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.

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. BIS Review 32/2005  1  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.