Special Report: Bank Negara: Market-driven development the way forward

Friday 04 Apr 2025

By Ahmad Naqib Idris + Joyce Goh / The Edge Malaysia

03 Feb 2022, 03:00 pm

"There’s always the concern that we might leave people behind — the digitally excluded.There will be no such thing. While we are pushing forward with digitalisation, we have to also make sure that no one is left behind.” — Adnan (Photo by Patrick Goh/The Edge)

This article first appeared in The Edge Malaysia Weekly on January 24, 2022 - January 30, 2022

BANK Negara Malaysia is shifting from a regulator-led model to a more market-driven development model and the upcoming Financial Sector Blueprint 2022-2026 (FSBP) will reflect this, says assistant governor Adnan Zaylani Mohamad Zahid.

“Market mechanisms will be strengthened. We are looking at the next phase of financial sector development to shift from regulatory-driven to market-driven, and for the financial industry to step up in terms of taking the initiative to push development forward,” Adnan tells The Edge in an exclusive interview.

Among the things the regulator is looking at when it comes to strengthening and supporting market dynamism, he says, include reducing barriers to entry, introducing competition, putting the digital infrastructure in place and developing the ecosystem.

The much anticipated blueprint charting the way forward for the financial sector in the midst of a global pandemic will be launched by Minister of Finance Tengku Datuk Seri Zafrul Aziz on Monday, Jan 24, at the MyFintech Week 2022 (MyFW).

Themed “Advancing Digitalisation for Recovery, Sustainability and Inclusion”, MyFW is anchored in seven priorities: sustainability; resiliency; new realities for finance; economy; financial health and inclusion; start-ups; and regulations. The event will feature more than 100 speakers including Zafrul; Tan Sri Nor Shamsiah Mohd Yunus, governor of Bank Negara; Achim Steiner, administrator of the United Nations Development Programme (UNDP); Gillian Tett, chair of the editorial board and editor-at-large (US) of the Financial Times; and Kevin Hartman, chief analytics evangelist at Google.

Adnan says the move to be more market-driven will be crystallised further in the new blueprint.

“It’s something that we have started adopting, but we are fine-tuning it further to expand the initiatives for this, such as the enhancements to the Regulatory Sandbox,” he adds.

Sharing examples, the central banker says this could involve further simplifying tracks for innovation that present lower risk and creating dedicated tracks for specific use cases so innovation can be rolled out to the market at a faster pace.

He also believes it is better for the market players in the financial arena to collaborate and share the cost of development, set standards and, overall, look at the processes that can enhance efficiency.

The move towards market mechanism, Adnan notes, will also be reinforced through empowerment and the strengthening of consumer protection.

“We will have efforts and initiatives to empower consumers as well as businesses when they are accessing financial services. They will know what they need to look out for, what’s out there and, in a way, it is uplifting for us as a whole to become more financially savvy.”

As Malaysia emerges from the Covid-19 pandemic, a key focus for the financial sector will be the recovery and strengthening of the economy.

“We are coming out of quite a long pandemic. We are not even sure we are out yet but, certainly, we need to put in place [measures] to help with the economic recovery. The next thing is definitely trying to ride technology and innovation [developments], which are taking place at a very fast pace. And we are looking at how we can capitalise on technology and innovation to support sustainability,” he says.

Sustainability, Adnan adds, is going to be a big agenda for the regulator and the industry in the next couple of years, with emphasis placed on climate and climate-related risks for the financial sector.

He asserts the main priorities in terms of financial stability will be maintained and that the regulator will not compromise on this.

Alternative finance

Another aspect that Bank Negara is looking at is alternative finance.

“In the past couple of years, we have [considered] alternative finance as an important area to complement the finance ecosystem as a whole. We cannot continue to look at increasing indebtedness of businesses and households.

“Alternative finance brings not only debt financing but also equity financing for businesses. We have already rolled out a few programmes during the past one or two years, but we are looking at how to scale up alternative finance in the next few years,” says Adnan, adding that Bank Negara is working on this with the Securities Commission Malaysia in a collaborative approach.

He adds that, this initiative includes increasing the use of blended finance, for example, and looking at alternative instruments as a way of financing business expansion, which could potentially require working with different players and not just the conventional financial institutions.

“It could be DFIs (development financial institutions), but it could also be equity investors such as PEs (private equities), VCs (venture capitalists), and even in the peer-to-peer space, equity crowdfunding … We are looking at a host of different strategies to … strengthen alternative finance by bringing in and partnering with traditional finance,” he adds.

Adnan — who has been with the regulator for nearly three decades — also reveals that Bank Negara is looking to reaffirm Malaysia as an Islamic financial centre.

“We are [exploring] how we can continue to strengthen our position in Islamic finance internationally, but at the same time use Islamic finance as one of the key vehicles to advance sustainability.

“Islamic finance for the past few years has already embraced value-based intermediation, which is consistent with the sustainability agenda. And after a few years of development, we see this as key — potentially Islamic finance can be a leading force in advancing sustainability as a whole for our financial sector and also for international Islamic finance.”

‘Only as strong as our weakest link’

The convergence of digitalisation in the financial industry, tracing back more than two decades, has taken a life of its own recently, with fintech transactions skyrocketing, driven by a high demand for digital and contactless services as consumers shy away from physical payments during the pandemic.

Latest Bank Negara statistics show that 233.6 million electronic money (e-money) transactions worth RM5 billion took place in the country in November last year — an all-time high.

Cumulatively, 1.87 trillion e-money transactions were recorded from January to November last year, amounting to RM45.2 billion, which is six times the value of RM7.7 billion registered five years earlier, in 2016, for a 12-month period.

Data also shows that the value of internet banking jumped to RM9.2 trillion for the 11-month period (January to November) in 2021 versus RM5.4 trillion in 2016. The volume of transactions nearly tripled to 1.8 billion compared with 620 million in the same period.

Given the rising volume of digital transactions, is there an urgent need for the local banks to allocate a bigger budget to improve their IT systems? Are the banks addressing the technology and security issues and will that pose any risks to the banking system if there is a delay?

Adnan points out that investment in IT by local banks has risen.

“Industry data shows investment in IT is [growing at] about 9% annually from 2019 to 2020. And this is against global estimates of half a per cent. In 2021, local expenditure grew about 14% compared with a 9.5% global average. Definitely, our local banks are increasing spending on IT as a whole,” he says.

From a regulatory perspective, Adnan says the regulator has always strongly emphasised on IT development and cybersecurity.

“The standards we have in place such as the RMiT (Risk Management in Technology) set the tone for [the banks] to comply. We are trying to ensure the system as a whole is resilient and protected on all fronts. The digital banks and soon-to-be digital insurance plus takaful will have to embrace RMiT,” he adds.

The RMiT requires, among others, that a financial institution must ensure sufficient and relevant network device logs are retained for investigations and forensic purposes for at least three years; a financial institution is required to consult Bank Negara prior to the use of public cloud for critical systems; and to promote effective technology discussions at the board level, the composition of the board and the designated board-level committee should include at least one member with technology experience and competencies.

Bank Negara has rolled out a few initiatives to safeguard the banks’ systems, including initiating collaborative efforts within the industry as a whole.

Adnan says the regulator brought together industry players to compare notes on cyber threats and incidents while looking at ways to protect the system. “Our overall view is that we cannot compromise on any particular aspect of the system — we are only as strong as our weakest link.”

Bank Negara at last hurdles of digital bank licences assessment, on track for end-March, says assistant governor

The highly anticipated digital banking licences are on track to be announced by the end of March, with Bank Negara Malaysia currently going through the final stages of its assessment of the applicants, according to assistant governor Adnan Zaylani Mohamad Zahid.

The central bank has received a total of 29 applications from companies and partnerships across different industries, with a mix of foreign and domestic applicants. Bank Negara will be selecting up to five successful applicants once it concludes its assessment.

“We have a total of 29 applications and have gone through several rounds of assessment and we are at the last hurdle. Before we make the announcement [on the successful applicants], it would have to be recommended to the [finance minister] first,” he explains.

He declines to comment on the number of applicants that have been shortlisted so far, but highlights that Bank Negara has in place prudential, national interest and inclusion requirements that the applicants need to meet.

Adnan adds that the bank is looking for “tech-heavy and tech-savvy” players, and expects them to deliver services digitally, without needing physical branches to service their customers.

Bank Negara had lowered the barrier to entry for the new entrants, by watering down the capital requirement to RM100 million, versus the RM300 million currently applicable to established players.

However, Adnan clarifies that these lower requirements would only be in force during the foundational phase, with these digital banks expected to “graduate” between three to five years after being granted their licence, following which they would be subject to the same capital requirements as banks.

While the issuance of the licences are on track, Malaysia has been rather late to the party considering that Singapore, Hong Kong and Taiwan have already issued licences between 2019 and 2020.

Adnan says that Bank Negara is “purposefully late” as it took its time to fine-tune the outcome it is seeking via the issuance of the licences.

“We have to remember that we already have a lot of banks, and all these banks can digitalise as well. On that basis, do we really need to have new players coming in? We tried to look at what these new players have to offer to our financial system, and this is where we landed.

“We took a bit of time to formulate that objective and framework as a whole to achieve those goals. I think, in a sense, we are purposefully late,” he says.

He further explains that while the incumbent financial institutions could transform themselves to become fully digital, the established players might face issues given their legacy systems that have been in place for decades.

These legacy systems dictate the way applications are processed, with banks typically conducting a traditional credit assessment — looking at an applicant’s bank statements and cash flow.

This has resulted in certain segments of the population finding it difficult to access financing, such as businesses operating for less than a year or individuals with less than three years of employment — essentially, the underserved and unserved.

These are the segments that digital banks need to serve, says Adnan.

“Under digital banking, financial institutions might look at payments data and how people make payments as a way to make an assessment of creditworthiness,” he says.

He adds that while some financing applications may be seen as a riskier bet when seen through the lens of traditional credit assessment, a different type of assessment using alternative data sets could show otherwise.

Besides serving the underserved, Bank Negara also has plans to introduce what it dubs as eKYB (electronic-know-your-business), which could be taken up by the incoming digital banks first.

The adoption of e-KYC (electronic-know-your-customer) has allowed for the onboarding of individuals being done totally online, and e-KYB will extend the same convenience to businesses.

He hints that the digital banks could be the first to adopt e-KYB, but the central bank has to develop a regulatory regime for it first before this can be rolled out.

While the digital push is much needed amid the continuously evolving financial landscape, Adnan gives his assurance that no one will be left behind.

“There’s always the concern that we might leave people behind — the digitally excluded. There will be no such thing. While we are pushing forward with digitalisation, we have to also make sure that no one is left behind,” he says.

He adds that everyone will still have a level of financial services made available to them, even though some segments may not be able to digitally migrate.

“For example, when we talk about rural areas, we still have an emphasis on making sure that these districts that we have identified are adequately served and that people have access to financial services such as cash withdrawals or to pay their bills.

“One of our key thrusts in financial inclusion is to ensure that this segment will continue to be served,” he says.

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