Malaysia already has in place high quality physical infrastructure but considerably more is needed. Steps already being taken include the development of an efficient urban public transportation system, reliable and seamless broadband connectivity and energy efficiency-related infrastructure. This also needs to be reinforced by the  2  BIS Review 146/2010  transformation of the Government machinery to support the transition to a high value added economy. The final and fifth factor is the ability to effectively participate in the economic and financial integration with other emerging economies in particular with that of the region. Asia, in particular, offers immense opportunities for increased participation by Malaysia. Indeed, there is already rising investment into the region by Malaysian companies and this trend can be expected to continue over the medium term. This is particularly pronounced in the financial sector, where Malaysia’s domestic financial institutions are now increasingly having a greater presence in the region. Of importance, is that such ventures yield mutual benefit. There must also be value added to the countries concerned so as to ensure the sustainability of such ventures. II. Financial stability and potential risks in the financial system  Let me now turn to the financial system and financial stability. The Malaysian financial system has continued to perform well throughout 2010, with a high degree of resilience and stability even under the more challenging conditions. The capital positions of both the banking and the insurance sectors have remained stable, well above the regulatory requirements.

The composition of financial institutions will also show much greater diversity: with banks, insurers and takaful operators offering higher value-added services to serve the more sophisticated customers, with more developed venture capital industry and angel funds providing risk capital for innovative firms, and with development financial institutions stepping up to widen the base of financial services to all Malaysians. In addition, new and existing forms of financing that have thus far remained at the fringes of the financial system such as factoring, leasing and credit companies are expected to become more significant. Spurred by new technologies, such as greater adoption of electronic invoicing and receivables  6  BIS Review 146/2010  exchanges, it will generate more competition to the traditional players while enriching the product offering, particularly to the SME segment. The evolution of the financial sector will also focus on the new growth areas that will catalyse Malaysia’s transition to a higher value added economy. These include areas of financing such as for green technology, infrastructure development, education, and entrepreneurship and innovation. These are key focal points that will yield increased national productivity, drive innovation and stimulate the formation of businesses. It is anticipated that a significant portion of new frontier industries will be spearheaded by young, innovative SMEs that would require substantial investments in research and development, and for the commercialisation of the research and development. To support these endeavours, a more diversified financial structure, involving new financing modalities will be essential.