Bank Negara’s financial blueprint sets stage for value-added, high income economy

PETALING JAYA: Bank Negara's financial sector blueprint 2011- 2020 is a strategic plan that charts the future direction of the financial system as Malaysia makes a transition towards a high value-add, high income economy.

In this decade, the financial system is expected to grow at an annual rate of 8% to 11%, and increase its depth to six times of gross domestic product (GDP) in 2020. (In 2010, it was 4.3 times of GDP).

Correspondingly, the financial sector's contribution to nominal GDP in 2020 is expected to increase to 10% or 12% (in 2010, it was 8.6%).

The assets of the banking sector are expected to rise to almost three times of GDP by 2020 (in 2010, it was 2.4 times of GDP).

This decade will also see a shift towards more market-based financing.

By 2020, more than half of total financing is expected to be raised through financial markets (in 2010, this was 46%).

Meanwhile, financing based on Islamic principles would also grow to account for 40% of total financing in 2020 (in 2010, this was 29%).

The central bank noted that the private sector, envisioned to be the key driver of Malaysia's economic growth, would need the requisite investment financing.

Financial solutions will be required to support the start-up of new frontier industries that will be spearheaded by innovative small and medium enterprises (SMEs).

Due to changes in the demographic structure, efforts will be aimed at developing a more sustainable pension system for retirement that protects against old-age poverty, and that will support a sufficient standard of living in retirement.

Institutional capacities will need to be enhanced for long-term care and forms of disability insurance, and products to encourage individual savings for long-term medical care. Also, the activities of Malaysian financial institutions abroad is expected to become more significant while the increasing presence of regional and international financial institutions will also further connect Malaysian businesses to foreign trade and investment opportunities.

It is estimated that the financial sector would need an additional workforce of 56,000 in 2020 (in 2010, it was 144,000) for areas such as risk and wealth management, Islamic finance and investment advisory services.

A Financial Sector Talent Council will be established to provide strategic direction for holistic talent development.

The central bank said Malaysia's strength would lie in being the window of investment in Asia, and as a centre for reducing information asymmetries and quantifying risks for Asian-bound investments.

Characterisations of the financial landscape in 2020 will include wider operational breadth and scope of institutional investors with the introduction of infrastructure funds and private pension funds as well as the rejuvenation of the venture capital and private equity industries.

Insurers and takaful operators would have an enhanced role in providing comprehensive protection and investment plans for the entire lifecycle of consumers, as well as offering greater for risk mitigation to reduce the cost of doing business in Malaysia.

Among the central bank's recommendation is to promote greater foreign participation under a strategic approach to evolve a financial sector that is more diversified and integrated with regional and international financial markets.

Key initiatives under this broad strategy include issuing new licenses to financial institutions with specialised expertise, according more flexible foreign equity participation in financial institutions as well as providing greater flexibility for onshore financial institutions to establish new delivery channels.