With the accelerating pace of regional integration, financial institutions are presented the opportunities to broaden beyond domestic borders to capture opportunities for the regional markets. It has been more than 5 years since the Financial Sector Master Pan was launched. The strategic focus has allowed us to promptly emerge from the crisis management mode and moved full steam ahead towards developing the financial system, The initiatives undertaken have now laid a strong foundation for the development of a strong and diversified financial system. Significant progress has been achieved in building the capacity and capability of the financial sector and in putting in place the necessary financial infrastructure including the supporting legislation and the domestic financial markets. 2  BIS Review 55/2006  The financial landscape and operating environment that is envisaged in Phase 2, where domestic banking institutions would have built greater capacity and capability to compete, is also progressing as planned. The level of competition in the financial system has increased significantly, fuelled by greater expectations from customers and facilitated by a more flexible regulatory framework and increased deregulation and liberalisation. This has resulted in improvements in the delivery of financial services and more efficient pricing and risk management, all of which contribute towards raising the level of economic performance. The wide range of measures to improve efficiency and effectiveness of the financial institutions, include initiatives on improving risk management practices, further developing the human capital and building talents for the financial sector, as well as measures to elevate the level of consumer awareness.

Benefits of foreign direct investment are manifold ranging from efficiency gains brought about by new technologies to the introduction of innovative products and management techniques. Further, more advanced research and development facilities and adoption of best practices from more matured financial markets will contribute to the transfer of skills and knowledge, adoption of sound risk management culture, technology and ideas in the domestic financial system. Another consideration in the liberalisation process is that of promoting financial inclusion, where all segments of society will have access to adequate financial services. The wide branch network of domestic banking institutions has ensured that non-urban areas have access to banking services, thereby eliminating the use of informal financial services. Domestic banking institutions with large presence in the non-urban areas, some as high as 20% of total branches, have succeeded in achieving sustainable performance while meeting this objective. Locally incorporated foreign banks are however located mainly in major cities and serve only certain segments of the banking public. A wider dispersion of branches of locally-incorporated foreign banks across the country would contribute towards achieving greater financial inclusion. For further expansion outside major cities to be a commercially viable proposition, it is recognised that the attainment of critical mass is essential. In this  6  BIS Review 55/2006  regard, in addition to the flexibility accorded to establish up to four new branches, consideration will be given to allow for greater presence in the non-urban areas and to serve the segments of the economy which are currently underserved.