Ladies and Gentlemen, In these competitive and challenging times, excellence in marketing capabilities, innovative and efficient distribution network, product development capabilities and customer relationship and care require the ability to harness these different competencies, formulate a coherent enterprise-wide strategy, that is then executed effectively. For that to happen, banks have to look within their organisations for the answers. Before resources are allocated, before a marketing direction and strategy is established, before the organisation is restructured, the bank needs to decide what its strategic business will be within the context of its markets - exactly what type of financial service provider it will be. As part of the efforts to enhance efficiency and thus alleviate the level of competitiveness, significant strategies were initiated during the year. This included the consolidation, the rationalisation of common functions and operations across institutions in the group, outsourcing of non-core activity and leveraging on cross- selling of the products and services within the group. Following the consolidation of the 54 domestic banking institutions into ten banking groups, there was significant rationalisation of the wide range of common functions and operations across institutions in the group. Six banking groups have also now leveraged on cross-selling of their products and services across institutions in the group. A further impetus towards achieving this would be the merging of the commercial banking and finance company businesses in the banking group into one single entity.

With the completion of the merger programme in December 2000, the banking groups are at various stages in building up their management team and enhancing corporate governance. A number of measures have been implemented to ensure that banking institutions’ Boards and key committees have sufficient representation of independent directors and that the Boards are encouraged to appoint qualified professionals to run the banks. Towards this end, Bank Negara has liberalised the remuneration package of the chief executive officers of banking institutions and left it to the Boards to formulate appropriate packages to attract the necessary talent and determine their remuneration package. In the final analysis, a more competitive banking system should produce benefits to their customers and the business in terms of easy access, quality choices and competitive prices. An indicator of the improved level of competitiveness has been the narrowing of margins. During the year 2001, gross interest margins of banking institutions have narrowed to 3.86% for the commercial banks from 4.3%. This reflected the larger reduction in the average lending rate vis a vis the average cost of funds. Competitive interest rates were particularly evident for mortgage and hire purchase loans reflecting strong demand for credit for these sectors. The competitiveness of the domestic banks in terms of the gross interest margin has also improved. The gap between the domestic banks and foreign banks has narrowed from 0.92 percentage points as at the beginning of year 2000 to 0.69 percentage points as at the end of 2001.