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chapter three

banking sector


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B a c k g ro u n dThe b an king sector comprises licensed institu tion s nam ely com mercial ba nks,

fi na nce compa nies, mercha nt b an ks, discount ho uses an d mon ey brokers w hich

a re licensed und er t he Ba nking a nd Finan cia l Institut ions Act 1989 (BAFIA) and

supervised b y BNM.

The banking sector plays an important role as fin a n c i a l

i n t e rm e d i a ry and is a primary source of financing for the

domestic economy, accounting for about 70% of the

total assets of the financial system as at end-1999.

As at e nd-2000, there w ere 31 comme rcia l ban ks (of w hich 14 are f ully fo reign-

ow ned), 19 fin an ce compa nies, 12 merchant b an ks an d 7 discount ho uses. Upon

completion of the merger programme a mong domestic banking insti tutions, the

numb er of do mestic ba nking institutions w ill be signifi cantly reduced to 10

dom estic ba nking groups consisting of 10 commercial ba nks, 10 fi na nce companies

an d 9 mercha nt ba nks.

Currently, the dom estic banking institut ions (excluding t he discount houses) control

ab out 75% of b an king sectors ma rket share, in terms of t ot al assets and tot al

depo sits. Despite th e do minance of dom estic ban king institutions, the 14 fully

foreign-ow ned ba nking institutions ha ve made a strong presence in the domestic

ba nking sector. The fo reign ba nking institutions as a group h as gen erally been

ahea d o f do mestic players in terms of fi nancial performance as refl ected by the

higher return on equity and return on asset, operationa l effi ciency and prod uct

innovat ion in the do mestic ma rket. The incumbent f oreign ba nking institutions

have g eneral ly operated based on a ta rget ma rket, focused on high value corporat e

clients as ag ainst the ma ss consumer an d corporate custo mers by the dom estic

ba nking institutions. Other facto rs contributing to t he bett er performa nce of

the incumbent foreign b an king institut ions include t heir globa l netw ork, access

to ta lents and experience in various markets as w ell as their superior level of

informat ion technology. There are therefore signifi cant ga ps betw een fo reign and

dom estic ba nking institutions, w hich need t o be na rrow ed to a chieve the orderly

development o f a viab le and ef fective dom estic ba nking sector.


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Vision and Objectives

While t he fi na ncial sector w ill become increasing ly

more diversifi ed, t he ba nking sector w ill cont inue to

be a n importa nt source of fi nancing f or the domestic

economy in the fut ure. The development of t he

ba nking system, pa rticularly the dom estic ba nking

institutions is therefo re vita l to f acilitat e a nd support

the economic growt h a nd transformation process.

Prima rily, due to t heir dom inant ma rket share, the

strength of t he do mestic ba nking institutions is an

important element of fi nancial s tabi li ty that

contributes to the long-term resilience of the

economy. The ad vanta ge o f ha ving b etter

knowledge o f the local market how ever does not

promise long-term compet itiveness for dom estic

banking insti tutions given the trend to w ards

grea ter g lobalisat ion a nd liberalisat ion. The a bility

of do mestic ba nking institut ions to meet the

increasing ly more complex dema nds of t he chang ing

economy and t he retention of their market share

w ill be severely tested a s domestic compet ition

inten sifi es. Theref ore, th e surviva l of d om estic

ba nking institutions w ill be depen dent o n their

ab ility to improve their effi ciency and effe ctiveness

in product of fer ing so as to b e at par w ith the w orld

cla ss players. As market f orces assume a grea te r role,

dom estic ba nking institutions must be proactive

in their strateg ies in order to compet e w ith globa l

players. Innova tion and strate gic reengineering

w ill be vita l a s th e process w ill eventua lly see

dom estic ba nking institut ions ha ving to redefi netheir focus and fi nd th eir own niches with broad

oversight b y the regulat ory auth orities.

The b an king industry is also rap idly restructuring a nd

consolida ting. Merger an d a cquisition activities

w orldw ide ha ve intensifi ed over the last few years.

New non -trad itional players such a s supermarkets

an d telecommunicat ion compa nies are entering the

fi na ncial services markets. These new entra nts b ring

large custom er base an d mo re innova tive delivery

chan nels. Insuran ce com pa nies, building societies

and independent mortg ag e companies are

leverag ing on t heir large capt ive custom er base by

cross-selling a w ide rang e of fi na ncial products.

Virtu a l market places are a lso increasing p rice

tran sparency an d pushing ma rgins dow n. Websites

a re providing simple, ea sy-to -access compa rison s of

the f ees, cha rges, interest rat es and investment

returns off ered by the different providers of fi na ncial

services. Over time, increa sed tra nspa rency w ill lea d


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to low er margins as the best product of fers at tract a

w ider rang e of bet ter-informed custom ers.

The land scape of t he Ma laysian b an king secto r

can be expected to evolve and chang e signifi cantly.

Players with stron g va lue proposition w ill survive

an d expand w hile oth ers w ill event ually exit th e

ma rket. The a im is for a set of core domestic

ban king insti tutions to emerge, out o f t he

competitive process, to b ecome lead ers in t he

fi nancial sector tha t is able to compete meaningfully

w ith the foreign players.

The presence of foreign ba nking institut ions in

Ma laysia is currently high, cont rolling a bo ut 25%

of ba nking sectors ma rket share in terms of tot al

assets and to ta l deposits as at end-2000. Moving

forw ard, incumben t foreign ba nking institut ions

w ill be able to operate o n a more level playing fi eld

w ith dom estic ba nking institutions as the dom estic

ma rket is increa sing ly de regu lat ed. The role played

by fo reign ba nking institut ions will be assessed in

terms of their contr ibution t o t he development of

the fi na ncial industry as w ell as to the o verall

economic grow th a nd sta bility. The introduction

of new types of foreign competition, particularly

during the a dvanced sta ge of development of the

fi na ncial system, w ill also be considered w ith a

view to ensuring tha t t he do mestic fina ncial system

continues to be e ffective, vibrant a nd responsive

to the req uirements of the economy.

Over time, it is expected tha t t he do mestic ba nking

groups, throug h a process of me rgers, a cquisitions,

asset swa ps and allian ces, w ill evolve into mo re

differentia ted competitors, spurred b y increa singly

more dema nding custom ers an d shareholders.

Banking institutions will be compet ing on cost, t o

be g loba l and to dominate in certa in product

segment s in Malaysia a t th e expense of gene ralist

institut ions. The key t o t his is the b uild-up of capita l

size a nd business scale as w ell as the investment in the

requisite ICTinfrastructure an d hu ma n t alent s.

It is envisag ed tha t the t rend tow ards building

mea ningfu l size w ill be complemented b y great er

specia lisat ion. Fina ncial institutio ns are specia lising

more a nd mo re in specifi c product ma rkets or

specifi c functions along the business cha in of

tra dition a l services. These institut ions develop scale

a nd skills in the p a rticular fu nctions necessary to

dom inate in the a rea of f ocus, reduce costs an d

increa se service q ua lity. As th ey succeed in one

ma rket, these specialised institut ions de velop oth er

skills an d scale necessary to e nter n ew ma rkets a nd

become g lobally competitive ba sed on strat egicapp roaches by focusing on specifi c product m arkets

or specifi c functions along the business cha in.

While increasing size is import a nt , th is ta kes time

an d requires signifi cant resources. Domestic banking

institutions are t herefore expected t o consider the

alternative mea ns by which to leapfrog a nd a cquire

new skills an d e xperience. Outsourcing an d strat egic

a llian ces can a ssist t his process. Globa l trend indicat es

this has been w idesprea d, a nd is fa st increa sing .

Banking institut ions are increasingly outsourcing an dent ering into strat eg ic a lliances to a ccess th e skills

th ey do n ot possess intern a lly. Externa l access to


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technolog y, w hich ent ails high costs, ensures banking

institutions access to t he late st technology a nd w ill

reduce replaceme nt costs. The mo st signifi cant

example in the a rea of outsourcing is the g rowt h of

virtual ba nks that out source nea rly all their functions.

ICTw ill cont inue to be a key driver in b an king in

the futu re. Successful ban king institutions w ill be

the ones tha t a re able to leverage mo st f rom the ICT

revolution. Grea ter recognition o f ICTas a driver of

chang e amo ng do mestic ba nking institut ions w ill

see th e rise in investme nt in ICT. One o f t he key

areas of new technology investment is the

development of a lternat ive delivery cha nnels,

not ab ly the inte rnet. Internet fi na ncial services are

alread y w idespread in North America. Hong Kong is

leading in Asia (excluding Ja pa n) whe re internet

fi na ncial service providers are developing strong

value propositions with h igh pa rticipation f rom

banking players, both in the context o f w ired a nd

w ireless internet ba nking .

Successful ba nking institut ions in the fut ure w ill be

increasing ly depen dent on inta ngible assets such as

ta lent. As competition intensifie s, the n eed fo r

domestic banking insti tutions to a t tract a nd reta in

the best skills an d ta lents will become mo re urgent.

Domestic ba nking institutions wo uld therefore be

expected t o strength en the ir huma n resource

management .

The reg ulato ry environment w ill also infl uence the

futu re lan dscape o f the b an king sector. Cha ng es in

regulat ory philosophies an d ap proaches to be

underta ken aim to provide conducive environment

for grow th and expansion o f b anking insti tutions.

The key to t his is th e a bility of individual ba nking

institutions to a da pt swiftly as well as respond a nd

ad just to new rules.

On the consumer front, a cha ng e in mindset w ill have

to b e evolved over time. Consumers must t ake charg e

of their own fi nances to eng ender a competit ive

environme nt a nd low er the cost of capita l. In order to

achieve this, a proactive education progra mme ha s to

be implemented f or the consumers to b e a ble to ma ke

info rmed fi na ncial de cision s. Tran sparency w ill nee d

to be enha nced, both a t the product and insti tutional

levels to promot e consumers aw areness of ba nking

an d fi na ncial products. Similarly, great er fl exibility in

product pr icing tha t w ould lead to competit ive a nd

dif ferentiated strateg ies among ban king insti tutions

w ill, eventua lly benefi t g enuine custo mers, in the

fo rm of low er costs. The a bility of consumers to

infl uence the m arket to react positively is an

importa nt ena bler for deregulat ion within the

dom estic fi na ncial sector.

Recommendations

A change programmew ould be implemented over

th e next 8-10 yea rs w ith th e ob jectives of improving

effi ciency, innovat ion, fl exibility, resilience a nd

dyna mism in the ba nking system. The prog ramme w ill

focus prima rily on b uilding the capa bilities of

dom estic ba nking institutions an d increasing th e

incentive to improve perfo rmance. The prog ramme

w ill conta in recommend at ions to be implemented

over the period t o develop domestic fi na ncial

infrastructure, strengt hen d omestic banking

institut ions, promo te fi na ncial sta bility, an d meet


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further competition to t he industry, as well as

providing w ider choices for th e consume rs. These

steps w ill be implemented g radua lly depending o n

the overall ability of the fi na ncial system t o ab sorb

these changes.

PHASE III

Consider introducing new foreign competition in the

third phase of development. Given the intensifying

degree of globa l competit ion and g reater

assimilation into the global a rena, the banking

sector needs to b e prepared for great er

liberalisat ion. Introd ucing n ew foreign compet ition

w ould therefo re be considered. In ad dition, there

w ill be expansion o f do mestic ba nking institutions to

foreign markets. At t he same t ime, the potent ial

threat f rom new and ag gressive non-fi nancial

players w ould a lso serve a s an incentive ag ainst

complacency and for incumbent pla yers to remain

competitive.

I. Enhancing Domestic Capacity

The e mpha sis here is to d evelop a core of strong

dom estic ba nking institut ions that is ab le to provide

the b road ra ng e of high q uality produ cts an d services

to the economy and t hat is effi cient and cost-

ef fective; and t hat has a signifi cant share of domestic

ba nking a ssets and profi ts. Broa dly, this objective is

to b e achieved in tw o steps, tha t is, building th e

capa bilities of d omestic ba nking institutions throug h

several proa ctive mea sures and implement ing

dereg ulation mea sures to increa se competition an d

fa cilita te th e emergence of leade rs.

the social objectives of Malaysia in an effi cient

an d eff ective ma nner w hich w ill cause least

distort ion or disruption to t he fi na ncial sector.

The implement at ion of the recommend at ions w ill

observe the fo l lowing a pproach and safeg uards:

PHASE I

The main objective in the transition is to develop a

core set of strong domestic banking institutions.

Therefore, initial steps shall focus on measures that

seek to strengthen the capability and capacity of

domestic banking institutions, create an

environment where the best domestic banking

institutions emerge, and building and enhancing the

financial infrastructure.All th e building blocks fo r

crea ting strong er domestic banking institut ions will

be implemented ea r ly within the fi rst tw o to fo ur

years, along w ith steps to creat e the ne cessary

infrastructure fo r a m ore ma rket-based consumer

protection fram ew ork, w hich is a vital element

before moving t o the next phase of development.As th e consumer prot ection infra structure is in place,

the f ramew ork to foster fur ther competi t ion w ill be

introduced. The result should b e t he em ergence of

dom estic players tha t a re strong er, more effi cient

an d innovat ive a nd increa sing ly more competitive

an d resilient.

PHASE II

Following the initial phase in which domestic

banking institutions have built greater capacity

and capability to compete, the playing field forincumbent foreign players will increasingly be

leveled. This w ill begin w ith th e removal of some of

the restrictions on incumbent f oreign players to ad d


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The specifi c recomme nda tions for b uilding the

capa bilities of dom estic ban king institutions a re

summarised as fo llow s:

The development of industry-w ide b enchmarksto drive performa nce improvement , investment

in technology and shareholder understan ding

of banking institutions;

Introd uce a proactive set of capa city-building

mea sures an d solving prob lems identifi ed ba sed

on information generat ed by the benchmarking

process. A series of institut iona lly sponsored

programme of senior manag ement seminars

an d industry-w ide tra ining exercise w ill also be

conducted;

Enhance credit skills of the bankinginstitutio ns by introd ucing proa ctive credit skill-

building mea sures an d monito ring th e

accreditat ion programme t hat w ill be required

for offi cers involved in credit p rocessing an ddecisions;

Strength en skills in a ll area s and the rebyenha ncing t he ab ility of do mestic ba nking

institutions to mob ilise, at tract a nd reta in the

highly skilled m an pow er from Ma laysia

and overseas;

Introd uce measures to f urther streng the ncorporate governance;

Encourage the ma ximisat ion of econom ies of

scale in cost, revenue a nd custom er relationship

throug h rationa lisation an d strateg ic allian ces

betw een fi nancial an d non -fi nancial insti tutions;

Streamline regulat ion of discount houses an dmerchant ban ks to level the playing fi eld;

Encourag e a nd facil ita te mergers betw eenmerchant b an ks an d stockbroking compan ies or

discount houses of t he same group t o creat e

full-fl edg ed investme nt ba nks;

Encourag e g reat er sha reholders activism andpromote long-term support for the g rowt h of

the b an king industry through institutiona lised

an d dispersed ow nership of ba nking

institut ions an d ba nk holding compa nies;

Allow an d encourag e outsourcing ofnon -core b usiness activities;

Encourag e t he development of al ternativedelivery channels such a s internet ba nking ;

New licenses w ill be issued to ba nking groupsw ith a tt ractive value proposition such as virtua l

banking;

Encourag e innovation amon g b anking

institut ions in product of ferings whereb y the

regulat ory philosophy of w ha t is not

forbidden is al low ed w ill be ad opted;

Remove restrictions on pricing w hen thenecessary infrastructure for consumer protection

frame w ork is well in place and there is a

conducive environmen t f or competition;

Enha nce market discipline amo ng ba nking

institutions through requirement of

independent rat ings;


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individual ba nking institutions need to a ddress,

by ha ving the righ t skills and business target s.

The informa tion w ould a lso enlighte n shareholders

on t he state of their banking insti tutions.

To a chieve the se objectives, the be nchma rking

process will involve the collection o f a broa d ra ng e of

dat a , w hich w ould include:

Financial and operating statistics to b e collected

based on customer segment a nd product group

an d aims at driving ba nking institutions to

understan d th eir relat ive performa nce as well as

th e drivers of p erfo rma nce. This w ill help ban king

institutions understand their risk-adjusted returns

on capita l by product and custom er seg ment ,

w hich is a ne cessary precondition t o

understan ding t heir competitive strat egies;

Customer needs analysis and satisfaction surveys

should form pa rt of t he process. It is importan t

for ba nking institutions to do systemat icma rket research to drive custo mer segment

strategies, particularly in retail and small business

banking; and

Risk management processesw hich should bebenchma rked ag ainst best practice templa tes.

A w orking group comprising BNM an d th e ba nking

industry ha s been estab lished to iden tify the relevant

indicators and approaches that are appropriat e for

this process.

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Encourage competition and participation ofba nking institutions in th e a reas currently

served b y fringe institut ions;

Facilitat e the d evelopmen t of a conducive taxregime tha t encourages prudence a nd

innovat ion; and

Facilitat e grea ter coordination a nd researchand development w ithin the fi nancial sector

throug h the merg ing of existing a ssociat ions of

commercial ba nks, mercha nt ba nks an d fi na nce

compan ies into o ne single associat ion.

Recommendation 3.1:

Develop industry-wide benchmarks to drive

performance improvement in domestic banking

institutions

Increa sed dome stic compet ition throug h

dereg ulation w ill be a key driver of strat eg ic an d

operational performance improvement in the

domestic banking institutions. An industry-widebenchma rking programm e provides a pow erful

too l for greate r strat egic focusing, for guiding

dom estic ba nking institut ions to mea sure th eir

ow n performance in wa ys tha t w ill highlight both

operational and strateg ic opportunit ies and for the

implement at ion o f skill building mea sures.

Benchmarking can b e used to drive the ba nking

insti tutions to understand w here and how to

compete, a nd the refore stimulate t he desired

strateg y formulation required to build strongdom estic ba nking institut ions. It can also highligh t

specifi c area s of opera tiona l w ea knesses tha t


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Recommendation 3.2:

Improve awareness of best practices and conduct

focused training

Resulting from t he benchma rking progra mme,

ba nking institut ions should underta ke proactive

measures to add ress the ga ps tha t ha ve been

identifi ed. Efforts w ill be ta ken by BNM, Institut

Ban k-Ban k Malaysia (IBBM) a s well as the b a nking

institut ions themselves to conduct progra mmes

for senior man ag ement . Industry-w ide training

programmes, including periodic discussion groups

w ould be o rga nised t o fa cilita te t his process.

While semina rs an d t raining progra mmes are long -

term mea sures to build cap ab ilities, the immediat e

objective of t raining prog rammes is to raise

aw areness of best practices and should be t arget ed

at tho se areas necessary to improve th e institutions.

The immediat e core area s tha t need to b e ad dressed

are:

Credit risk management;

Consumer ma rketing(including sales force ma na ge ment );

Performance management;

Risk-a djusted profi ta bility an a lysis a nd pricing;

Procurement o f opera tiona l support system(such a s ICT, risk ma na ge men t system a nd physica l

branch netw ork); an d

Electronic comme rce a nd ba nking .

Recommendation 3.3:

Enhance credit skills and monitor the requirement

for accreditation of credit officers and managers

Streng th ening credit skills req uire proact ive focus in

the short te rm. It ha s been ident ifie d a s req uiring

improvement due t o t he fo l low ing observat ions:

Few dom estic ba nking institutions use creditscoring for retail and small business lending,

leading to over-reliance on collatera lised lending,

high costs, w ide marg ins an d custom er

dissatisfaction;

Few ba nking institut ions separat e creditassessment from credit origina tion, leading t o a n

inherent confl ict in ob jectives;

Few ba nking institut ions cond uct explicit custom errisk-rat ing exercises, o r price t heir lend ing

products to cover explicitly estimate d expected

losses, and e ven few er mana ge a nd price credit

risk ba sed on increment al a dditions to the risk of

their to ta l portfo l io ; a nd

Few ba nking institut ions monitor custo meraccounts across products, one o f t he key elements

of a n ef fective ea r ly w arning system, a par t f rom

being a n ef fective ma rketing to ol .

In t his reg ard, the necessary structures as w ell as

industry semina rs an d t raining prog rammes to raise

a w a reness of b est practices in credit risk

ma na gem ent a nd credit processes w ould cont inue

to be developed and organised. Minimum standa rds

on credit risk ma na gem ent w ill also b e issued by

BNM so a s to furt her improve th e cred it culture. In

ad dition, the accredita tion requirement as req uired

by BNM w ould need to b e closely monitored t o

ensure its effe ctiveness.

Recommendation 3.4:

Remove restrictions on salaries and staff mobility

in banking industry

People a re the most importa nt a sset fo r the

development of a n effi cient a nd ef f ective banking

industry. Successful fi na ncial ban king institu tion s a ll

over the w orld are those that a re able to a t tract the

best ta lent a nd rew ard t his ta lent a ccordingly . In the


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Recommendation 3.5:

Uplift restriction on employment of expatriates

The a bility of ba nking institutions to at tract b est

ta lents should cont ribut e to the t ransfer of

technolog y. Howe ver, despite th e mo re liberal policy

on t he employment of expatr iat es in th e recent

years, there is little evidence of sign ifica nt

improvement s and tran sfer of skills taking place in

th e ba nking ind ustry. Given t he lack of expertise in

specific areas of banking and fi nance, the need for

internat ional ta lents in specifi c areas remains.

How ever, it is in th e interest of t he count ry over the

long t erm to d evelop its ow n poo l of dom estic skills

an d best ta lents. In this w ay, do mestic ba nking

institut ions will not only provide job opportu nities

but reduce their relian ce on fo reign experts.

However , in the immediat e term, new ta lents f rom

competen t expat riat es should serve to e nergise the

industry. The e mployment of the expat riat es could

be ma de on a contractual ba sis w ith more fl exible

remuneration packages.

Recommendation 3.6:

Set up board committees to further improve

corporate governance

The key principles of corporat e g overnance a re tha t

memb ers of the Boa rd of Directors (BOD) act a s

representa tives of a ll the ow ners (shareholders),

an d pot entia lly of oth er sta keholders, in their

oversight of executive man ag ement a ctions.

This m ea ns:

Ensuring directo rs are q ualifi ed, ha ve thenecessary info rmat ion a vailab le to exercise t heir40

case of d omestic banking institutions, senior ta lents

a re lacking pa rticula rly in key area s such a s risk

mana gement , systems development, and al liance

building including outsourcing management.

Domestic ba nking institutions need t o at tract th e

very best peo ple, especially those tha t ha ve acquired

experience in the more de veloped fi na ncial ma rkets.

These people can either be Malaysian s w orking

abroa d or foreigners w ho ha ve interest t o w ork in

Malaysia . In th is regard, the w ag e morat or ium

(w hich ha d since been uplifte d), an d pena lty for sta ff

pinching w ill be gra dua lly removed.

To furt her improve sta ff m ob ility, ba nking

institutions w ill be expected t o t ake conscious efforts

to estab lish effi cient m echanism for redistribut ion of

staff w ithin the industry and sourcing for new

ta lents. This could be don e th rough, f or insta nce,

setting up of a single web site fo r recruitment s

amo ng the b anking insti tutions.

Similarly, ba nking institut ions, toge ther w ith BNM

an d IBBM w ill design a comprehensive tra ining

programme to retrain staf f w ho ha ve been

af fected b y the rat ionalisat ion process in order to

improve th eir mobility and hence fa cilita te t heir

redeployment into other a reas in t he fi nancial sector

w here there are new manpow er requirements.

To complement these me asures, th e role of unions

w ill a lso be harnessed so as to br ing abo ut g reater

aw areness and chang e of mindset a mong employeesw ith rega rd to the need for ba nking insti tutions to

increase productivity, effi ciency a nd effe ctiveness

and become performance based.


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41

responsibilities, can veto ma na ge ment decisions

tha t a re not in the interests of t heir constituent s,

an d are compelled to d o so through some level of

persona l liab ility; a nd

Those sha reholders (an d, pot entia lly, ot her

stakeholders) have the ability to discipline

directors who do not perform up t o t heir

expectation.

In order to further enha nce corporat e go vernance in

the long term, i t is proposed t hat :

All ba nking institut ions be required t oestab lish the follow ing Boa rd Committ ees, in

ad dition to t he existing req uired committees

i.e. Audit Committee, Credit Committee, Asset

an d Liability Committ ee:

Nominating Committee - Respon sible f ornomination o f d irectors and committee

a ssignm ent s. This comm itte e should com prise of

on ly non-executive directors. The pu rpose of a

Nomina ting Committ ee is to counter-ba lance

the infl uence of executive directors, in response

to legit imate concerns of over pow ering and

dominant stat ure of some ow ner-mana gers, to

ensure that appointees are suitably qualified.

The Nominat ing Committ ee should a lso b e

responsible fo r overseeing the composition o f

the BOD.

Management Development and CompensationCommittee(a compensation committee is

already required) - The p rima ry purpo se of t his

committee is to evaluat e the performance of

mana gement and ensure that executives are

app ropriat ely compensated , given their

contribution to the creation of shareholder

value.

Risk Management Committee- Responsible forall risk management policies and processes,

including m arket risk mana ge ment , credit risk

mana gement a nd operations r isk manag ement.

This committ ee is not responsible for ta king

pa rticula r market risk position s or credit

de cision s. It is, essent ially, responsible fo r

reviewing decisions mad e by t he Credit

Committee a nd Asset an d Liability Committe e

w hen these d ecisions contra vene t he p olicies

and guidelines tha t have been estab lished.

This division of pow ers in reg a rd t o risk

mana gement is a po w erful tool for ensuring

disciplined a nd con sistent a pplica tion o f risk

management principles.

The a bove committ ees should b e chaired by

no n-executive directors. How ever, in certa in

cases, executive directors ma y also be app ointed

to cha ir the a bove committee s subject to

conditions to be set by BNM. Regu lar

at tenda nce is required for the Board meetings

an d Boa rd Committee m eeting s, as per BNMs

Guideline on Duties and Responsibilites of

Directors and Appointment of Chief Executives

(BNM/GP1). This is to en sure t ha t d irecto rs ha ve

full knowledge a nd understanding of their

institution or relevant f unction and b ea rrespon sibility fo r its perfo rma nce.

To fa cilita te the desired level of tran sparency ofperforma nce outcomes to shareholders throug h

provision of summa ry benchma rk da ta , an nua l

an alyst b riefi ng s by publicly listed fi na ncial


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42

insti tutions would be mand at ed immediately

af t er announcement of t he Annual Report and

the Annua l General Meet ing. The purpose is to

ensure that ana lysts have the opportunity to

understa nd a nd educate exist ing a nd poten tial

shareholders the drivers of performa nce as w ell as

the strateg ic strengths a nd w eaknesses of the

individual ba nking institut ion.

Recommendation 3.7:

Allow group rationalisation and facilitate the

operation of one-stop financial centre

In t he p ursuit of improving compe titiveness, effi ciency

an d eff ectiveness in the delivery of ba nking products

an d services, there ha s been a globa l trend for

fi nancial insti tutions to creat e on e-stop fi nancial

centres tha t of fer w ide rang ing fa cilities to customers.

This phen ome no n involves th e cond uct of b usinesses,

trad itionally carried out solely by either commercial

ba nks, mercha nt ba nks, fi na nce compa nies or

stockbroking compa nies. The ab ility to off ercustom ers a b road ra ng e of fi na ncial services throug h

the sam e distribution chann el will be t he key to

building strong er customer know ledge a nd

relation ships - crucial sources of compet itive

advant ag e fo r banking insti tutions. Research fi ndings

indicat e th at having such centres enable fi nancial

insti tutions to b enefi t f rom bo th revenue and

cost synergies throug h cross-selling pro duct s a nd

consolidat ing ba ck-offi ce processes and rationa lising

branch operations.

Thus, in orde r to increase effi ciency and e ff ectiveness

of b an king institutions in meeting t he increasingly

more differentia ted d ema nds of their customers, a

w ider scope of ope rations of one-stop fi na ncial

centres should be con sidered over th e long term . This

could include a llow ing b an king institutions involved

in cross-selling t o consolida te t heir bala nce shee ts an d

opera te as a sing le entity ho lding multiple licenses,

subject t o prud ent ial conside rat ions. This w ill req uire

a review of the present licensing requirement a nd

law s regulating t he operations of b anking insti tutions

in the country. In the immed iate t erm, there are

pot entia l benefi ts of cross-selling an d rat ionalisat ion

of operations that are a lready permitted by BNM.

Recommendation 3.8:

Encourage strategic alliances

Eq uity allian ces are o ne o f t he po ssible mea ns for

dom estic ba nking institutions to catch up to

internat ional sta nda rds in t erms of skills, technolog y,

culture an d scale . Signifi cant benefi ts sta nd t o be

derived f or dom estic ba nking institutions from

allian ces w ith othe r ba nking institut ions an d non-

ba nking institut ions. This include s ope ning u p newgrow th a venues through a ccess to new markets or

skills. Allian ces bet w een internat ional fi na ncial

institut ions are w idespread a nd fa st increa sing.

Financial institutions in other countries are making

increasing use of merg ers an d eq uity allian ces for a

ran ge o f rea sons, nam ely, to a ccess skills a nd scale,

a ccess new custo mers and delivery chan nels, cut costs,

develop new products and a ccess cutting-edg e

technology.

Moving f orw ard, a lliances w ill be encourag ed eitherin the form of a joint venture (incorporat ed or

unincorporat ed), an eq uity sw ap, a minority equity

stake or a contra ctual allian ce. Inte rnat ional allian ces


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43

w ould a lso b e considered subject t o t he prevailing

permissible equity participation level. Competition

an d innovat ion amon g ba nking institut ions w ill also

be encourag ed through a l liances betw een ba nk and

non-banking institut ions such as t elecommun icat ions

ope rat ors, sa te llite TV providers, and ICTcompa nies

as w ell as betw een domestic and foreign ban king

institutions.

Recommendation 3.9:

Streamline the regulation of discount houses and

merchant banks to level the playing field

Leveling the playing fi eld betw een discount houses

and merchant banks would a l low fair competi t ion

am ong players in the dome stic ma rket. Due to th e

convergence in th e a ctivities of t hese tw o players,

leveling t he playing fi eld w ill enha nce compet ition

an d reduce possibility of reg ulato ry arbitrage b y

players in the same g roup. The stream lining o f

regulat ion w ould be in the areas of the reserve

requirement, risk w eighting s on a ssets as w ell asscope o f a ctivities underta ken.

Recommendation 3.10:

Encourage mergers between merchant banks and

stockbroking companies or discount houses of the

same group to create full-fledged investment banks

The me rcha nt b an ks should be de veloped into f ull-

fl edged investment b anks, so as to be a t pa r with

internat ional investment banks and to have the abil ity

to undertake trading a nd b rokerage a ctivit ies, apa r t

from merely providing a dvisory services. As such,mergers betw een merchant ban ks and discount

houses, and bet w een merchant banks and

stockbroking compa nies w ithin the sam e fi na ncial

group w il l be encouraged and facil ita ted t o reduce

duplicat ion a nd improve effi ciency.

To f acilitat e t his process, the leg al a nd regulat ory

framew ork governing t he ba nking and securit ies

industr ies would need to be fi ne-tuned a nd

ha rmonised. Investmen t b an ks w ould be supervised

by b ot h BNM an d t he Securities Com mission (SC).

Appropriat e reg ulato ry and supervisory mecha nisms

w ould be formulat ed to g overn the operations of the

investment ba nks. This is to ensure t ha t t here a re no

regulat ory ga ps or tha t t here is no e xcessive

regulato ry burden for the investmen t ba nks arising

from the dual regulatory environment.


Encourage ownership of banking institutions by

institutional investors

Long -term grow th of t he dom estic ba nking industry

depends substantial ly on the avai labi l ity o f fi nancial

an d non -fi na ncial support from shareholders, in terms

of capita l for business expa nsion, skills a nd e xperience

as w ell as commitment to pursue business strat egies.

Hence, it is necessary to ensure tha t t he ow ners of

ba nking institutions are able to commit their

resources for the d evelopmen t of strong ba nking

institutions and a d ynam ic fi na ncial sector. Over the

long t erm, such support could come from institutiona l

investors that have a n understa nding a nd strateg ic

interest in developing the fi na ncial services industry.Historically, th e m ajority o f dom estic ba nking


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institut ions is eith er fa mily-ow ned b usinesses or

controlled by prominent individuals. Hence, th e

development o f these ba nking institutions largely

depen ds on th e capa city of the individuals to inject

new capital a nd provide the n ecessary resources and

expertise. Furthermore, the premium att ached t o

ow ning a ban king l icense is high, given tha t no new

license has bee n issued fo r some time. This ha s to

some exten t contributed to t he slow consolidation of

the ba nking industry.

Moving forwa rd, greater par ticipation of th e

institut ional investo rs in the fi na ncial secto r w ill be

encourag ed in order to develop a nd nurture the much

need ed sha reholders a ctivism t o d rive performa nce

improvement s am ong dom estic ba nking institutions.

The lega l provision o f section 46 of t he BAFIA w hich

limits the sha reholding of a ba nking institution

to n ot m ore tha n 20% for corporations an d 10%

fo r ind ividua ls, w ill be strictly enfo rced such tha t

the o w nership structure of dom estic ba nkinginstitutions a nd t heir holding compa nies will improve.

A divestmen t of shares over a reasona ble time frame

w ould be introduced t o meet this objective.


Encourage outsourcing of non-core functions

Outsou rcing is a po ten tia lly useful too l in a ssisting

ba nking institutions to neut ralise the scale ad vant ag e

enjoyed by larger institut ions, to cut costs, and t o

focus the ba nking institutions at tent ion on

develop ing stron g skills in niche a rea s. It allow sinstitut ions to concentra te t heir resources an d

energies on developing a set of core compet encies.

It w ill also a llow the ba nking institut ions to access

sca le and skill improvem ent s in core a reas of t heir

business, as w ell a s enh a nce the custo mer service

level. Well-develop ed core compe ten cies provide

competi t ive a dvanta ge a ga inst exist ing a nd

fut ure compet itors. Focused a nd w ell-estab lished

relat ionship will improve the compet itive ad vant ag e.

In the rapidly chang ing marketplace and the pa ce of

technolog ical ad vancement s, out sourcing can

decrease the risk of investing in out da ted technolog y,

shorten upgrad e t imes and pot ential ly create bet ter

custome r responsiveness. In th e current environme nt

of technolog ical cha ng e, fl exibility is particularly

importan t for the ba nking institut ions.

Areas that can be out sourced by ba nking institutions

on a contractua l ba sis are low -skill processes tha t are

not crucial to t he strateg ic positioning o f th e

institut ion. These include b a ck-offi ce processes such a s

da ta ent ry, dat a conversion, transaction processing ,

pa yroll functions an d certa in ICTfunctions such a s

coding a nd t echnical design. Ot her ICTprocesses such

as w ebsite services, netw ork manag ement and

ad vanced da ta an alysis can also be considered.

There a re several a lternat ives w ith respect to

out sourcing . While using th e services of locally

ba sed providers could be a n at tractive option, some

ba nking institutions may wa nt to set up in-house

units or pooled arrangements betw een few banking

institutions to obta in scale adva nta ge. Consideration

how ever needs to be ma de w ith respect to the shar ing

of informat ion a nd t he secrecy provision specifi ed in

section 97 of BAFIA. Some fl exibility ho w ever can


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be a ccorded t o out sourcing by ba nking institutions

for it t o a chieve a discernible effect on costs an d jobs

allocation.


Require management of banking institutions to give

greater attention to the development of ICT

Given the speed of chang es in technolog y, the large

ICTinvestment by b an king institut ions, ho w ever,

doe s not necessarily gua rant ee a ga inst ob solescence,

scalab ility and fl exibility in t he fut ure. Therefore,

at tention a t th e highest senior mana gement level will

be vital to ensure the f ormulation of a ppropriat e ICT

strateg ies. The investme nt should a im at allow ing

ma ximum fl exibility an d expand ab ility in the f uture.

The a bility to discern tren ds and develop men ts in ICT

and hence, appreciate the potential impact on t he

institut ions is critical. ICTshou ld be reg a rded a s a

strateg ic too l to crea te value, an d no t simply

an o perat ional too l to enh an ce w ork processes.

Examples wo uld be in t he use of custo mer relat ionshipma na gem ent (CRM) to ol to a na lyse customer profi les

and behaviours for better marketing and strateg ic

focus an d the a pplication

of custom er-ma na ged relat ionships (CMR) tha t

allow b ett er understa nding of custom ers needs.

Hence, the ab ility to contribute to t he development of

technolog y within the b an king institutions will

be pa rt of the core compet encies to b e expected

of senior mana gement in the future.

Recommendation 3.14:Encourage the development of new delivery channels

Inno vative a nd more effi cient delivery cha nnels such

as inte rnet an d mob ile phones w ill become a n

increasingly essentia l part of a m ode rn ba nking

system. It w ill offer b an king institutions sign ifi cant

advant ag e in customer retention, customer

a cquisition a nd service cost red uction. Skills a nd

brands can b e developed a nd promoted t hrough

these channels, w hich ha ve been important for

success in ot her hig h t echno logy services such a s

TV/broa db a nd b a nking. High t echno logy services

such as internet ba nking o ffers a unique value

proposition to consumers an d is grow ing fa st

glob a lly. The interne t imp roves accessibility t o

ba nking products and services, and can be h arnessed

not just as mere delivery cha nnels but a s new

business venture throug h the sett ing up of virtua l

ba nks by ba nking institut ions.

In th is rega rd, ba nking institutions w ill be allow ed

and encouraged to em brace these innovative

ap proaches. At th e sam e time, minimum sta nda rds

w ill be imposed t o ensure tha t such innovat ions

do no t compromise fi na ncial sta bility and integ rity.Thus, its regulat ory frame w ork will balance t he

var ious trade-of fs betw een effi ciency and fi nancial

syste m sta bility.


Adopt what is not prohibited is allowed

regulatory philosophy and phase out product

pre-approval requirement

The present a pproa ch involves pre-a pprova l

requirement restriction o n a ctivities to b e

underta ken by ban king institutions. Participat ionan d introduction by ba nking institutions in the se

new services is subject to the ap proval requirement.


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Although some restrictions are necessary for

prudentia l purposes or consumer protection, t he

requirement fo r approval to conduct a ctivities tha t

are not clear ly forbidden h as been view ed a s an

impediment to innovat ion.

The uncertainty a mong ba nking institutions as to the

regulat ory requirements for new approaches to be

approved has contr ibuted to t he uncerta inty and ha s

bee n a d isincentive to inno vat ive vent ures. As such,

banking insti tutions have t ended t o remain w ith their

traditional approaches.

In a ddit ion, this has been ag gravated by the lack of

pressure fo r ba nking institut ions to improve effi ciency

an d ef fectiveness in th e a bsence of a gg ressively

dema nding custo mers an d shareholders.

A move to t he a pproach of w hat is not prohibited is

allow ed should provide more certa inty to ba nking

institut ions to new an d innovat ive ba nking a ctivities

from reg ulato ry perspective. The a dopt ion of thisphilosophy how ever must be complement ed w ith

effo rts by banking institut ions to improve the level of

product transpa rency and consumer educat ion.

Banking institut ions w ould be req uired t o increase

product tra nsparency and improve a ccess to product

informat ion as w ell as to make a vai lable a n ef fective

mechanism to a ddress an d provide resolution for

consumer complaints.

In a ddition, a more effi cient structure involving

Banking Media tion Bureau (BMB) as an e ffi cientmea ns to a ddress consumer complaints w ill need to be

implemented.

Recommendation 3.15.1:

Replace product pre-approval requirements with a

simple new product notification process

A simpler produ ct not ifi cat ion process w ill give

incent ive for investmen t in new an d innovat ive

products. Ban king institutions w ill be encourag ed t o

invest in resea rch a nd d evelopment t o de velop

products that can capitalise on t heir area s of

expertise. The not ifi cation process w ill be suffi cient

to ensure tha t regulators are aw are of ma rket

development on new products . Intervention w ith

corrective a ctions shall still be p ossible f or cases

of improper disclosures to ensure tha t t here is

adeq uat e protection fo r consumers aga inst w rong

and misleading information on banking products.

BNM w ill also h ave t he right to recall products

tha t h ave been introduced by ba nking insti tutions

w hich ha ve detrimenta l effects to th e consumers or

the sta bility of th e fi na ncial system .

Recommendation 3.15.2:Outline guidelines for all applications for regulatory

exemptions

Follow ing the ab ove recommenda tion, a set o f c lear

guidelines for a pplications for regulat ory exemptions

to en sure tha t ba nking institutions provide the

relevant inform at ion w ould b e issued by BNM. This

w ill cont ribut e to reduce the response time for

approva l of new ba nking prod ucts an d give incentive

for innova tion. The reasons for rejection o f prod ucts

w ill be communicated t o the b an king institutions to

indicat e the na ture of th e regulato ry concerns.


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Deregulate pricing and rules of association on rates,

fees and charges gradually

A key element in driving perfo rmance improvement

in do mestic banking institutions is to increase

substa ntially the compet itive intensity in th e

industry. This will drive the specialisa tion , focus an d

ag ility that w ill be req uired t o build sustainab le

competitive ad vant ag e for core domestic ba nking

institut ions. At t he hea rt of increa sed compet ition

is the need for m arket-det ermined prices.

As the a bility of ba nking institut ions to price th eir

product improves over time, t he present rule on

pricing a nd imposition of fees and charges on

selected prod ucts and services w ould be further

libera lised. This wo uld seek t o:

Avoid high lend ing ma rgins, possibly throug h t acitag reements not t o pr ice below the ba se lending

rates;

Avoid overpricing to certa in custom er segmen ts,an d credit rat ioning on o thers tha t could possibly

ha ppen in an environme nt w here price cap is

imposed; and

Facilitat e prod uct bun dling for segm ent -specificbund led products with segment -ta rget ed pricing ,

w hich is potent ially a key source of compe titive

ad vanta ge f or domestic banking insti tutions w hen

competing w ith specialised ma rket player.

Price l imitat ions would be removed t oget her w ith an

effe ctive mo nitoring o f price collusion am ong

ba nking institutions to ensure tha t collusive

beha viour does not emerg e. Anot her precondition

w ould be a n eff ective ma rket-driven consumer

protection framew ork w here consumers are ab le

to exercise t heir rights a nd h ave recourse to lega l

protection to a ddress pot entia l problems.


Mandate all banking institutions to be rated

One of t he importan t element s in building capa city of

ba nking institutions is the implement at ion of

mea sures tha t a im to exert a nd improve market

discipline. This is part icularly import a nt a s regula tion

plays a lesser role in d etermining ma rket outcome s.

Under a more liberalised environmen t, t he a ctivities

of b an king institutions w ill be subject to the scrutiny

of ma rket players and hence there will be great er

dema nd fo r transparency. Banking institut ions

performance w ill be measured a ga inst a b road

spectrum of fi na ncial benchma rks tha t w ill reveal the

key strength s an d w ea knesses of th e ba nking

institutions.

To e nsure t ha t ba nking institut ions are consistent ly

aw are of the role of ma rket fo rces in evaluating

the ir performa nce, measures to en ha nce market

discipline w ill nee d to b e implement ed. Theref ore,

it is recomme nded t ha t th e ba nking institutions be

rate d by at least a local rat ing a gen cy. The rat ing

should serve t o inform consumers and investors

the level of risks in t he b an king institut ion. A

precond ition to this is an en ha nced level of consumer

education an d d epositors understa nding o ffi na ncial informat ion. Improvement in the level of

transparency and accounta bili ty o f rat ing a gencies


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w ould also be an importa nt prerequisi te for the

implementa tion of this recommenda tion.


Encourage competition and participation of banking

institutions in areas currently served by fringe

institutions

Fringe institut ions include saving s institut ions,

housing credit institutions, lea sing compan ies,

fa ctoring compa nies an d credit token compa nies.

Altog ethe r, these institutions a ccount for less tha n

4% of t ota l assets and less than 5% of t ota l deposits

in the fi na ncial system . These fringe institut ions

therefo re have limited impact on the ef fi ciency,

effe ctiveness an d stab ility of the overall fin an cial

system.

In the long t erm, banking institutions wo uld be

expected to increase their participa tion in the a reas

current ly served b y fringe instit ution s. While some of

the fringe institutions w ill survive th e compet ition

and expand, some of them ma y be phased out or be

ta ken-over by ba nking institutions. It is not possible

to forecast w ho t he future w inners in ea ch market

w ill be. The end g am e w ill depend no t on ly on t he

degree of market or ienta tion of t he fi nancial system,

the regulato ry framew ork but also on the evolution

an d tra nsformat ion of th e real sector. The opt ions

are open a s long as there is a comparative ad vanta ge

in a compet itive market w here the institut ions

operat e under th e same rules.

As th e business fo cus of f ringe institut ions becomes

broa der a nd riskier, it w ill be necessary fo r the

regulat ory framew ork to evolve accordingly. For

mortg ag e building societies, for instan ce, the initial

business focus on end -fi na ncing, ha s now been

shif t ing tow ards fi nancing housing developments.

As the risk of the business ha s increa sed an d in o rder

to promote a level playing fi eld amo ng the fi nancial

institut ions, it w ill be necessary fo r the au tho rities to

exercise a certa in form of pruden tial regulat ory

control over their activities to en sure t ha t consumer

protection an d investors interests a re preserved.


Facilitate the development of a conducive

tax regime

While certa in tax exemptions ha ve been gra nted to

drive ba nking b usinesses, pa rticula rly th ose involving

mergers and a cquisitions, certa in aspects of th e ta x

framew ork may need to be reviewed fur ther to

provide incentives to encourag e fi na ncial prudence

a nd inno vat ion. This relat es to, in part icular,

facilitating greater research and development

activities, the reby encourag ing innova tion am ong

ba nking institut ions.


Merge the associations of banks, merchant banks

and finance companies into a single association

While th e fi na ncial secto r is prog ressing to w ards

grea ter consolida tion, effo rts should be taken by the

three respective a ssociat ions to converge by

esta blishing a n a ssociat ion w ith w ider and broa der

mem be rships of fi na ncial institut ions. The current

effo rts of the t hree associations can be a ssimilated

an d streamlined in the merged a ssociat ion, wherebythe scope of w ork can b e more exhaustive and

conclusive in dea ling w ith t he issues relat ing t o t he

fi na ncial institutions. On training, the synergy

obt ained t hrough cross memb erships can further

enha nce the skill level and und ersta nding o f the sta ff

in the fi na ncial institut ions. The me rged association

is hoped to und erta ke further consumer education

programme a nd develop a c lose netw ork of

professionals with similar pruden tial beh aviour an d


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include implement ing the follow ing mea sures:

Streng then corporat e go vernance and riskma na gem ent capa bilities of ba nking institut ions;

Cont inue implemen ting risk-ba sed supervisionw ith incent ives for strong performers an d mo re

focused supervisory att ent ion for w ea k

institutions;

Streng then consolida ted supervision of fi na ncialconglomerates;

Refi ne capital ad eq ua cy risk w eight ings inresponse to new market developments and

ba sed on the risk profi le of loa n boo ks;

Introd uce lega lly binding a rran gem ents forba nking institutions to implement examiners

fi ndings;

Enha nce surveillan ce of t he fi na ncial sector t oprovide ea rly wa rning signa ls to impend ing

problems; an d

Implement a tran sparent a nd clearly structured

early wa rning system an d set of prompt corrective

mea sures for w ea k institutions.

These recomm end a tion s are discussed in t he

follow ing sections. Corporat e governa nce and

risk ma na gem ent are a lrea dy covered in Section I

of t his chap te r.


Continue implementing risk-based supervision

with more focused supervisory attention for weak

institutions

It is recommend ed t ha t BNM cont inues to conduct its

supervisory fun ction using th e risk-ba sed ap proa ch

w here on-site exam ination w ill be focused on a few

high risk area s. Ban king institutions w ith higher

deg ree of risk w ould be continuously monito red

identity. A w ebsite d eta iling th eir products and

services, as w ell a s edu cat iona l ma te rials on current

issues could be e sta blished .

II. Promoting Financial Stability

Mainten an ce of stab ility in th e fi na ncial secto r is

one o f t he core objectives of t he FSMP and w ill

remain an importa nt challenge for regulators.

Banking institutions should be resilient to systemic

an d externa l shocks an d be in a po sition t o provide

high q uality service to consumers throug hout the

tran sition process of t he implement at ion of the

FSMP. An importa nt aspect of this is the reg ulato ry

frame w ork and ha ving a set of risk-ad justed

prudentia l regula tion a nd supervision t o ensure

safe and sound insti tutions and t he protection

of t he interest of a ll stakeholders, as w ell as

the development of an effi cient a nd rel iable

infrastructure. A careful ba lance w ill be ma de

betw een the need for protection and sta bili ty

ag ainst the need to a t ta in effi ciency and

competitiveness.

Strong, Risk-Adjusted Prudential Regulation

and Supervision

In mo ving to w ards a ma rket-ba sed supervisory

framew ork, the regulatory framew ork w ould need

to be ad apt ed according ly. Flexibility is vita l in order

to a ccommoda te t he rapid technological ad vances

an d a void stifl ing innovat ion. The challenge for the

regulat or wo uld be to ensure cont inuous

surveillan ce of ma rket de velopmen ts and t he

evaluat ion of trad e-of fs betw een encourag ing

innovat ion and ma intaining sta bility. These wo uld


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50

forma l enforcement a ctions, these w ill be imposed

by BNM on ba nking institutions, which were fo und

to be ope rating un satisfa ctorily as high ligh ted by

the examiners fi ndings. This ma y include a w ritt en

ag reement or capita l directives, cea se and desist

orders, pena lties, an d prompt corrective a ctions

required for institutions w ith w ea k capita l positions.

The purpose o f t he f ormal enf orcement a ctions is

to en sure tha t ba nking institutions seek remedial

actions on t he fi nding s raised by th e examiners. The

forma l enfo rcement a ctions must have a lega l stand i.

This w ill theref ore req uire ame nd men ts to t he BAFIA

or specific regulat ions to b e ga zetted.


Implement a transparent and clearly structured

early warning system and set of prompt corrective

measures for weak banking institutions

The t ransparency of intervention process to ba nking

institutions w ill be an importan t incentive fo r

ba nking institut ions to avoid a dverse publicity andreputat ion. This is to fa cilita te enha nced corporate

go vernance am ong ba nking institut ions. An explicit

codifi cation of the t rigg er points w ould also result in

ma king the intervention process more consistent an d

mea ningfu l. The prompt corrective a ctions w ill be

ta ken in cases whe re specifi c early w arning indicato rs

rea ched iden tifi ed levels such a s declining risk-

w eight ed capital ra tio (RWCR) w hich indicat e

det eriorat ion in the overall safet y and sound ness

of banking institutions.

How ever, the t ransparency of the intervention

process will be mana ged so a s to avoid an y

an d subject to m ore regular a nd inten se on-site

examinat ion. As an a dde d incent ive for the ba nking

institut ions, the propo sed set up o f th e depo sit

insurance fu nd a s discussed in Section III of t his

chapt er will require cont ribut ion from ba nking

institutions ba sed on a risk-ba sed ap proach.


Refine calculation of risk weightings for the purpose

of capital adequacy calculations

A more sophisticat ed a nd dif ferentiated treatment

of different risk classes shall be developed t o t ake

into a ccount the risk profi le of loan exposures to

different secto rs of t he econom y, besides

incorporat ing t he ma rket risk. The a im of this

mea sure is to be a ble to a ssess the required capital

for the institution, depen ding on the risk profi le of

tha t pa rticular institution. Besides the a bove, the

revised risk-w eight ed capita l adeq uacy framew ork

places grea ter relian ce on t he a ssessment of credit

risk, throug h interna l rat ings or use of externalrating s to det ermine risk weigh ts.


Implement a system of incremental enforcement

actions

Increment al enfo rcement actions ag ainst problem

ba nking institut ions sha ll be d eveloped to

implemen t exa miners fi nd ings. These w ill be d ivided

into informal and formal enforcement actions.

Info rmal enforcement a ctions ma y include bo ard

resolutions (declara tion b y the BOD outlining

a plan to d eal w ith identifi ed w eaknesses),

and memorandum of understa nding (MOU),

out lining specifi c actions an institution must ta ke

to a ddress an d correct ident ifi ed w eaknesses or

non-compliances. Unlike board resolutions, the MOU

w ill be draf ted by BNM and signed by the members

of t he boa rd of a f fected ba nking insti tutions. On


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desta bilising conseque nces on the individual ba nking

insti tution. It w ill be complemented w ith ad equa te

consumer education programme and institutional

tran sparency, wh ereby ban king institutions are to

publish a deq uate informat ion for the public to ma ke

informed decisions.


Enhance surveillance of the financial sector through

the use of modern technology

Given the increa sed volat ility of the fi na ncial

ma rkets, the de gree of surveillan ce by regula tory

ag encies over fi na ncial activities an d development s

in the fi nancial market w ill need to be enhanced

signifi cantly. This w ould be a chieved th rough the u se

of mod ern technology tha t a l low s real t ime

informat ion to be collected. Key informat ion on

market development w ill need to be provided in an

integrated ma nner so as to al low better

understan ding of the impact o f such developments

on t he fi na ncial sector a s w ell as the econo my. Suchinformat ion should be presented in the man ner that

w ould faci li tate ana lysis and understa nding a mong

policy ma kers as w ell as to provide t he ea rly

w arning signa ls for impending problems. A sing le

comprehensive system of rea l time informat ion on

fi na ncial markets that allow s tracking o f sources of

risks in th e econom y should b e developed to allow

ea rly corrective actions to b e ta ken.


Develop comprehensive framework for consolidated

supervision of financial conglomerates

The increa sing ly complex gro up structu re involving

fi nancial conglomerates with heterog eneous

capital requirement a nd risk factors and a

combinat ion of at least tw o enti t ies f rom the

ba nking, insuran ce or securities industry ha s ca lled

for an enhanced framew ork for consolidated

supervision. This is to ensure tha t the fi na ncial he alth

of t he conglomera tes can b e assessed on group-wide

ba sis, and not just a t individual institut ions level.

Regulation w ould therefore need to balance

betw een a l low ing group synergy a nd ef fi ciency,

and ensuring t hat the a ctivit ies of t he fi nancial

conglomera tes do not introduce excessive risks to the

fi na ncial system .

Developing a comprehensive approach towards

consolida ted supervision w ould no t only require

streamlining principles of regulat ion of t he diffe rententi t ies within the g roup, but also to study the

various fi na ncial cong lomerate structures tha t ma y

impa ir eff ective supervision. This is vital in orde r to

formulat e a ppropriat e policies w ith respect to

regulat ory principles an d t he a ccepta ble corporat e

structures. Here, a clear scope o r mat eriality

threshold of supervision on the fi na ncial group

w ould be defi ned. Another aspect w ould be the

assessment of t he group-wide meth ods of

supervision such as on t he me asurement o f

capital ad eq uacy, risk concentra tion, intra g roup

tran sactions as well as ade qu acy of inte rnal cont rols

an d corporate g overnance. A key req uirement for


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52

the implementa tion of t he consolidat ed supervision

is an e fficient info rmat ion sha ring a nd coordination

amo ng t he dif ferent regulat ory bodies.

Efficient and Stable Infrastructure

An effi cient a nd stab le fi na ncial system nee ds

to be b uil t on a solid foundat ion made up of

interconne cted fi na ncial infrastructure. Four

elements of the necessary infrastructure include:

Deep and liquid capital markets al lowinginstitutions to broaden their product offering

an d ma na ge their risk exposures. Through

ba lance sheet structuring, investme nt choices for

consumers can be diversifi ed, a nd cont ribut e to

ma cro-level sta bility (This is covere d b y th e

Capital Ma rket Masterplan b y the SC);

Effi cient a nd reliab le payments system promoteseffi ciency and inspires consumer confi dence in

ban king insti tutions and in the w ider fina ncial

system;

Use of electronic trading platforms in theforeign exchang e a nd mo ney market to improve

effi ciency and the accessibility level in the ma rket;

a nd

Strong consumer protection infrastructure

protects consumers, p romot ing public

confi dence in the system (Recommend at ions

in this area w ill be covered in Section III of

this Chapter).


Increase efficiency and competition in the payments

system

As we move forw ard, the effi ciency of the payments

system should be enha nced to support the nee ds of

the fi na ncial system. The fi na ncial system w ould

require a paymen ts system t ha t is capab le to

facil ita te sett lement bet w een var ious fi nancial

players an d fo r various types of instruments in th e

ma rket. In this rega rd, a fl exible, proa ctive an d

effective regulat ory framew ork for the payments

system w ould be a dopt ed by BNM in its oversigh t of

the p aymen ts system. The fra mew ork wo uld seek to

improve th e effi ciency of t he pa yment-related

infrastructure wh ile mainta ining th e saf ety and

integ rity of the paymen ts system. The regula tory

frame w ork w ould provide a h olistic view of th e

paymen ts system a nd w ould cover the follow ing

areas:

BNM po licy objectives in pa ymen ts syste m;

Scope of regulat ory oversight by BNM onpa yments system;

Policies on th e conventiona l payment mechanisms(e.g. Autom a ted Teller Machine s [ATM], d ebit ,

credit a nd cha rge cards) as w ell as paymen t

mechan isms made po ssible by the a dvent o f

internet (e.g. e-money, e-cheq ues, barter t rade

exchange);

Minimum criteria an d stand ards including securitystand ards fo r service providers to b e a utho rised

to provide pa yment services; an d

Minimum stand ards to a ddress consumer relat edissues such a s transparency of fees a nd


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53

charges, privacy of consumer informat ion,

as well as consumer education an d aw areness

programmes.


Allow market forces to shape developments in the

payments system while BNM assumes the role of

regulator

As the pa yments technology a nd th e structure of the

fi na ncial services industry a re chang ing ra pidly, it

w ould be more effi cient and ef fective for the market

forces to pla y a pivot al role in the d evelopmen t of

the pa yments system . Allow ing grea ter competition

w ill increase innovat ion in pa yments system ,

pa rticularly for the ret a il pa ymen ts system. By driving

competi t ion fur ther and al low ing al ternative

payments system a nd g at ew ays, greater dynamism

an d effi ciency w ould be encourage d in the existing

pa yment s system provide rs. Recog nising th is, BNM

w ill adopt a f acil ita t ive rather tha n a developmenta l

role, especially in th e reta il pa ymen ts system.

How ever, BNM wo uld need to en sure tha t minimum

security stand ards are met w hen new systems are

introduced.


Allow incumbent foreign banks to set up

shared ATM network

Currently, the foreign b an ks individually ma na ge a

limited num be r of ATM ma chines. The p resence of a n

alterna tive ATM netw ork opera ted b y foreign b an ks

w ill drive further dyna mism in the t raditiona l

payment net w orks and provide a n a l ternat ive

paymen t chan nel for the consumers. In the long run,

th ere is a possibility for th e do mestic ATM ope rat or,

Malaysian Electronic Payment System Sdn Bhd

(MEPS) to initiate a m erger betw een the t w o

net w orks to form a single ATM net w ork. While t his

could be a n op timal solution, the d ecision b y MEPS

w ith regards to its futu re strat egies should be ba sed

on t he business value of the a lternat ives.


Allow use of electronic communication networks

and electronic trading platform

The signifi cant grow th o f the internet ha s

contributed t o t he increased po pularity of electronic

communicat ion netw orks an d electronic trad ing

systems. While t his could lea d to a disintermediat ion

of t raditiona l players, these ad vancement s in

technology h ave ena bled the incumbent players to

reap g reater opportunit ies and extend their market

reach. In t his rega rd, dom estic fi na ncial institutions

an d brokers should seek effi ciency ga ins by

conducting tran sactions through electronic mea ns

w ith respect to t heir operat ions in the foreignexcha ng e and mo ney market. Regula tory fl exibility

w ould be accorded to encourage effi cient use of

technolog y for provision o f t ransaction systems tha t

can provide mea surab le cost savings to the

participants.

III. Meeting SocioeconomicObjectives

Ano th er primary objective of t he FSMP is mee ting

the social objectives of Malaysia, part icularly w ith

regard to :

Access to fun ding by priority secto rs in theecono my (SMIs, low -cost housing a nd

Bumiputera ent repeneurs);


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54

Providing a dvisory services to small borrow ers;

Providing b a nking services in rura l area s;

Fund ing of specifi c industries (a griculture,shipping a nd infra structure); and

Consumer prot ection.

Access to Funding by Priority Sectors

Priority secto rs such a s the SMIs are e ssent ial sub-

sectors of the e conomy tha t req uire fi na ncing . While

the d evelopment of low -cost houses an d lending to

Bumiputera community seek to raise stand ards of

living an d improve the socioeconomic balance, the

SMIs cont ribut e more signifi cantly to the economic

transformation and g rowt h of the country. Over

time, SMIs will be increa sing ly more sign ifi cant such

tha t i t w ill become a vita l foundation of t he

economy, hence, bringing large r volume of

businesses to ba nking institutions. Ba nking

institutions need to ma intain go od long -term

relat ionship a nd understan d t he businesses of SMIs.

While i t is important to ensure adeq uat e fi nancing to

th ese sub-secto rs, such provision of fi na ncing should

be consistent w ith the ob jective of developing a n

effi cient b an king sector. The present approa ch wo uld

be reviewed a nd enha nced as embodied in the

fol low ing recommenda tions:


Introduce an expanded credit guarantee scheme

Lending to priority sectors by the ba nkinginstitutions should be implemente d th rough

mechanism tha t h as least d istor tion on the effi cient

w orking of the sector (Access to fund ing t o priority

sectors from ot her sources is covered in cha pte rs 6 and

7). Presently, there a re three lending ta rgets imposed

on t he ba nking institut ions, na mely lending to SMIs,

lending to t he Bumiputera community and low -cost

houses. While th e ba nking institutions a s a g roup,

have a lwa ys met, t he overal l lending ta rgets , some

ba nking institutions ha ve had diffi culty in meeting

the individual lending t arg ets for SMIs during the

crisis years.

Overtime, a s price dereg ulation t akes place, the

lending ta rgets can be g radually replaced w ith an

expanded a nd more effi cient credit g uarantee system.

Such a fra mew ork will ensure that continuous access

to fi nancing by these sectors while a t t he same time

avoid homogeneity in ba nk strateg y and the

ma intena nce of duplicated infra structure, as well as

w ea kening the credit system. The fi scal cost t o t he

Government under this arrangement w ill be in the

form of higher guarant ee funds tha t need to beallocat ed to the Credit Guara ntee Corporat ion (CGC).

The CGC will play a larger role in g ua rant eeing t he

priority secto rs, especially the SMIs. At th e sam e

time, Cag ama s would play a role in supporting loans

extende d t o t he low -cost h ouses. Besides introducing

more a tt ractive fi na ncing schemes, CGC ha s ta ken a

numbe r of steps recently to improve its operat ions,

including opening o f new bran ches all over the

country as w ell as strength ening its funding structure.

This w ill prepare CGC for the e nha nced role in the

expanded g uarant ee scheme.


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In the new frame w ork to b e introd uced, CGC is

expected to expedite application and the a pproval

process by the setting up of a po rtal w hereby SMIs can

apply for loans w ith CGC gua rant ee directly. Under

such a rran gem ent, t he CGC w ould the n solicit from

ba nking institutions their proposed lending rat es an d

gua rantee requirements for the loan. Among the

prospective lenders, CGC wo uld select t he b est of fer,

w hich is the o ne w ith the low est price as w ell as

low est gua rant ee requ irement . The scheme, o nce fully

opera tiona l w ould require full participat ion from the

ba nking institutions. The size of CGCs funding w ould

therefore be fur ther increased through m anda tory

contribution from a ll ba nking institutions, in a mount s

equivalent t o t heir directed lending ta rget fi nancing.

Prior to t he removal of t he existing lending t arg ets,

the ba nking systems overall compliance w ith

specifi ed t arg ets w ill be mon itored. The lending

ta rgets would be gradua lly removed w hen the

ba nking institutions have developed the a bility to

support t hese priority sectors, and BNM is a ssured t ha t

these secto rs w ill have continued a ccess to fi na ncing .


Require provision of advisory services on financial

planning and management to SMIs and small

borrowers

As SMIs and small borrow ers become increa sing ly

importan t custom ers of b an king institutions, the

fi nancial support expected from the ban king

insti tutions w ill need to go beyond mere fund ing.

Recognising the business opportunities in t he f uture,

based on t he earning potent ial o f some of these

ent erprises, ba nking institutions w ould the refore be

expected to estab lish long -term relationship with

these borrow ers and ded icat e resources for provision

of a more comprehensive fi na ncial support including

ad visory services on fi na ncial plann ing a nd

mana gement . This w ould contr ibute tow ards better

fi nanc ia l understand ing and manag ement among

these borrow ers.


Allow banking institutions to rationalise their branch

network and relocate branches, subject to certain

conditions

In terms of numb er of bran ches in the country to th e

number of population, cer tain areas are found to be

under-bran ched, wh ere certa in geog raphic locat ions

in the country are not served by an y ban king

institution w hile there is a high concentra tion of

ba nking institutions in the urban area s. There is

therefo re a need t o improve the d ispersion of the

branches in the count ry throug h a bra nch

rat iona lisat ion exercise. The rat iona lisat ion ofbranches by b an king institutions is also necessary for

the b an king institutions to a chieve the right mix of

ta rget ma rket a nd a chieve cost savings.

In order to ensure that all areas are served b y a

ba nking institution, it is recomme nded t ha t a ll area s

currently served by ba nking institut ions are to be

continuously served by at least one b an king

institution. The ba nking institution w ould be a llow ed

to ra tiona lise their branches as long as there is one

branch of a ban k serving the a rea w here the branch isto b e closed. In order to b e eq uitab le, future

branches, particularly in t he rural a reas should b e


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underta ken by banking institut ions tha t currently

ha ve low er-tha n-averag e number of rural branches.

Over the longer te rm, esta blished ba nking

institutions can f orm a lliances to serve the rural a reas

an d creat e value proposition throug h ta ilored

prod ucts and de livery cha nne ls. The cha nne ls of

delivery can be provided in the f orm of allian ces w ith

retai l outlets or w ith the post o ffi ces, so tha t t he

insti tution does not ha ve to build i ts own netw ork of

branches an d can thereb y decrease its cost ba se. The

superma rket/post o ffi ce for example can h ave o ne

multi-function ATM a nd one employee w ith a

connected compute r to the hea d offi ce. All credit

applicat ions w ould be sent to a central or regional

credit centre a nd replenishment of cash can b e

outsourced.

Consumer Protection Infrastructure

A crucial aspect of stability in t he fi na ncial system

relat es to its ability to und ergo t he tra nsition to

deregulation a nd increasing competi t ion w ithout

resulting in disruption in t he level or relia bility o f

services to consumers. The n eed to prot ect

consumers from pot ent ial unfa ir practices by

ba nking institutions will cont inue to be on e of th e

ma in area s of respon sibilities of BNM.

Moving tow ards a supervised market-driven fi na ncial

system, BNM w ould ne ed t o b e less involved in a

han ds-on w ay to reg ulate a nd supervise the

fi na ncial sector, and th ereby avoid micro-ma na ging

th e ind ustry. Neverth eless, as pa rt of its social

obliga tion t o t he country, BNM w ill cont inue to

ensure t ha t n ecessary infrastructure is put in place to

protect customers from possibilities of unfair

practices by b an king institut ions. Consumer

educat ion and a w areness are essent ial to a chieve this

objective a nd t o ensure tha t t he level o f information

and guidance to t he public will be enhanced.

Recommend at ions in this section a re aimed a t

ensuring adequate and effective consumer protection

in an increa singly ma rket o riente d fi na ncial system.

The recommend at ions are ma de un der six head ings,

namely:

Initiate a n a ctive a nd structured consumereducation programme;

Increa se transparency on t he performa nce of

ba nking insti tutions and the profi le of new

products;

Esta blish leg a l redress fo r consumers;

Expand t he operat ions of t he Banking Mediation

Burea u (BMB);

Introd uce ant i-trust regulation; a nd

Set up a depo sit insuran ce fund.


Initiate an active and structured consumer educationprogramme

A crucia l elemen t in ma king t he FSMP a success is

the development of active consumerism. Active

consumerism can o nly be developed w ith the public

having a strong understa nding of t he products and

services of the ba nking institut ions. In view of this,

BNM and the b anking insti tutions w ould need t o

underta ke a structured consumer education

progra mme to ed ucate consumers on reta il products

a nd services. The pub lic needs to b e info rmed o f

the roles and functions of the fi nancial players and

the va rious types of fi na ncial instrument s being

off ered. The prog ramme w ould be comprehensive

involving publishing articles in mainstream media an d

other publications, roadshow s and integrating into

the curriculum in schools and institut es of higher

learning.


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57


Increase product-specific and institutional

transparency and move towards full disclosure

Product transparency sha ll be improved throug h the

implement at ion of full disclosure requirement f or

reta il fi na ncial products. In moving tow ards a

stand ard full disclosure mod el for products, the

follow ing actions sha ll be ta ken:

Develop clea rly defi ned g uidelines for comparab ledisclosure of a ll fee s, interest ra te s, yields, a nd

ot her stand ard product fea tures. The o bjective

w ould be to achieve more complete disclosure

(i.e. product informa tion) to consumers for a ll

fi na ncial products;

Develop a dictiona ry of commo n terms used todescribe a nd compa re products;

Req uire institutions to test initial ma rketing an ddisclosure d ocuments w ith fo cus groups t o e nsure

tha t th ey are easily understood b y a representa tivesample of the po pulat ion of Ma laysia ;

Stan da rdise disclosure rules in forma ts consistent

w ith internat ionally recognised best practices to

al low clear a nd transparent an alysis and

comparison of prod uct feat ures an d associated

risks; and

BNM ma intains the right ex post f actoto requirean institut ion to recall product or ma terial tha t is

deeme d m isleading an d reissue clarifying

materials.

With reg a rd to institu tion a l transpa rency, BNM/GP8

Guidelines on the Specimen Financial Sta teme nts fo r

the Ban king Industry would need to be review ed t o

ensure that the g uidelines are in line with t he

developments in accounting stan dards and to enable

depo sitors and investors to ga uge t he relative

strength s of individual ba nking institut ions.


Encourage consumers to pursue formal

administrative and legal redress

Forma l adm inistrative an d leg al redress should be

ta ken by consumers if they suffer harm du e to

purcha se of fi na ncial products an d services. This

requires ba nking ins

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