Zamani Abdul Ghan: Creating a competitive banking system - towards the
enhancement of quality and efficiency in Malaysian banks
Speech by Mr Zamani Abdul Ghan, Deputy Governor of the Central Bank of Malaysia, at the
9th Malaysian Banking Summit 2005 - "Enhancing Competitiveness to Meet Strategic Challenges",
Kuala Lumpur, 10 May 2005.
* * *
Bismillahirrahmanirrahim
Y. Berusaha Encik Mirzan Mahathir,
President, the Asian Strategy and Leadership Institute or ASLI
Y.Bhg. Dato' Dr. Michael Yeoh, CEO/Director of ASLI
Your Excellency
Distinguished Guests
Ladies and Gentlemen
Assalamualaikum warahmatullah and Good Morning
On behalf of Bank Negara Malaysia, thank you for the invitation to officiate at this year's Banking
Summit organised by ASLI. It is indeed a great pleasure to be here today at this important forum. The
theme chosen for this year's Summit is most relevant as it provides an opportunity to deliberate on the
challenges ahead and the strategic initiatives needed to realise our common goal of a progressive and
competitive banking system that will facilitate and drive our economic transformation.
Ladies and Gentlemen,
The financial landscape is undergoing transformation, driven by financial liberalisation and
consolidation, economic transformation, and more discerning consumers. These developments have
been reinforced by technological advancements, which have allowed the developments of new and
more efficient delivery and processing channels as well as more innovative products and services.
Against this backdrop, a number of challenges have emerged. Foremost amongst these is intensified
competitive pressures, spurred by financial liberalisation and technological revolution. Banking
institutions are facing competition not only from each other but also from non-traditional competitors
such as non-bank financial intermediaries as well as from alternative sources of financing, such as the
capital markets. Indeed, the Malaysian capital markets have broadened and deepened, and are now
playing a more pronounced role than before in the financial intermediation process. In this respect, the
challenges to the banking sector are manifold. On the funding side, consumers' continued interest in
diversifying their investments in search of higher returns, have seen funds flowing directly into the
financial markets instead of going into banking institutions' deposits. At the same time, companies are
increasingly meeting their financing needs in the equity and bond markets, thereby reducing their
reliance on banking institutions. This is evidenced by the growth of outstanding private debt securities
or PDS in the market by 10.7% to RM160 billion as at end of 2004, accounting for approximately 25%
of the total financing channeled to the economy. The challenge to banking institutions is to enhance
their competitive edge by being cost efficient without compromising on the quality of their services. On
the other hand, the disintermediation process also offers opportunities to banking institutions. In
particular, they can enhance their income by cross-selling mutual funds products and increasing their
role as advisors, arrangers, underwriters and brokers for corporate financing arrangements. There is
also bancassurance and bancatakaful in the area of cross-selling.
On the Islamic banking front, new foreign Islamic banking players and the transformation of Islamic
windows into Islamic subsidiaries of a banking group present new challenges to the Islamic banking
scene where competition is expected to intensify. In line with the government's strategic direction,
initiatives are being taken to encourage strong and capable Islamic financial players to venture abroad
to explore new markets. In the years to come, it is envisaged that corporations and multilateral
institutions will increasingly use Malaysia as a launching pad to raise Shariah-compliant long-term
capital and issue sukuks, while investors look to Malaysia for investment in Islamic financial
instruments. This is not merely a national vision, but actually a national target. The key challenge is to
ensure that the financial infrastructure is well in place and that our banking institutions are well
equipped with distinct capabilities to enable Malaysia to compete regionally and internationally as a
leading Islamic financial centre.
Ladies and Gentlemen,
As competition intensifies with the entry of foreign players and non-bank financial intermediaries,
another challenge confronting banking institutions is to find new markets or growth areas to tap new
sources of income and thereby diversify their income sources. Amongst the growth areas is financing
to small and medium enterprises (SMEs). SMEs play a very significant role in terms of generating
employment and contribution to export earnings, and that SMEs can blossom and contribute
significantly to the national economy in the future. Given the importance of SMEs to the economy, a
number of initiatives are being taken to foster the development of SMEs and improve their access to
financing. In this respect, banking institutions have provided considerable support in terms of financing
to the SME sector. Moving forward, the banking industry is expected to play a greater role in the
development of SMEs, such as by offering a complete financial services solution as part of and in
conjunction with their financing programs. Aside from the SME sector, banking institutions should
explore other potential growth areas such as microcredit and agro-based financing, which are
generally perceived as riskier and more costly than lending to larger firms. The challenge is for
banking institutions to innovate and develop new form of financing arrangements and business models
to exploit the opportunities offered by these market sectors. Strategic opportunities are also available
from a larger marketplace as economic integration and regional linkages of markets in the East Asian
region gather pace, driven by increasing regional trades and investment flows. In this regard, banking
institutions should broaden their strategic outlook and expand their presence in the region to support
Malaysian businesses and investors as they venture into new activities and expand their geographical
profiles.
Another strategic challenge facing banking institutions today is the growing and changing needs and
expectations of consumers in tandem with increased education levels and growing wealth. Consumers
are becoming increasingly discerning and have become more involved in their financial decisions. For
this reason, they are demanding a broader range of products and services at more competitive prices
through more efficient and convenient channels. Corporate customers have also become more
performance-oriented and are demanding both competitively priced credit facilities and world-class
financial advisory services. In this environment, the challenge is for banking institutions to anticipate
and respond quickly to the differentiated demands and expectations of customers to sustain their
competitive advantage. With growing customer expectations for continuous availability of services, the
ability to continue to provide critical banking services at all times will also be crucial in the pursuit of
building and maintaining their competitive edge. In conjunction with this, banking institutions must be
able to quickly recover mission critical functions and assets during a major interruption to ensure
efficient and reliable services to their customers.
Technological advancement, which has increased the complexity of banking business and which has
led to the emergence of increasingly innovative products and distribution channels, also presents
opportunities for the banking sector. With ICT, financial services are being delivered to places and
markets without requiring physical branch networks through a growing array of alternative delivery
channels, including Internet, ATMs, and even mobile phones. The challenge to banking institutions is
to effectively leverage on the opportunities offered by technology to innovate products and services
aimed at attaining greater efficiency, reliability and competitiveness. While the efficiency of electronic
means of doing banking is acknowledged, banking institutions should recognise the need for them to
meet customer expectations for more personalised and quality services. Additionally, the potential
benefits from electronic delivery channels need to be exploited without undermining the security and
confidence of the banking public. The growing incidences of e-banking scams globally present
banking institutions with the challenge of being one step ahead by deploying security measures that
will provide customers with the highest level of confidence.
Technological development has also redefined the landscape of the payment systems industry with
the introduction of new payment instruments and new delivery channels, as well as the entry of
non-banks into payment services once thought to be the domain of banking institutions. While a vast
array of electronic payment systems and instruments have been introduced against a background of
more flexible regulatory policies, the use of cheques remains pervasive, accounting for more than 90%
of the non-cash retail payments in Malaysia. Significant development efforts and initiatives have been
taken aimed at increasing the safety and efficiency of payment systems infrastructure, including
upgrading funds transfer systems, migrating all magnetic stripe ATM and credit card infrastructure to a
chip-enabled environment, and introducing payment platforms that leveraged on the Internet. These
trends underpin the challenge for banking institutions to accelerate the adoption of electronic payment
instruments and channels amongst consumers to gradually replace paper based payment instruments.
While significant investments have been made to develop the network infrastructure, banking
institutions should capitalise on the opportunity to further drive cost reductions and reap efficiency
gains. There should be industry-wide participation in the e-payment infrastructure to attain critical
mass in a much faster time frame and drive the unit cost of production lower. Accessibility of payment
services should be made more convenient by leveraging on existing network infrastructure, such as
facilitating inter-bank funds transfers via the ATMs. Further, industry standards on common payment
value dates, payment references and notifications would entice consumers to use the more reliable
e-payment channel. To encourage the use of e-payments, consumers should also be provided with
the right pricing incentives. In this regard, banking institutions should price their payment services
according to their production costs to encourage the use of the more cost effective and efficient
payment modes.
Ladies and Gentlemen,
The Malaysian economy has registered a robust growth of 7.1% in 2004, the fastest growth since
2000. The economic prospects for 2005 will continue to be favourable as the economy enters the year
from a position of strength. Growth is expected to be sustained at 5-6% as underlying conditions in the
domestic economy remain strong, with robust private consumption and investment activities. The
sustained global growth as well as relatively favourable prices for primary commodities would ensure
that the external environment would remain supportive of growth.
The banking sector also enjoyed a very good year in 2004, a year in which strong performance was
recorded, and this positive trend has continued into the first quarter of 2005. Buoyed by favourable
economic and financial market conditions, 2004 marked another year of strong profitability
performance by the banking system where the combined pre-tax profits rose by 16.1% to RM11.8
billion. Banking institutions have diversified their revenue source by venturing into a broader range of
fee-related activities, which yielded a strong growth of 17% for the banking sector as a whole. This
shift in the sources of revenue has been gradually taking place over the past few years as banking
institutions seek to lessen their dependence on interest-based activities as their main source of
revenue. With the growth in the middle-income group in Malaysia, banking institutions are poised to
provide value-added services to this increasingly affluent group including wealth management services
and sale of unit trusts and bancassurance.
Perhaps the biggest contributor to strong earnings has been the steady improvement in asset quality,
consistent with a gradually improving economy. The net non-performing loans have declined to a
record low of 5.4% as at end-March this year, the lowest level since the Asian financial crisis.
Improvement in economic conditions is a key reason for the sustained decline and credit quality is on
track to improve further, more so as the economy improves. The underlying strength of the Malaysian
banking system is also confirmed by trends in capital adequacy. The banking sector continued to
exhibit strong risk-weighted capital ratio where the level has remained above 13% for 33 consecutive
months and continues to improve.
For Islamic banking, the sector has registered a strong growth of 19% per annum from 2000 to 2004.
While the Islamic assets accounted for almost RM95 billion or 10.5% of total assets of the banking
system as at end-2004, market shares of Islamic deposits and financing increased to 11.2% and
11.3% of the banking system respectively. The capital position of the Islamic banking sector remained
strong during 2004, registering an increase of 14.7% to RM7.8 billion. The risk-weighted capital ratio
and core capital ratio were sustained above 12% and 10% respectively.
Ladies and Gentlemen,
While our banking sector has made progress, as financial liberalisation and consolidation gather pace,
greater competition in the banking sector is likely to ensue. As such, the need to enhance the
competitiveness of the banking sector to withstand forces of change and compete in this more
liberalised environment becomes even more pressing. Successful institutions will be the ones with the
agility to adapt swiftly and respond to the changing market needs through - innovative and
differentiated product offerings; excellent service quality; and superior level of efficiency. With growing
competition in traditional banking products and services, banking institutions need to continually strive
for excellence in product development capabilities with a greater focus on customised and higher
value-added services. In this respect, banking institutions should capitalise on the opportunities
presented by the emergence of new growth areas as well as rising households' wealth by
strengthening their capabilities in the areas of wealth management, financial advisory services and
consumer banking. Product innovation must also be high on the agenda of Islamic banking institutions
going forward. The move into niche markets will not only increase the potential to secure higher
returns for shareholders and depositors but would also increase the diversity of new asset classes
available for Islamic investment. Banking institutions are expected to maximise the full advantage of
the universal Islamic banking licence issued, which allows a wide range of business to be undertaken
ranging from retail and corporate banking to investment banking and fund management.
To meet the challenge from more discerning and demanding customers, it is equally important for
banking institutions to complement the richer and more customised range of product offerings with
higher levels of service performance. Of importance is the enhancement on customer relationship
management and development of 'front-office' strategy that is aligned with the customer-centric value
proposition to improve customer satisfaction and retention. Closely related to this is the need to
promote a customer-centric culture and align the organisational structure and strategies towards
supporting the strategic focus of building a lasting and profitable relationship with customers. In this
regard, clear communication of business strategies to front-line staff is important to achieve excellence
in service performance, particularly in complaint management and customer service. As service quality
is the essence in banking business, the quality of manpower will increasingly be the defining factor of
competitive advantage and long-term sustainability. As such, continuous investment in human
intellectual capital must be made to ensure the availability of best talents at all levels of the institution.
Most importantly, strategic leadership at top management level is required to chart the strategic course
and drive the banking institution towards attaining the highest standards of performance.
The business environment remains dynamic, as such human resource management must adjust to
support business strategies and realise improvements in business processes and systems by ensuring
employees are equipped with the appropriate skills at all times. Such adjustment requires greater
integration of personnel policies and practices with the corporate mission and goals, improvement in
recruitment practices to attract the best talents and greater focus on human resource development.
While qualification and skills of staff are critical elements, of greater importance is the ability to
translate knowledge into enhancing the capabilities and excellence of the institution. Banking
institutions will have to enhance the level of competencies and motivation on an ongoing basis,
cultivate professionalism and the right attitude, and create and maintain a learning environment. For
Islamic finance, the banking industry needs to continually promote human capital development and
expertise to create a larger pool of experts and high calibre professionals in Islamic banking and
finance. In particular, adequate resources should be allocated in building distinctive capabilities in the
newly emerging areas such as private equity investments, real estate investments, private wealth and
asset management.
Ladies and Gentlemen,
Another key aspect that drives higher standards of performance and competitiveness is the
capabilities to deliver products and services in the most efficient and effective manner. To facilitate
this, banking institutions should adopt the relevant technology to enhance their delivery capability to
ensure speedy and seamless customers access to banking services through a wider range of delivery
channels, aimed at reducing operating costs and providing greater convenience to customers.
Information technology still has immense untapped potential in banking. For instance, technology
could be harnessed as an enabler in building higher quality research, strengthen risk management
capabilities, enhance market information gathering and analysis capacity to keep pace with the
changing trends and demand patterns. While leveraging on technology may achieve improved
efficiency, banking institutions should also ensure that the new banking technology does not lead to
the emergence of a digital divide in the access to banking services. In this regard, banking institutions
are expected to continue providing high standard of banking services to all consumers, regardless of
their income and where they live, whether urban or rural.
With the growth in the diversity and complexity of products and services, risk profiles of banking
institutions will change. Consequently, banking institutions should continuously upgrade their risk
management framework by improving their governance standards, adopting global best practices and
enhancing information management systems. Enhancing risk measurement and management
systems would better prepare banking institutions in complying with the criteria required under the
Basel II Capital Accord. In addition, with enhanced risk management capabilities, banking institutions
will be better equipped to price products and services more competitively while ensuring that their risk
exposures remained within manageable levels. Better insights into their risk profile also facilitate in
their formulation of business strategies and enable the optimal use of their capital. In this context,
banking institutions must be prepared to beef up their financial strength and capital level during the
current favorable economic environment so that they could weather vulnerability during downturns and
crisis situations.
Ladies and Gentlemen,
While the responsibility for strengthening competitiveness rest with the banking institutions, Bank
Negara Malaysia plays an important role in spearheading the development of the banking sector. In
realising the vision of a progressive and dynamic banking system, Bank Negara's policy initiatives aim
at providing a more conducive environment that encourages innovation and competition, while
maintaining the safety and soundness of our banking sector. In line with this, Bank Negara Malaysia
will ensure its prudential framework is adaptable to changing market circumstances and business
practices, and does not contain features that might inhibit banking institutions from upgrading their
capabilities or delaying their response to changes. Our regulatory approach has shifted away from
prescribing detailed rules towards "principle-based" regulations. There is now greater focus on
providing "incentive compatible" parameters that encourage banking institutions to conduct their
businesses prudently, whilst allowing them the flexibility to develop strategies within the broad
principles. Over time, our regulatory and supervisory framework would rely more on market discipline
through increased disclosure and transparency. In this respect, shareholders are expected to play a
more active role in overseeing the performance of banking institutions and the effectiveness of
management in conducting the business in an efficient and professional manner.
As we advance into the second phase of the FSMP or the Financial Sector Masterplan Plan,
progressive liberalisation will take place to level the playing field for domestic and foreign banking
institutions. To this end, greater operational flexibility will be accorded to the existing foreign banking
institutions. Bank Negara Malaysia has, in addition, granted three new full-fledged Islamic banking
licences to foreign financial institutions. Additionally, foreign direct investment of up to 49 per cent has
been allowed in the equity holding of the Islamic subsidiary of a commercial bank. The overall market
shares of local and foreign banking institutions have not changed drastically, but there has been
qualitative improvements in operational efficiency, service levels, risk management and corporate
governance standards. Over time, as the industry further evolves, Bank Negara Malaysia will reassess
the environment before deciding on further liberalisation measures.
Ladies and Gentlemen,
Macroeconomic and financial conditions are evolving swiftly, posing more significant challenges and
lending urgency to accelerating efforts towards realising our vision of a more progressive and dynamic
financial system. Greater commitment towards enhancing strategic competence and organisational
effectiveness are critical as we strive for higher standards of performance and greater efficiency in the
banking system. To ensure that the financial system is well placed to serve the nation, on-going efforts
will be directed towards enhancing the efficiency of financial infrastructure and strengthening the
functioning of the markets as we advance forward. Our policy initiatives will continue to maintain a
regulatory environment that encourages innovation and efficient competition towards evolving a more
diversified banking sector, while at the same time maintaining high prudential standards to ensure the
soundness and stability of the system. With strong concerted efforts between Bank Negara Malaysia
and the industry, or continuous and honest dialogues in one form or another, we can look forward with
confidence to continued strong performance from the banking sector to contribute significantly to the
economic prosperity of the nation.
On this note, I wish you all an enjoyable and fruitful conference.
Assalamualaikum and thank you.