of finance to mobilise capital, create leverage and distribute
risk allows it to be a powerful force for good. But excessive and unbridled risk taking creates
instability which is harmful not only for the particular firm, but the economy and society at large.
There is also a greater need for finance to be Financial institutions can
socially responsible.
and must assert the much needed leadership in a world where the continued neglect of equitable
development and a rapidly deteriorating environment is displacing communities, raising social
and political tensions, and putting future generations at grave risk. Finance still holds the trust of
society and substantial influence over economic agents. But this is a privilege earned, and
demands that financial institutions behave ethically, and act in the best interest of the
communities they serve.
The role of technology to revolutionise finance
There is no question that technology will lie at the very heart of these imperatives for the financial
system. This has been true for decades, only the order of its impact is now, arguably much
greater.
After all, the world's first ATM in 1967 transformed the relationship between people and money
and making finance more accessible. Today, fintech signals the next phase in the transformation
of finance.
Fintech holds enormous potential to enhance competition, increase productivity, address
unfulfilled consumer demand and fundamentally change the way institutions provide financial
services - in ways we may not even have fully discovered.
Similarly for Islamic finance, adoption of technology could present significant opportunities to
reduce the cost of financial intermediation and expand access. For example, distributed ledger
technology could enable automated execution of contracts through the use of digital protocols, or
smart contracts, which can simplify complex Shariah contractual processes. In addition, fintech
initiatives to integrate social finance tools, such as waqf, sadakah and zakat, to offer more
affordable financial and protection solutions, will be instrumental to serve those who are currently
financially underserved or excluded. The integration of social finance into Islamic financial
services encourages wealth distribution among society to achieve greater balance between
wealth creation and wealth sharing.
Ultimately, fintech in Malaysia should be harnessed to offer inclusive, sustainable and relevant
financial products and services to serve the needs of all.
The responsibility to manage the attendant risks
This however means that we need to be cognisant of the potential risks associated with
technology.
This will be especially important as fintech and bigtech firms become more prominent in the
financial system. Such firms could pose system-wide vulnerabilities that can amplify shocks to
the financial system and cause financial and economic instability. Increasing reliance and
concentration on third party service providers, including those located offshore, to support critical
functions, could also increase operational vulnerabilities in more unpredictable ways
The demands of society for speed, convenience and cost efficiency are at a point where
substantial tensions already exist between pressures on financial institutions to accelerate the
adoption of technology, and our capacity to manage those risks effectively. These tensions will
only increase going forward.
Managing these tensions at an optimal level will be critical. It will call for changes to how financial
institutions internally oversee and manage technology risks, both within and across their
business activities, invest in hard and soft infrastructure and having much deeper collaboration
across institutions and agencies.
Socially responsible finance will also require institutions to carefully consider how technological
innovations may create new forms of financial exclusion or raise difficult ethical questions. Clear
guidance on acceptable conduct by staff and relevant parties will be needed. This in turn, will
require financial institutions to reflect on their core values and risk appetite.
In short, managing technology risks is not just an operational matter. It is a strategic one with
high stakes for individual institutions, as well as the industry and the economy more broadly. Our
response should be commensurate with these stakes.
Beyond measures taken at an institutional level, there is a pressing need for the financial
industry, and indeed even the nation, to provide an enabling and secure framework for
technological innovation; and educate and empower the public to take advantage of innovations.
For example, the need to formulate a cohesive, coherent and comprehensive national strategy
on cyber security is an urgent need. We can only play our intended role to support the broader
economy if we are attentive to both strategic and operational considerations of risk.
Developing a safe, sound and vibrant financial system through innovation and
technology
Bank Negara Malaysia is committed to play a facilitative role to enable innovation to flourish. Like
financial institutions, we need to balance the significant benefits of financial innovation with its
risks. We are also mindful that the calls we make in regulating and supervising the industry can
themselves sometimes, restrain innovation.
Our responses to new financial technologies will continue to be primarily concerned with the
risks that they pose to financial stability and consumer protection. In finding the right balance in
our overall regulatory and supervisory posture, we will continue to consult widely with the industry
and experts in the field. A key priority for the Bank is to ensure that our regulatory and
supervisory system is appropriately calibrated to encourage innovation, but also has the agility to
shift gears when required to respond to new risks. This recognises that innovation without
stability ultimately destroys value, confidence and undermines our future.
What does this mean in practice? There are at least three things, which are each a reflection of
our ongoing efforts to build an enabling, yet safe environment for innovation:
First, building interoperable infrastructures. This will start with open and fair access to a
shared payment infrastructure for banks and non-banks alike. It is also important to
recognise the need for other digital public infrastructures as key enablers to harness the full
potential of fintech. These include having a national digital identity system, framework for
open API and open banking, clear cloud policy and nationwide broadband connectivity.
Second, further differentiating our regulatory and supervisory approach to capture new
sources and transmission of risks while allowing room for experimentation and for firms to
develop economies of scale. An important objective will be minimising regulatory arbitrage,
which can lead to risks building up in parts of the financial system that may be subject to
differentiated regulations. We anticipate that this will call for a much more dynamic approach
to regulation and supervision as well as better communication of regulatory developments
going forward.
Third, strengthening platforms for collaboration. In this regard, the Bank, together with the
financial industry, is in the process of establishing a Financial Threat Intelligence Platform.
The platform will collate, analyse and disseminate real time information on cyber threats and
trends to strengthen the detective capabilities of the industry against such threats. We
expect to operationalise the platform before the year end. I am also pleased to announce the
establishment of a dedicated innovation lab, right here in Sasana Kijang. The lab will provide
a collaborative environment for the purpose of creating, elaborating, and prototyping
innovative solutions to clearly defined problem statements.
Recall that ocean tides present us with both opportunities and risks. The fact that humanity today
is better able to understand, predict and master ocean tides should give us encouragement for
the future of finance. The goal of a relevant, safe and socially responsible financial system can
be attained by focusing our energies toward this shared goal in which we all have a critical
stake. Much like a "rising tide that lifts all boats", the actions and choices that we make within the
financial system do not just affect the provision of financial services, but have important
implications for the well being of society and our economic prospects as a nation. We owe this
not only to ourselves and others at this point in time, but especially to our future generations.
With that in mind, this event provides a valuable opportunity for us to reflect on a broad range of
issues that can help us move forward with greater confidence. Let me leave you with three
questions to ponder as you do so:
First, what are the barriers preventing the industry from working together more closely to
unlock the true potential of finance?
Second, have firms in the industry achieved the right balance in their adoption of technology
in finance and capacity to manage the attendant risks?
Third, how can we scale financial innovation to create greater value for society, including
advancing inclusive and responsible finance as well as the sustainability agenda?
On that note, it gives me great pleasure to formally launch MyFintech Week and the Financial
Industry Conference. I wish all of you an informative and productive week ahead.