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. 4  BIS Review 32/2005  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.

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.