By DALJIT DHESI
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.
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