FSM target: A high-income nation

PETALING JAYA: The thrusts of the upcoming Financial Sector Masterplan (FSM) will likely revolve around transforming the country into a high-income nation, strengthening its position in Islamic finance and managing and retaining the talent pool.

The new masterplan, expected to kick off this year and replace the previous 10-year plan (2001-2010), may also see some new areas of financing as without a simultaneous expansion of private sector financing capacity and capability, the shift will not gain traction.

Jeffrey Chew says central banks in the region must enhance cooperation. RAM Holdings Bhd group chief economist Dr Yeah Kim Leng said he envisaged the FSM to include specific themes like enhancing the capacity and efficiency of the banking sector to support the country's high-income drive, particularly in financing private investments and small and medium enterprise (SME) growth.

“This is necessary to support the required shift to private sector-led growth envisaged under the Economic Transformation Programme (ETP).

“The challenge for the banking sector is to develop a stronger focus on commercial lending, especially to the SME sector, as the household sector currently accounts for 55% of total bank loans,'' he told StarBiz.

OCBC Bank (M) Bhd director and CEO Jeffrey Chew (top) added that leasing and factoring companies should embark on new technologies such as electronic invoicing in an effort to elevate SMEs onto a higher level of productivity.

The challenge now, he added, was that most of these peripheral companies were facing dwindling prospects due to their inability to access lower cost of deposits and liquidity compared with banks that possessed these advantages.

He felt the Government, in the coming financial masterplan, should explore avenues and flexibility measures to overcome these challenges.

By placing strong emphasis on Islamic banking and finance as a new source of growth for the financial services sector, Yeah said it would enable Malaysia to position itself as the regional hub to intermediate capital and financial flows from the Middle East.

But the pitfall here, he added, would be in terms of the shortage of talent as the country's best talent would be poached by competing countries.

He said there was also a need for central banks in the region to enhance regional cooperation to streamline Islamic legal and regulatory framework as well as to harmonise its principles and standards.

Yeah noted that the FSM should also allow for the strengthening of the regional footprints of Malaysian-owned banks to tap growth opportunities provided by regional economic integration and, at the same time, ensuring that financial stability was not compromised.

In view of the high cost-income ratio of Malaysian banks compared with some of their peers in the region, providing incentives was necessary to improve cost efficiency and pass on the cost savings to consumers.

Malaysian banks' cost-income ratio had risen from 0.42 in 2000 to 0.46 in 2009 whereas banks in South Korea and Singapore had improved theirs to 0.37 and 0.34 respectively in 2009.

Chew said financing in new areas such as renewable energy and infrastructure development was crucial in the effort to achieve the status of a high-income nation.

“As the majority of these projects will be privately funded, further liberalisation of the financial sector will become even more important as the sector will require talent and expertise to assess the risks associated with these projects, especially since banks are currently still pretty comfortable with the traditional industries.

“For example, in the consumer lending segment, it took almost eight to 10 years for everyone to move into this space,'' he added.

Stressing on the payment systems, United Overseas Bank (M) Bhd director and CEO Chan Kok Seong said such systems played a pivotal role in the efficiency and stability of the financial system.

With the pervasiveness of the Internet and technologically-advanced mobile devices, the payments systems and its regulations would have to be enhanced to tap into these new opportunities.

Other areas of focus in the FSM, Chan said, would include having more intra-regional integration of payment systems, initially among the Asean countries.

With the accelerated demand for talents by new recent entrants into the domestic banking industry, there was an urgent need to address the talent dilemma and strengthen human capital development to increase the talent pool in the financial sector, he noted.

“New strategies will also be required and support of the regulators will be crucial to their success. There is a growing global trend towards over-regulation of financial institutions in response to the global financial crisis. This may not be the optimal solution for all jurisdictions. We expect to continue to see an evolving, effective and yet sensible regulatory framework that is sensitive to the domestic market,'' he said.

By DALJIT DHESI

daljit@thestar.com.my