ric battellino : challenges and opportunities for the funds management industry in australia opening remarks by mr ric battellino, deputy governor of the reserve bank of australia, to the 20th australasian finance and banking conference, sydney, 12 december 2007. * * * introduction it is a pleasure to be here to open the 20th australasian finance and banking conference. over the past twenty years, the conference has provided a stimulating forum for discussion of a wide range of issues facing the banking and finance industry, and it has played an important role in helping to promote australia as a major financial centre. i ’ m sure this year will be no exception. this morning ’ s business forum on the challenges and opportunities for the funds management industry has already generated a number of interesting points for discussion. the schedule for the next two and a half days will take the discussion into a broader range of topics in the field of banking and finance but for the moment i will focus my remarks on the funds management industry. industry size let me begin by recapping some facts on the size and growth of the industry. as we have heard, the funds management industry in australia has expanded at a remarkable pace over the past couple of decades. since 1990, the value of funds under management has grown at an annualised rate of 12½ per cent, and now stands at around $ 1. 7 trillion. this is equivalent to about 160 per cent of gdp, up from about 50 per cent in 1990. by international standards, australia ’ s funds management industry is among the largest in the world, not only as a ratio to gdp but also in absolute terms. some reports rank australia as the fourth largest funds management industry in the world in terms of assets under management. the data underlying this ranking are compiled by the investment company institute, an industry association for us mutual funds. this measure covers investments in mutual funds and unit trusts, and therefore favours countries such as australia where this type of investment vehicle is quite common. on the other hand, it understates the size of the funds management industry in countries that tend to use other investment structures. an alternative approach for measuring the size of the funds management industry is to add up all of the assets of pension funds, life insurance companies and other managed investments, regardless of the precise legal structure in which they reside. this provides a broader view of the funds management industry and one that is more comparable across countries. this exercise is not straightforward, however, as consistent international data are difficult

the next 25 years. in order to contribute to the achievement of these aspirations, the financial sector has to play a clearly defined role, particularly in mobilising resources required to finance the 20 flagship projects worth ksh 500 billion that will be required over the next five years. this is a significant budget, equivalent to kenya ’ s annual budget and hence the need for a strong and vibrant financial sector that will help channelling these savings into the required investments. it is with this in mind that the government is requiring banks to double their efforts in building a solid capital base capable of supporting product innovation, savings mobilisation and expanded access of financial services to the kenyan public. let me add that the heavy infusion of public investment to attract and enhance private sector investment will be important to continue the economic growth acceleration. 5. although physical bank branch expansion programs play an important role in expanding access, it will be important for the banking sector to complement these programs with increased product innovation. the real challenge for all of us is how to enhance savings mobilisation, and effectively channel society ’ s savings to its most productive use. we, at the central bank would like to encourage banks to offer an expanded range of banking products in order to mobilise savings to support financing of economic activities in the country. this will also provide acceptable options to the investing public who are currently falling prey to schemes being touted by unscrupulous business people in the form of pyramid schemes. we need to guard our successes from these pyramid schemes menace. we will rely on the screening and monitoring roles of the commercial banks like yours to eradicate this menace and with the appropriate savings and investment products in place. 6. the banking sector in this country has, over the last few years, witnessed significant growth in consumer lending. this is evidenced by the growth in real private sector credit of 17. 7 % in the twelve months to may 2007. the resultant credit expansion has brought significant benefits to the economy, but the information asymmetry that is prevailing in the lending environment poses a real challenge in the form of credit risk for the banking sector in kenya. 7. in order to mitigate this risk and promote effective credit provision, consumer protection and strong institutions for these aspects, the central bank has been working towards the development of a credit information sharing mechanism in kenya. the banking act has recently been amended to make it mandatory for institutions licensed under the banking act to share credit information on nonperforming loans. in this regard