Buoyed by favourable economic and financial market conditions, 2004 marked another year of strong profitability performance by the banking system where the combined pre-tax profits rose by 16.1% to RM11.8 billion. Banking institutions have diversified their revenue source by venturing into a broader range of fee-related activities, which yielded a strong growth of 17% for the banking sector as a whole. This shift in the sources of revenue has been gradually taking place over the past few years as banking institutions seek to lessen their dependence on interest-based activities as their main source of revenue. With the growth in the middle-income group in Malaysia, banking institutions are poised to provide value-added services to this increasingly affluent group including wealth management services and sale of unit trusts and bancassurance. Perhaps the biggest contributor to strong earnings has been the steady improvement in asset quality, consistent with a gradually improving economy. The net non-performing loans have declined to a record low of 5.4% as at end-March this year, the lowest level since the Asian financial crisis. Improvement in economic conditions is a key reason for the sustained decline and credit quality is on track to improve further, more so as the economy improves. The underlying strength of the Malaysian banking system is also confirmed by trends in capital adequacy. The banking sector continued to exhibit strong risk-weighted capital ratio where the level has remained above 13% for 33 consecutive months and continues to improve.

On the other hand, the private sector may have larger financial capacity but is traditionally more inclined to support low-risk and well-served customers, whilst high risk customers are either left out or are charged quite expensively to buffer for uncertainties. In overcoming these challenges, DFIs ought to collaborate with other entities in mobilising capital and diversifying risk across different institutions, thus providing an opportunity for the private sector to participate in these segments within the comfort of their risk tolerance. In parallel, DFIs need to continuously build their internal expertise and deepen their understanding of the sectors or segments through regular engagement with the industry, as well as enhance industry analysis, leveraging on access to data within the government. This would augment DFIs’ credibility to lead and crowd-in the private sector towards participating in innovative funding structures. There are two noteworthy solutions that DFIs may wish to find ways to adapt to the local context: Firstly, a risk-sharing facility that can catalyse private capital. This entails offering instruments that enhance the private sector’s willingness to finance high-risk segments. For example, USAID partnered with the Medical Credit Fund (MCF) in Africa in providing USD 1 million catalytic first-loss capital which successfully drew in USD 17 million debt financing from impact investors. MCF, in turn, worked with African financial institutions to provide loans and technical assistance to healthcare SMEs in providing quality healthcare services as well as ensuring business sustainability. Secondly, the use of blended finance while offering financing instruments that promote customer resilience.