This was to ensure that the necessary preconditions were in place so that the benefits of increased financial internationalisation would be realised, while ensuring that the associated risks inherent to a more open economy and internationally integrated financial system could be effectively managed. Seven preconditions were identified as being important to this process. The first was to accord priority to building the capacity of the intermediaries in the financial sector, and to strengthen their resilience and competitiveness. At the time of the Asian financial crisis, Malaysia had a highly fragmented banking sector with more than seventy banking institutions, many of which were small and highly vulnerable. During the financial crisis, a major restructuring exercise was undertaken. This was followed by an industry-wide merger exercise, prompted by an increase of the capitalisation requirements. The restructuring strengthened the balance sheets of the banking institutions, while the consolidation produced larger and stronger financial groups. The second was to undertake financial reforms which focused on the transition to a more market-oriented financial system. This involved interest rate reforms that would support the more efficient pricing of financial products and services. The more competitive environment that was generated became an important driver of efficiency gains and innovation in the financial system. Equal attention was also given to the development of the financial infrastructure, in particular, the payment and settlement system and the modernization of the legal framework to give greater clarity to the legislation governing the financial sector.

The case for increased financial liberalization and internationalization maintains that it would foster the development of a more efficient and robust financial system. While the resulting more competitive financial system will enhance the efficiency in the financial intermediation process and contribute towards reducing the cost of intermediation, the supervisory oversight needs to ensure over competition does not result in the mispricing of risk with adverse consequences on financial stability. Other benefits are the increased opportunities for technology transfer, new expertise and greater innovation and new product offerings. Increased foreign participation in the domestic financial markets would also contribute to increased liquidity and more competitive pricing in the domestic financial markets and encourage a more efficient allocation of capital within the economy. It is also maintained that it will contribute to the expansion and development of the domestic financial markets in particular, the capital market, proving an important access for financing of investment activity. With the more efficient functioning of domestic financial markets, it would also improve the transmission mechanism of monetary policy. Meanwhile, the increased capital inflows following the capital account liberalization represents another source of financing that would contribute towards increased investment and growth. It will allow jurisdictions with surplus funds to be channelled to those regions with productive investment opportunities and thus contribute towards a more efficient allocation of funds across international borders. The stronger cross border financial linkages has the potential to enhance international trade and investment opportunities.