Product innovation must also be high on the agenda of Islamic banking institutions going forward. The move into niche markets will not only increase the potential to secure higher  BIS Review 32/2005  3  returns for shareholders and depositors but would also increase the diversity of new asset classes available for Islamic investment. Banking institutions are expected to maximise the full advantage of the universal Islamic banking licence issued, which allows a wide range of business to be undertaken ranging from retail and corporate banking to investment banking and fund management. To meet the challenge from more discerning and demanding customers, it is equally important for banking institutions to complement the richer and more customised range of product offerings with higher levels of service performance. Of importance is the enhancement on customer relationship management and development of 'front-office' strategy that is aligned with the customer-centric value proposition to improve customer satisfaction and retention. Closely related to this is the need to promote a customer-centric culture and align the organisational structure and strategies towards supporting the strategic focus of building a lasting and profitable relationship with customers. In this regard, clear communication of business strategies to front-line staff is important to achieve excellence in service performance, particularly in complaint management and customer service. As service quality is the essence in banking business, the quality of manpower will increasingly be the defining factor of competitive advantage and long-term sustainability.

Over time, our regulatory and supervisory framework would rely more on market discipline through increased disclosure and transparency. In this respect, shareholders are expected to play a more active role in overseeing the performance of banking institutions and the effectiveness of management in conducting the business in an efficient and professional manner. As we advance into the second phase of the FSMP or the Financial Sector Masterplan Plan, progressive liberalisation will take place to level the playing field for domestic and foreign banking institutions. To this end, greater operational flexibility will be accorded to the existing foreign banking institutions. Bank Negara Malaysia has, in addition, granted three new full-fledged Islamic banking licences to foreign financial institutions. Additionally, foreign direct investment of up to 49 per cent has been allowed in the equity holding of the Islamic subsidiary of a commercial bank. The overall market shares of local and foreign banking institutions have not changed drastically, but there has been qualitative improvements in operational efficiency, service levels, risk management and corporate governance standards. Over time, as the industry further evolves, Bank Negara Malaysia will reassess the environment before deciding on further liberalisation measures. Ladies and Gentlemen, Macroeconomic and financial conditions are evolving swiftly, posing more significant challenges and lending urgency to accelerating efforts towards realising our vision of a more progressive and dynamic financial system. Greater commitment towards enhancing strategic competence and organisational effectiveness are critical as we strive for higher standards of performance and greater efficiency in the banking system.