##160 billion as at end of 2004, accounting for approximately 25 % of the total financing channeled to the economy. the challenge to banking institutions is to enhance their competitive edge by being cost efficient without compromising on the quality of their services. on the other hand, the disintermediation process also offers opportunities to banking institutions. in particular, they can enhance their income by cross - selling mutual funds products and increasing their role as advisors, arrangers, underwriters and brokers for corporate financing arrangements. there is also bancassurance and bancatakaful in the area of cross - selling. on the islamic banking front, new foreign islamic banking players and the transformation of islamic windows into islamic subsidiaries of a banking group present new challenges to the islamic banking scene where competition is expected to intensify. in line with the government's strategic direction, initiatives are being taken to encourage strong and capable islamic financial players to venture abroad to explore new markets. in the years to come, it is envisaged that corporations and multilateral institutions will increasingly use malaysia as a launching pad to raise shariah - compliant long - term capital and issue sukuks, while investors look to malaysia for investment in islamic financial instruments. this is not merely a national vision, but actually a national target. the key challenge is to ensure that the financial infrastructure is well in place and that our banking institutions are well equipped with distinct capabilities to enable malaysia to compete regionally and internationally as a leading islamic financial centre. ladies and gentlemen, as competition intensifies with the entry of foreign players and non - bank financial intermediaries, another challenge confronting banking institutions is to find new markets or growth areas to tap new sources of income and thereby diversify their income sources. amongst the growth areas is financing to small and medium enterprises ( smes ). smes play a very significant role in terms of generating employment and contribution to export earnings, and that smes can blossom and contribute significantly to the national economy in the future. given the importance of smes to the economy, a number of initiatives are being taken to foster the development of smes and improve their access to financing. in this respect, banking institutions have provided considerable support in terms of financing to the sme sector. moving forward, the banking industry is expected to play a greater role in the development of smes, such as by offering a complete financial services solution as part of and in conjunction with their financing programs. aside from the

growing incidences of e - banking scams globally present banking institutions with the challenge of being one step ahead by deploying security measures that will provide customers with the highest level of confidence. technological development has also redefined the landscape of the payment systems industry with the introduction of new payment instruments and new delivery channels, as well as the entry of non - banks into payment services once thought to be the domain of banking institutions. while a vast array of electronic payment systems and instruments have been introduced against a background of more flexible regulatory policies, the use of cheques remains pervasive, accounting for more than 90 % of the non - cash retail payments in malaysia. significant development efforts and initiatives have been taken aimed at increasing the safety and efficiency of payment systems infrastructure, including upgrading funds transfer systems, migrating all magnetic stripe atm and credit card infrastructure to a chip - enabled environment, and introducing payment platforms that leveraged on the internet. these trends underpin the challenge for banking institutions to accelerate the adoption of electronic payment instruments and channels amongst consumers to gradually replace paper based payment instruments. while significant investments have been made to develop the network infrastructure, banking institutions should capitalise on the opportunity to further drive cost reductions and reap efficiency gains. there should be industry - wide participation in the e - payment infrastructure to attain critical mass in a much faster time frame and drive the unit cost of production lower. accessibility of payment services should be made more convenient by leveraging on existing network infrastructure, such as facilitating inter - bank funds transfers via the atms. further, industry standards on common payment value dates, payment references and notifications would entice consumers to use the more reliable e - payment channel. to encourage the use of e - payments, consumers should also be provided with the right pricing incentives. in this regard, banking institutions should price their payment services according to their production costs to encourage the use of the more cost effective and efficient payment modes. ladies and gentlemen, the malaysian economy has registered a robust growth of 7. 1 % in 2004, the fastest growth since 2000. the economic prospects for 2005 will continue to be favourable as the economy enters the year from a position of strength. growth is expected to be sustained at 5 - 6 % as underlying conditions in the domestic economy remain strong, with robust private consumption and investment activities. the sustained global growth as well as relatively favourable prices for primary commodities would ensure that the external environment would remain supportive of growth. the banking sector also enjoyed a very good year in 2004