BANK Negara governor Tan Sri Dr Zeti Akhtar Aziz was in
high spirits when she briefed the media ahead of the unveiling the Financial
Sector Blueprint.
She has grounds for feeling
cheery in the holiday season. The first Financial Sector Masterplan (FSMP) had
met most of its targets set for the 10-year period when it was introduced in
2001.
And the new blueprint, although
containing fewer proposals than its predecessor, aims to put the financial
sector on a stronger footing to compete globally and withstand any financial
headwinds.
Themed “Strengthening Our
Future”, the new blueprint will be a 10-year strategic plan that charts the
future direction of the financial system as Malaysia transitions towards
becoming a high value-added and high income economy.
Looking back, although the
banking sector had its ups and downs, it has nonetheless over the years become
stronger and better capitalised to ride out the financial challenges constantly
taking place in the global arena.
That strength, which was the
priority of the central bank after the Asian Financial Crisis in the late
1990s, saw the local banking sector escape relatively unscathed during the
2008-2009 financial turmoil when its counterparts were sinking in the west.
The FSMP ensured that the
domestic financial system had sufficient buffers in place and a sound risk
management system as well as adequate level of capital for it to undertake
organic and expansion activities.
Whether by devise or through
the natural evolution of the local banks, the financial sector expanded by an
annual growth of 7.3% during the tenure of the FSMP and transformed the
financial landscape to one where the banks were more competitive and
diversified, possess better financial infrastructure development, regulatory
reforms, greater usage of technology and efficient delivery channels.
Progressive liberalisation in
the banking sector also saw more foreign participation in the domestic banking
scene, and that fuelled greater competition in the sector.
As all roadmaps, there were
some areas that did not meet the FSMP targets, especially in the consolidation
of the insurance sector and Internet banking.
But this has changed and more
mergers and acquisitions have taken place and some are in the pipeline.
Internet banking has been growing dramatically in recent years, and will see
continued take-up as broadband becomes more pervasive and more effort spent to
promote its growth.
Unlike its predecessor, the
Financial Sector Blueprint's recommendations are based on shared outcomes
applicable to various sub-sectors within the financial sector instead of being
sector-based. This is due to the increasing linkages, greater connectivity and
regional integration in the financial sector.
Another area of difference is
that the blueprint envisions greater participation of Malaysian banks beyond
domestic borders in facilitating regional trade and investment, regional
financial integration as well as the internationalisation of Islamic finance.
Illustrating the impact banking
has had on the economy, the sector grew from 1.3 times gross domestic product
(GDP) in 2001 to 2.4 times GDP when the FSMP ended. The deepening of the
banking sector with the real economy has multiplied its importance to the
economy and under the new blueprint, Bank Negara envisages the banking sector
to grow to three times GDP by 2020.
Financial sector growth
On the growth of the financial
sector, Zeti says that by the end of 2020, it is expected to expand to six
times of GDP from the current 4.3 times. Correspondingly, she says, the
financial sector contribution to GDP is projected to rise to between 10% and
12% for the period from the current 8.6%.
More than half of total
financing in 2020 will be raised through the financial markets, while Islamic
finance will continue to increase in prominence, growing at a faster pace to
account for 40% of total financing by the end of this decade, she says.
With growth of the financial
service sector prjected to rise, so will risks inextricably.
RAM Holdings Group chief
economist Dr Yeah Kim Leng feels the financial sector contribution to GDP of
10% to 12% was rather high currently and there should be more balanced growth.
Over imbalance expansion of the
financial services sector could create credit bubbles and over-leveraging, he
says, adding that the projected growth of 10% to 12% should be supported by the
effective channelling of Malaysia's high savings into productive investments
leading to sustained growth of the real economy.
Nine areas of focus have been
identified under the blueprint. They are the effective intermediation for a
high value-added and high income economy; development of deep and dynamic
financial markets; greater shared prosperity through financial inclusion; strengthening
regional and international financial integration; internationalisation of
Islamic finance; safeguarding the stability of the financial system; achieving
greater economic efficiency through electronic payments; empowered consumers
and talent development for the financial sector.
Of the nine, Zeti says, three
will be critical ones although all the others will also be given strong
priority. The three she made reference to are from the intermediation aspect,
strengthening the regional and international financial integration including
internationalisation of Islamic finance and the stability of the financial
system.
Bank Negara says effective
intermediation entails the mobilisation of diverse savings to productive
investments to meet the needs of both businesses and households. In this
regard, vibrant risk-capital ecosystem to support innovation-driven economic
activities and start-up ventures will be developed. The initiatives will
include enhancing the provision of large and long-term project financing for
infrastructure development.
As Malaysia deepens its trade
and investment linkages, the financial sector is envisaged to have a larger
role in supporting the internationalisation of Malaysian businesses.
To cater to Malaysia's growing
affluent segment and maturing population, emphasis will be placed on enhancing
the provision of financial services for wealth management, retirement and
long-term healthcare.
The development of a vibrant
private pension industry is expected to enhance the role of pension funds as a
key source of funding for the longer-term and risk-based financing needs of the
economy.
A banking analyst says forging
regional integration with Asia and other emerging markets is the right
direction to take, judging from the encouraging economic growth and high
savings rate in the region. The savings, he adds, can be invested in productive
activities in other Asian countries rather than using the funds to invest in
volatile market like in Europe and the United States.
The blueprint appears to also
favour stronger banks with scale and reach and there is a fear smaller banks
with an introverted view on banking could see the gap with its larger peers
expanding as a result of the push in the blueprint.
Yeah feels that forging greater
linkages will result in higher cost, especially for smaller banks. “Banking
services are driven by scale and technology. Smaller banks will find it
difficult to compete unless they have a niche, for example in small and medium
enterprises or technology financing,” he adds.
Regional integration
One of the big successes of
Malaysian banking under the last plan has been the expansion of reach beyond
the shore of the country. Large banking groups have stakes in a number of Asean
countries and the focus on growing such linkages wiill benefit them.
On way that will happen is
through the recycling of Asian savings to invest in the region. By 2030, Zeti
says, emerging economies are projected to account for 60% of total world
output, from the current 40%, and greater regional integration will benefit
banks.
On the financial sector
liberalisation aspect, which is also given prominence in the blueprint, foreign
financial institutions intending to set up operations in Malaysia will be
guided by two key considerations. They are the prudential criteria and the best
interest of Malaysia criteria.
The latter will take into
account whether the foreign investment, among others, will contribute to the
Malaysian economy and its impact on the financial stability. Banking licences will
be issued to those with expertise and in niche areas to ensure it can value-add
to the banking industry.
That stance does not mean
licences will be given freely as the central bank does not want the country to
be over-banked despite protestations from parties wanting a slice of the
Malaysian market.
A banking analyst with a
foreign brokerage opine that the conditions for issuing of licenses to foreign
banks under the blueprint was relevant. “Its quite fair that any banks
intending to operate in Malaysia should adhere to the prudential aspect in
terms of having sound risk management, strong capital base and good governance.
“It should be in the interest
of country to ensure local banks are protected and there is no over competition
in terms of products and services. We need foreign banks with specific
expertise to add dept and breadth to the domestic financial sector,” he
explains.
RAM Ratings head of financial
institution ratings Wong Yin Ching says the blueprint which advocates further
liberalisation is envisaged to lift the financial sector to new heights as
doors are now opened to foreign institutional shareholders.
“We think that Bank Negara may
consider more flexibility with respect to foreign shareholdings in banks beyond
the current cap of 20% on a case by case basis as long as it is within the best
interests of Malaysia. Liberalisation could be viewed as beneficial if the
foreign shareholder is an international banking group given the potential for
transfer of knowledge and best practices. Additionally, the central bank is
receptive of issuing new licences to foreign financial institutions with specialised
expertise,” Wong says.
With liberalisation, she says
local banking groups can expect stiffer competition which may exert pressure on
their margins, adding that this may also spur local banks to innovate and
provide better services to customers. As competition in the Malaysian banking
scene intensifies, she says local banking groups will continue to seek
opportunities offshore.
Islamic financial centre
While Malaysia has made
significant inroads in becoming an international Islamic financial centre, Zeti
says efforts under the blueprint will continue to be undertaken to enhance the
Islamic financial ecosystem.
This will entail developing a
more conducive environment for the mobilisation of higher volumes of
international Islamic financial flows from a diverse range of players to be
channelled through innovative Islamic financial instruments.
“We want to be an international
Islamic financial hub. We have an edge over other Islamic financial
jurisdictions as we have a comprehensive Islamic financial infrastructure and
strong Islamic legislation in place,” she says.
But that does not mean its an
open revolving door for any new players into Malaysia. They too have to adhere
to stringent requirements and that explains why the conditional licences for
two mega Islamic banks have yet to be fulfilled.
In strengthening the legal and
syariah frameworks and further advancing Malaysia's thought leadership in
Islamic finance, a single legislated body to be the apex authority on shariah
matters in Islamic finance will be established.
Malaysian Rating Corp Bhd
(MARC) CEO Mohd Razlan Mohamed says the focus on internationalisation of
Islamic finance would benefit MARC as a domestic credit rating agency.
“As the largest global market
for sukuk issuance, we believe we will benefit from the attraction of more
global issuers to raise rated sukuk in Malaysia. The domestic credit rating
industry would benefit from the availability of a wider international rating
universe and foreign issuers against which our local issuers may be benchmarked
to build our capability and experience to rate foreign credits,” he explains.
Malaysia is the largest sukuk
market in the world with 65% valued at US$96bil in 2010. In the global takaful
sector, Malaysia was the second largest takaful market with 26% share of the
global takaful assets in 2009.
In fostering a sound and stable
financial system, efforts will also be intensified towards ensuring a robust
surveillance, regulatory and supervisory framework.
Efforts will be directed
towards improving the liquidity, depth and participation in the money, foreign
exchange (forex) and government securities markets in Malaysia, in enabling
more effective intermediation, transfer of risks and management of liquidity.
The forex administration rules
will be progressively liberalised to further raise efficiency in financial
market transactions. On the internationalisation of the ringgit, Zeti says
Malaysia is in no hurry to do so. She adds, this will only be done when there
is a developed forex market in the country, which she hopes will be established
over the decade, to handle manage activity on the ringgit.
An important agenda under the
blueprint will be to accelerate the migration from paper-based payments to
electronic-payments. In the next 10 years, electronic payment transactions is
targeted to increase the number of e-payments per capita from 44 transactions
to 200 transactions, and reduce cheques by more than half from 207 million to
100 million per year. Consumer protection is also not disregarded. To this end,
the infrastructure to support greater consumer empowerment will be strengthened
through establishing a single consumer credit legislation, integrated dispute
resolution system and an enhanced credit information framework.
In talent development, a
Financial Services Talent Council will be established to drive, oversee and
coordinate talent development efforts in the financial sector. Other
initiatives include developing talent for entry level, promoting continuous
learning for the existing workforce, and attracting talent from abroad.
Ensuring an adequate supply of
skilled talent to meet the challenges in the new financial landscape will
require greater collaboration and coordination among various agencies beyond
the financial sector.
An industry observer says
talent has always been one of the pressing issues in the banking sector and
local bankers need to be upskilled at a higher pace in order to meet the blue
print's target of 10% to 12% contribution to GDP from the financial sector at
the expiry of the blueprint.
“There is need for further
upgrading of skills and talent in the private banking and wealth management
side as banks have to compete with countries like Singapore, Hong Kong and
Dubai. Although Malaysia has an established Islamic financial infrastructure,
it is still facing shortage skill as talent is being poached by other
countries,” he notes.
DALJIT DHESI
The Star
Business & Investment Opportunities
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