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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.
38
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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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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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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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.
Recommendation 3.11:
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.
Recommendation 3.12:
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.
Recommendation 3.13:
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.
Recommendation 3.15:
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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Recommendation 3.16:
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.
Recommendation 3.17:
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.
Recommendation 3.18:
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.
Recommendation 3.19:
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.
Recommendation 3.20:
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.
Recommendation 3.21:
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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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.
Recommendation 3.24:
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.
Recommendation 3.22:
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.
Recommendation 3.23:
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.
Recommendation 3.25:
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.
Recommendation 3.26:
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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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).
Recommendation 3.27:
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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charges, privacy of consumer informat ion,
as well as consumer education an d aw areness
programmes.
Recommendation 3.28:
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.
Recommendation 3.29:
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.
Recommendation 3.30:
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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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:
Recommendation 3.31:
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 .
Recommendation 3.32:
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.
Recommendation 3.33:
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.
Recommendation 3.34:
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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Recommendation 3.35:
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.
Recommendation 3.36:
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