Central bank needs to be future-ready

  • Business
  • Saturday, 15 Jun 2019

Below are excerpts of StarBizWeek’s interview with Bank Negara governor Datuk Nor Shamsiah Mohd Yunus:

SBW: How much has changed in the period between the time you left the bank and returned?Governor: I am fortunate that the foundation of the Bank remains strong. This is to the credit of my predecessors who have ensured that the Bank remains professional in terms of discharging its duties and mandates.

However, like any other organisation, the Bank has to be future-ready, given the rapid disruptions that we are facing. To do so, there are some changes that we made when I came in. The first is to cultivate a more open culture, have more candid conversations and be more efficient in making decisions.

Secondly, there are also some changes made to the organisation structure of the Bank. These changes are intended to better reflect the Bank’s accountability in performing its various responsibilities, ranging from financial sector development, regulations and supervision, financial inclusion and financial integrity functions.

The structure improves coordination across these responsibilities while preserving important checks and balances within the organisation.

At times, the actions and decisions of the Bank involve trade-offs between different policy objectives. The changes ensure that such trade-offs are made at the appropriate level.

Given what has happened of late what has been your priority in terms of managing the bank and the banking industry.Our mandate is clear – to promote monetary and financial stability that is conductive to the sustainable growth of the economy.

The Malaysian financial sector continues to face headwinds emanating from the external sector. Technological disruptions in the provision of financial services to consumers and businesses will also alter the domestic financial landscape.

Against this backdrop, the priority for the Bank is to ensure that the financial system remains resilient and does not become a source of risk or amplifier of shocks to the Malaysian economy.

Financial institutions must ultimately be able to serve the economy through their role of providing credit responsibly protecting against risks, and enabling effective functioning of financial markets and payment systems.

The Bank will do its part to monitor and assess the financial system to ensure that it remains sound, progressive and inclusive to the benefit of the rakyat.

Given that things change so fast, what are the differences in the central bank between the time before, and now that you are governor?Now, more than ever, it is important for the Bank to have closer engagements with the industry and other key stakeholders to promote greater understanding. There needs to be open and constructive dialogue on the issues we face, if we want to effectively navigate these rapid changes.

An example of this is in how we facilitate better industry planning. We have started disclosing our regulatory calendar, which will provide some guidance to the industry on the upcoming regulatory policies that will be issued by the Bank. We recognise that this will lead to better resource allocation among industry players and better readiness for anticipatory changes.

Given that you would like to engage the industry, what is your preference in terms of the pendulum of swings between control and freedom for the banks?Bank Negara does not make commercial decisions on behalf of the banks and their boards. That is their call, and the accountability lies with them. What we do is to set out regulations and guidelines that promote an environment where financial institutions exercise that business judgment soundly.

How much of a role do you play in advising the Government?Bank Negara has always played an important role when it comes to providing our objective and professional advice to the government. If you look at the various publications of the Bank – be it our annual reports or quarterly bulletins – the Bank has always been transparent with our stance when it comes to the key challenges facing the Malaysian economy.

There are also a few other areas that we have been advising the government to focus on. This includes the need to improve the economy’s productive capacity, creating higher-paying jobs by reforming the labour market, reducing our overdependence on low-skilled foreign workers and moving up the value chain.

In terms of housing, there is greater realisation that the crux of the issue is affordability and not access to financing. The government is addressing this. From what I read from the newspapers, the government is increasing the number of affordable houses.

So there’s a lot of more conversation now around affordability instead of focusing on access to financing.


Where is our ringgit heading?Our ringgit is a flexible and market-determined currency. Malaysia has benefited from this when the ringgit acted as a crucial shock absorber, allowing the economy to remain resilient in the face of external headwinds. And this has been proven to be the case in 2014 and 2015, when volatility has been absorbed by the Ringgit, and thus limiting the adverse impact on the real economy.Given the recent uncertainties in global trade and geopolitical developments, periods of heightened volatility in the ringgit should be expected. This is not unique to the ringgit but also to other regional currencies as well. Importantly, the ringgit’s performance has been in line with other regional currencies. Most regional currencies have depreciated by between 0.7% and 4.0%. In 2019, the ringgit has depreciated by 0.6% against the US dollar. At the end of the day, Malaysia does not rely on the exchange rate for its economic competitiveness.

The Bank remains vigilant of these risks and will ensure orderly conditions in the domestic foreign exchange market. Market participants and businesses should also undertake proper exchange rate risk management, including hedging flexibilities provided by BNM.

With the trade war that doesn’t look like it is going to go away soon and Brexit on the horizon, how will this affect the Ringgit and Malaysia and what would be our response to these new pressure points that will continue to unfold?This is the new reality that we are in. We are going to see bouts of heightened volatility that will affect the Malaysian economy. But Malaysia has a proven track record in managing these shocks well.

Since the floating of the ringgit in 2005, Malaysia has been able to sustain steady economic growth despite several episodes of large external shocks. In 2015, we had a perfect storm with the oil price crash, the 1MDB scandal unravelling and large capital outflows, but yet the economy continued to grow. We had also experienced steep depreciation in the ringgit but our financial markets remained orderly, and banks lending continued to increase. Going forward, it is important for us to make sure that financial markets continue to remain orderly and financial intermediation can continue uninterrupted.

How much of a risk is this overhang within the property sector?The Bank has voiced our concerns on the risk of oversupply office spaces and shopping complexes for some time now. As such, the banks have been managing their exposure accordingly. As a result, the exposure to this sector has been small: less than 10% of banking system loans.

However, it is important for us to manage carefully the leverage we see in the household sector such that it does not materialise as risk to the economy. For now, household debt has been moderating and there are no apparent source of risks based on the stress-test that has been done.

To better anchor expectations, we are now publishing our Financial Stability report twice a year. These reports are intended to highlight what are the risks on the horizon so that the banks can take them into account.

Is there a need for a new Financial Masterplan given challenges technology is bringing to the banking industry?The Malaysian economy is changing and the financial sector needs to adapt accordingly. We are taking stock of the mega trends, and more importantly, the risks that they bring. No matter how the future unfolds, our financial system must remain sound and resilient. The last thing we need is for it to become a source of risks or an amplifier of shocks.

One example is the fintech agenda. Our philosophy is to strike a fine balance in harnessing the potential of technology, while managing its risks to preserve financial stability. The Bank is technology and brand neutral. As far as supervision is concerned, we will look at the business model of the banks to make sure they remain viable in light of emerging risks.

We recongnised that the financial sector need to be responsive to Malaysia’s changing economic structure and work to build capacity internally or with partners to meet the changing needs of the economy and society.

To the credit of the banks, they have not been sitting idle. They are forging collaborations with fintech firms. Our aspiration is that the financial institutions should continue to be a catalyst for positive change that will enhance the country’s long-term growth potential.


Will there be a push for consolidation?Any consolidation in the banking industry has to be market driven, based on commercial and business considerations.Mergers and acquisitions of significant size will be assessed against the prudential and “best interest of Malaysia” criteria, in line with the Financial Services Act (FSA) 2013. At the end of the day, this exercise must have a positive impact on economic development be it in terms of generating high value added economic activities, in creating high skilled employment opportunities, meeting an unmet need, or enhancing productivity and efficiency.

The licensing framework for virtual banks, is that on track?Yes, the target is to unveil the virtual banks’ licensing requirements by year-end for public consultation.

We are looking into several areas. For example in the Financial Services Act 2013, while it has been modernised, we realised that the definition of “banking business” includes the paying or collecting of cheques. We will have to relook at this definition and other provisions.

Digital banks...would incumbents be at a disadvantage? If there is a digital bank that can bring about change in the best interest of the nation, why should we keep our doors closed? That’s our philosophy. We’ve had quite a few parties approaching us but talks are still at the exploratory stage.

Again the potential entrants would be assessed on the two aspects before we issue out any new licenses - the introduction of digital banks must bring about positive economic development and reinforce financial stability. This existing licensing framework is not meant to protect the incumbents; rather, it’s to ensure the best interest of the economy. And just to be clear, there’s nothing stopping our local banks from going digital even today.

The grandfather clause with regard to ownership is increasingly in focus as the beneficiaries of that clause are getting older. How will Bank Negara treat this issue? We are very clear. Whatever was granted is “personal to holder” and will not be extended to their estate or beneficiaries. As such, all affected shareholders have in the recent years taken the necessary steps to ensure orderly succession and transition. In terms of their involvement in the institutions that they own, our regulations ensure that banks are being professionally-managed. There’s a clear separation between their role as the owners and the responsibilities of management.

Is Bank Negara open to private equity firms owning major stakes in banks?Well, to the extent that they can meet the prudential and best interest of Malaysia criteria, we will assess it on a case by case basis.

Islamic banking - are there too many players?Let me put things in context: Islamic Banking now accounts for nearly 35% of banking assets. They have come a long way and have mature. Is there still a need for us to hand-hold the industry as we did when they were at their infancy?

Our focus now is more on ensuring that the operating environment remains conducive for Islamic Finance. This is an exciting time for Islamic Finance to seize the leadership role, especially when it comes to the sustainability agenda through the value-based intermediation strategy.

The growing concern over climate and environmental risks to financial sector makes this all the more important.

There is also room to better integrate social finance tools, namely waqf and zakat, in Islamic Finance services to better enhance financial inclusion and create positive impact on the economy, community and the environment.

The central bank had previously envisioned a mega Islamic Bank. Indonesia is moving towards this. What is Malaysia’s stance on the subject?We already have 6 Islamic banks with capital more than US$1bil.

They are already sizable and some of them are operating in a number of countries.

How do you view the current leadership at local banks?The Asian Financial Crisis showed us the importance of good corporate governance. As such, over the years, the banks have put in place a robust framework to assess the performance of the board and senior management.

This is also part of the engagement that we have with the banks and their boards on an annual basis.

This performance evaluation framework is a balanced score card such that it is not limited to financial performance alone. It also assesses the bank’s risk management practices, succession planning and talent management, amongst others.

Having a robust evaluation framework is important because banking is a highly leveraged business.

To put it simply: if a loan goes sour, chances are depositors will stand to lose a lot more than shareholders. And this is where regulations step in to protect depositors.


The lessons learned from 1MDB and what more for reforms? How has 1MDB changed Malaysia?

I have to be careful with my remarks as there are on-going court cases. To put it broadly, this is not solely a Malaysian affair. The 1MDB episode not only puts a spotlight on Malaysia but the existing practices in other financial institutions in other countries as well.

One can even say that Malaysia was a victim because the other banking institutions involved also did not implement the necessary controls to mitigate the risks of them being used as a conduit to launder money.

We should never allow another 1MDB to happen again. Internationally, Malaysia is a member of the Financial Action Taskforce (FATF), an inter-governmental body that sets standards to ensure that countries have effective AML/CFT framework and practices.

Malaysia was assessed in 2015 by the FATF.

One of the key areas identified for improvement is the area of investigation and prosecution of high risk crimes such as corruption, smuggling and drug trafficking. We need to do more on this front.

At home, the Bank is supportive of the critical institutional reforms that are being carried out now following the 1MDB incident.

The Malaysian Anti-Corruption Commission (MACC) is now pursuing greater number of investigations and the setting up of the National Centre for Governance, Integrity and Anti-Corruption (GIACC) reinforces the government’s commitment to strengthening governance and combat corruption.

In addition, the government is also establishing the National Anti-Financial Crime Commission to ensure greater coordination amongst other agencies in the investigation of financial crimes.

There is also a Cabinet committee on Corruption. The Bank is taking steps to strengthen our commitment to financial integrity.

I have announced in March that the Bank will be releasing a public consultation paper to solicit feedback on the possibility of implementing a Cash Transaction Limit.

We are targeting to release the paper by the third quarter.

These institutional reforms are important and we must see them through.

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