The banking sector has come a long way since the launch of the Financial Sector Master Plan that envisaged the formation of banking groups of a certain size and strength. In her interview of the sector's performance and prospects, Bank Negara Governor TAN SRI ZETI AKHTAR AZIZ looks at the progress charted: new trends and growth areas. She sees that regional expansion is encouraged for the larger banks and shares further details on the liberalisation of the islamic sector.
Progress of the consolidation process; further developments
The consolidation exercise that was driven by the higher capital requirements has been completed. Today, there are 10 domestic banking groups with average total assets of RM49.1bil, nearly three times the average total assets in 1998. The average capital size has also improved from RM1.4bil in 1998 to RM4.4bil.
We have seen the banks continue to reap the benefits of the earlier consolidation between the banking groups. We have a banking system that is now less fragmented and our domestic banks are less vulnerable to external developments.
The higher capital capacity allows for large IT investments that has improved service delivery. It has also contributed to enhanced operational efficiency and flexibility. Customers have also benefited from the wider range of products and services.
In 2004, we have amended the legislation to allow mergers of commercial banks and finance companies within the same banking group to capitalise on the synergy between the entities and the economies of scale and thus enhance the operational efficiencies within the banking groups. So far, five of these internal mergers have taken place and we expect further such mergers to take place this year.
More consolidation between the banking groups
This is something we encourage but there is no urgency for further consolidation to take place. The banking sector is still reaping the benefits of the mergers that have taken place.
At this stage, however, the priority is for further efficiency gains to be made, improved pricing of products and services, and for world class quality of services to be achieved.
Going forward, further mergers may take place, however, such mergers will be determined by the market, based on the business strategies. Our policies will be focused on further enhancing efficiency, resilience and effectiveness of the financial system in meeting the needs of the entire spectrum of the economy.
Foreign banks interest in buying stakes in local banks
Given the positive economic prospects and stable socio and political environment, Malaysia will always be an attractive market for foreign banks. New foreign entities can take up strategic stakes in our domestic banks especially where their presence can enhance the capability and competitiveness of their local partner through amongst others, technology and skills transfer, and contribute towards further development of the Malaysian banking system.
Review of foreign competition, further introduction of foreign competition
Foreign participation has been here since banking was first established in our country. In fact, over time, domestic banks have increased their market share. Foreign presence in our system has brought new developments associated with new technology and other expertise to our system. They have also had a role in facilitating our integration with the international economy.
It is important for us to not only have international economic linkages but also financial linkages. Recently, we have liberalised in the area of Islamic banking to issue three new banking licences. These were from financial institutions in the Middle East, which we expect to enhance our linkages with markets in the Middle East.
In conventional banking we have not issued any new foreign licences for several decades now. The foreign presence in our banking system accounts for almost 30%. This includes the 13 foreign-owned banks operating in Malaysia as well as foreign stakes in our domestic banks.
Under our WTO commitments, we allow foreigners to take up to 30% interest in our domestic banks. This arrangement has been in place since 1995. It is however, important to recognise that Malaysia never brought foreign interest into our system during periods of financial stress. It was never part of the resolution of our banking sector. Foreign entry into our system have been when the conditions are favourable. Such foreign entry are based on the higher value added that is expected to bring to our financial system and to our economy.
Being part of our financial system, foreign banks are expected to make a meaningful contribution to our domestic economy. They must appreciate and recognise the domestic environment and the socio-economic agenda of our country. Foreign banks benefit from the stable macro economic environment and significant economic growth we have experienced for so many decades. It has to be a two way process. They must also do their part and contribute to the environment in which they operate.
On reports that Bank Negara Malaysia prefers institutions rather than individuals to invest in banks.
It is not advisable to come in on a consortium basis.
The preference is for institutional shareholders who have deep pockets to inject capital rather than individuals who may have various limitations. This avoids conflict of interest and professionals can be hired to manage the institution.
Unlike other businesses in the corporate sector, where they are dealing with the funds of shareholders, in the financial sector, we are dealing with the funds from the public and other businesses. Therefore, as the custodian of these funds, they are subject to more stringent requirements. These are among the reasons we have moved away from individual interests in banks to institutional investors.
Regional expansion of banks
We basically see three categories of banks; first the very large banks that have both regional and global presence. The second category are those banks that have nationwide presence. The third category is the smaller banks that specialise in niche areas.
In this recent two or three years, some of our larger banks have intensified their initiatives beyond our borders and have expanded their presence in the region.
The regional expansion has been in the term of branches or subsidiaries or strategic stakes in existing entities operating abroad. These moves are encouraged for the larger institutions. There are significant opportunities to tap new markets in the region. It will also strengthen the regional economic integration that is already taking place. It would also support financing of intra-regional trade and investment, giving support to local entrepreneurs who have ventured out to these countries.
I believe that ASEAN and Asia will become a major bloc in the world economy. It has experienced growth that is above the global average for more than a decade now. It is becoming an increasingly important component of the world economy.
Earlier a concept paper was already discussed with the industry. We have now been in discussion with the Securities Commission to develop the regulatory framework that needs to be in place to oversee investment banking in our financial system. We have at this stage reached an agreement with the Securities Commission on the regulatory issues. A finalised concept paper will be circulated to the industry. It will be issued to the industry very soon.
In view of its implications on the industry, the approach adopted is very much a consultative process. The industry will be given an opportunity to provide their input into the exercise. This will include a wider group, the merchant banks, discount houses and the stock broking industry.
They will be given the opportunity to give their views on the configuration that is being proposed. The objective is for resources to be appropriately aligned to what constitutes an investment bank. Also important is the regulatory framework that will have to be in place to ensure the effective and sound functioning of the investment banks.
New growth areas in banking
Banks need to assess their own strengths and competitive advantages to see their own potential in new areas of growth. The factors in the environment that will influence the potential new growth areas are the changing economic landscape, the growing customer affluence, the changing demographic structure, the growing importance of small and medium-scale enterprises, the new technologies, the coming on stream of new delivery channels, new business models being developed and so on.
Among the areas that have started to show significant growth is consumer banking, financing of small and medium-scale industries, money remittances, wealth management and structuring of securitisation deals. The range of products in the new delivery channels can also be widened. There has also been prospects for increased cross-selling for example in the distribution of unit trust and marketing of bancassurance products.
There are also new customer segments that are emerging. The banking sector needs to capitalise on these new trends. There are also new areas in the economy that requires new forms of financing and new financial services. New schemes will need to be developed. n many of these, the banking system will need to adopt different business models to capture these new markets.