Financial Services

Improve Malaysia’s stock exchange’s (Bursa) scale and liquidity. The Government will play a catalytic role to increase the scale of Bursa through managing its stakes in Government-linked companies (GLCs). Firstly, the Ministry of Finance (MoF) will work with government-linked investment companies (GLICs) to partially sell down their stakes in listed companies (with clear targets and timelines) in order to improve the free float in the capital market.

Secondly, we will take public key GLCs that remain privately held today. The listing of these strong flagship companies, particularly in oil and gas and plantations, will significantly expand the market capitalisation of Bursa and draw investor interest.

Simultaneously, GLICs will further diversify their portfolios to include greater exposure to other assets classes, such as mid-cap stocks, wider credit spectrum in fixed income securities and international investments where there are ample opportunities for value creation. This will help to catalyse trading activities while providing greater access to financing for key segments of the economy (e.g. small medium enterprises) and reducing concentration risks.

Both these measures will also promote greater discipline and transparency in the management of GLCs. In this way, GLCs will be motivated to continually enhance their core competencies and sharpen their competitive edge when venturing outside Malaysia.

Increase velocity in the market. Bursa’s market velocity has decreased from 66% in 1996 to 31% in 2009 while regional averages are at approximately 60%. The central order book is not deep enough and large trades can incur substantial market impact costs. All this threatens the price discovery process and impairs market liquidity.

To address the imbalance between long-term and short-term players in the market, greater diversity will be encouraged such as attracting absolute return funds, liberalising day traders and encouraging stock lending. With greater diversity in trading activities, market liquidity should improve.

More volatility will be carefully allowed into the market. At 13% volatility, Bursa is the least volatile exchange in the region. Vibrant capital markets like Singapore, Hong Kong and Japan have volatility of 25%, 22% and 23% respectively. While Malaysia may have benefitted from low volatility during the global financial crisis, the current low-level volatility is resulting in low trading activities and low liquidity, impacting the overall attractiveness of the market.

Other actions include:

• Improve breadth and depth of product offerings
• Accelerate liberalisation of stock broking industry
• Integrate with leading exchanges

• Widen the credit spectrum of the bond market
  Through the establishment of Danajamin, Malaysia’s first financial guarantee insurer, in May 2009, companies with lower credit ratings have better access to the bond market. We will encourage GLICs to further diversify their portfolios by investing in A-rated fixed income instruments. In addition, we will attract and facilitate niche investors with higher risk appetites to invest in lower rated instruments.
• Increase participation of foreign issuers and investors
  A concerted promotional effort between SC and Malaysian Investment Banking Association will be made in order to attract Asian issuers and investors, who have already tapped the ringgit bond market, to further issue bonds or sukuk in Malaysia.
• Strengthen retail participation
  SC and Bursa will work with the industry to promote retail participation in the market. Currently, only high net worth individuals are able to invest directly in bonds due to a minimum transaction size of RM250,000 (USD71,000). Developing exchange-traded bonds or lowering the threshold would allow for more participation with lower transaction sizes.

• Revisit DFI mandates and rationalise where possible
  MoF in conjunction with the relevant ministries (e.g. Ministry of Agriculture, Ministry of International Trade and Industry and Ministry of Domestic Trade, Cooperatives and Consumerism) will review whether current operations and mandates of the DFIs are aligned to developmental needs. Where there are synergies or overlaps, every opportunity will be taken to rationalise in order to improve efficiency.
• Improve operations and promote self-sustainability of DFIs
  MoF will institute a performance based culture in the DFIs. Broad assessment criteria will measure DFIs on their developmental achievement, financial results, customer satisfaction and employee engagement. MoF will also continue to further strengthen management and corporate governance practices in the DFIs. In addition, governance and operations in key areas, such as risk management, product management, will be enhanced by drawing on industry best practices. Lastly, DFIs will gradually move to shared services and outsource middle and back office activities to improve productivity.
• Provide value added services
  DFIs will extend their offerings to include advisory or technical assistance, acting as partners to their customers. DFIs have intimate knowledge of their customers’ businesses and are well-positioned to advise on key decisions. In this way, DFIs will play a role in on-going capability development of the segments they serve.
• Encourage DFIs to shift emphasis towards Islamic finance
  In supporting our intent to become the global Islamic finance hub, DFIs will gradually shift towards “Islamic finance first” whenever possible. This policy will be implemented in a manner that will not prevent DFIs from fulfilling their developmental obligations.
• Enhance performance management for other government developmental agencies
  MoF will conduct a study on measures to enhance the operations and performance management systems of other developmental agencies such as the SME Corporation, Biotech Corporation, Multimedia Development Corporation, etc. This will promote greater accountability and improve their effectiveness.

• Expand merchant acceptance
  BNM, in collaboration with MoF, MEPS, Touch 'n Go and merchant acquirers will develop a comprehensive strategy to expand merchant acceptance to achieve 1.3 million merchants by 2020. The strategy includes, but is not limited to sourcing cheaper POS terminals, providing a competitive merchant discount rate through tiered pricing and creating customer demand pull through loyalty programmes.
• Drive adoption through education and selective forced adoption
  Banks and payments industry players (e.g. MEPS) in collaboration with the government will step up consumer education on the benefits and safety of using e-payment to accelerate the migration process. E-payment awareness and education will be included as part of the National Financial Literacy curriculum. The government will also induce forced adoption in selective areas. For example, the MoF will credit tax returns directly into bank accounts.
• Reduce usage of cheques and go cheque-less in 2020
  Our vision is to become a cheque-less country by 2020. To achieve this, BNM and banks will start by educating customers on the cost of cheques to the economy (RM2.00 per transaction as compared to RM0.50 for e-payment).

  MoF will gradually increase stamp duty for cheque transactions to reflect the actual cost to the economy and more importantly to discourage the use of cheques. The increase in government revenue will be used to invest in e-payment, e.g. for an e-payment education campaign and tax rebate for point-of-sale terminal investments.

  BNM will develop a roadmap to phase out cheques by 2020 taking into account feedback from consumers and businesses. This roadmap will be reviewed on an annual basis to incorporate refinements to specific milestones. MoF will lead the way by virtually eliminating the use of cheques for Government related payments by 2013.

• Expand MEPS strategic partnership with key countries
  MEPS will expand strategic partnerships with other countries. First, we will broaden the scope of existing ATM partnerships to point-of-sales and more advanced e-payment (e.g. mobile and Internet) transactions. Then, MEPS will connect with countries with a lot of cross-border inbound and outbound travellers, such as India, Australia, Philippines and Japan. Malaysians will benefit from cheaper transactions in partner countries.

• Create employee insurance scheme
  An employee insurance scheme (EIS) will be launched for the benefit of low-income employees. EIS is a basic, low-premium term life insurance scheme. Enrolment in the EIS is automatic, but there will be a convenient opt-out option. Participants will also be able to opt into additional critical illness and hospitalisation benefit coverage. Premium payments will leverage on the existing infrastructure of agencies such as the Employees Provident Fund (EPF) and the Social Security Organisation (SOCSO). The key features of EIS will be clearly communicated upfront and extensive education efforts will be undertaken to educate the public on the importance of insurance.
• Improve tax treatment for life insurance
  Currently, a combined personal tax relief of RM6,000 (USD1,714) is provided for EPF contributions and life insurance premiums. In addition, there is a RM3,000 (USD857) relief for medical and education insurance and a RM1,000 (USD286) relief for annuity products. However, for the upper middle- to high-income segments, EPF contributions often fully utilise the RM6,000 (USD1,714) limit. Furthermore, certain segments of the population may not access the relief for medical and education insurance and annuity products.

  Going forward, separate tax reliefs of RM6,000 (USD1,714) each for EPF contributions and insurance premiums will be introduced (a net increase of RM2,000 (USD571) in relief). This change provides greater flexibility for individuals to select insurance products to suit their needs. This relief covers both conventional insurance and takaful products.

• Develop private pension funds to supplement public pensions
  Private pension funds (PPFs) will supplement existing public pension schemes and offer non-EPF and self-employed people a way to save for retirement. Participation will be voluntary.

  The value propositions of PPFs will be customised for different target segments. For working adults, the focus will be to build a desirable level of savings while for retirees, PPFs will offer protection against longevity and inflation risks and provide adequate returns during retirement. Fund participants can match their investments to their own risk preferences. Benefits such as insurance coverage or direct payment of pension income for retirement homes or nursing care will be incorporated to encourage higher participation.

  The private pension fund industry will be open to high quality, well capitalised institutions, including insurance companies, asset management firms and banks. A robust legal and regulatory framework will be established to safeguard the interests of PPF participants and lay out the legal and regulatory rules that qualified PPFs must adhere to, including laws governing relationships between sponsors (employers), managers and funds. Clear guidelines on governance will cover fund governance, monitoring and reporting as well as performance disclosure and benchmarking. A modern and risk-based investment framework that will address asset allocation guidelines as well as investment restrictions such as portfolio ceilings and age-based limitations will also be put into place.

• Provide incentives to rapidly build critical mass in the private pension industry
  The experiences of other countries like Australia have demonstrated the use of tax incentives as a critical tool to encourage citizens to prioritise retirement savings. Similarly, we will introduce incentives to enable the new private pension industry to operate at a sustainable scale and grow into a vibrant industry.

  The pension review committee is currently reviewing and finalising the proposed tax incentives. More details will be shared with the public before the end of the year, but will include tax exemption on private pension disbursements (currently applicable under approved public pension schemes such as EPF), additional tax reliefs for contributions to PPFs and tax deductibility for employer contributions to PPFs (just as EPF contributions are tax deductible for employers). The EPF Fund Management Institute framework currently applicable to unit trusts will also be expanded to allow investment in PPFs.

• Improve education on importance of financial and retirement planning
  A concerted, long-term financial education programme for the public will be implemented to create awareness and promote basic financial and retirement planning, as a critical element of the National Financial Literacy Programme.

  This will be a joint public-private sector effort involving SC, BNM and industry organisations and training providers such as Malaysian Association of Asset Managers (MAAM), LIAM, PIAM and Malaysian Insurance Institute. Key activities will include media campaigns and retirement planning.

• Increase range of wealth management products available
  We will carefully liberalise wealth management products to allow a wider range, such as structured products, to be easily marketed in Malaysia. In addition, we will streamline the product approval process to significantly shorten time to market.

  For the most sophisticated investors, we plan to move to a “register and issue” based product approval regime. This means that wealth management firms can market new products to sophisticated investors without having to get government approval for each new product. The criteria to be deemed a "sophisticated investor", currently RM3 million (USD857,000) in total assets, has recently been put out for public consultation and the results are being reviewed by the SC. Future criteria could be based on investable assets rather than total assets.

• Implement tiered returns for EPF balances above RM1 million (USD289,000)
  Today, 7,000 EPF members with balances above RM1 million have the option to withdraw the excess amount, but very few have done so to date. Moving forward, EPF will be restructured to a tiered return structure, whereby the dividends on amounts in excess of RM1 million will be capped at 2.5%. This will encourage wealthy individuals to withdraw the excess monies and we expect part of this will be channelled to wealth managers.
• Attract top wealth management institutions
  None of the global top 10 wealth management institutions have full-fledged wealth management operations in Malaysia. In order to attract them to set up operations in Malaysia and deepen the intermediary base, we must simplify licensing. As the location of operations often depends on quality of life factors, we will continue to focus on broader considerations (similar to those being undertaken by the GKL/KV NKEA) to make Malaysia an attractive place to work, live and play.
• Carve a niche in Islamic wealth management
  Syariah wealth management is a largely underserved market today that represents a unique opportunity for Malaysia, requiring specialised knowledge such as Syariah compliant wills and estate planning. To capture this opportunity, we will first build Syariah financial planning capability. Currently, Malaysia has less than 300 Syariah financial planners. This number will be increased through training and education, and the training curriculum will also be standardised. Secondly, wealth managers will exploit synergies with Islamic asset management firms to access new products.

• Stimulate the industry through outsourcing mandates
  Having already established offices in regional hubs such as Singapore and Hong Kong, most leading global firms may not be planning further regional expansion. Still, it is critical to attract firms that can serve as catalysts for growth.

  Currently, the GLICs are outsourcing to external fund managers at a relatively small scale compared to other major regional and global pension funds. Going forward, we will increase the total GLIC mandates to external fund managers from 5% to 15% of AuM. Each mandate must be sufficiently attractive, with RM1 (USD286 million) to RM2 billion (USD571 million) awarded to top fund management companies. These firms will be required to set up operations in Malaysia with at least six employees, including at least two portfolio managers, and to match foreign capital on a one-to-one basis within the first three years. Financial support may also be given, such as subsidising rents or salaries.

• Further stimulate the retail market
  EPF members are required to maintain a basic savings amount (ranging from RM1,000 (USD286) to RM120,000 (USD34,285) based on age). For any amount in excess, up to 20% can be withdrawn for investment in unit trusts. To further stimulate the retail market, members with more than RM120,000 (USD34,285) in Account I, regardless of age, will be able to invest up to 50% of the excess in unit trusts. The excess can also be invested directly in ETFs.
• Carve a niche in Islamic asset management
  The global Islamic fund management industry is growing at 12% over the past six years to reach approximately RM166 billion (USD47.4 billion) AuM in 2009. Malaysia already has the largest number of Islamic funds in the world with 184 funds and the second largest AuM of RM18.2 billion (USD5.2 billion). However, the industry still lacks scale as well as foreign investors.

  Firstly, we will attract more leading funds to set up in Malaysia, leveraging on GLIC mandates. Secondly, growth of the wealth management industry will create demand. In the long run, Malaysia could be the global Islamic asset management product innovation hub, with our products sold globally through foreign banks and private banks.

• Expand internationally in a meaningful manner
  The Government and BNM will assist strong Malaysian banks to establish a meaningful presence in priority markets and become true regional champions, subject to prudent considerations. Banks with strong management capabilities and strong capital position that want to expand internationally can expect higher levels of support.
• Expand beyond ASEAN
  Outside of ASEAN, Greater China and South Asia are also experiencing strong growth in demand for financial services. Furthermore, a significant portion of Malaysia's outward FDI has also been invested in these markets. Expansion into these markets requires significant capital commitment. Our strong banks and GLICs will lead expansion outside ASEAN through the acquisition of banking assets when the opportunity arises.

• Codify and standardise Syariah guidelines
  BNM is already in the process of issuing Syariah parameters as standard documents to facilitate a comprehensive understanding of the principles and form the basis for Syariah contracts. Acceleration of this effort will help clarify understanding and ensure consistent interpretation of Syariah contracts in Malaysia, facilitate the formulation of policies and guidelines, promote innovation and enable faster product development and launch.
• Drive global convergence and mutual recognition of standards
  The full potential of Islamic finance will only be unleashed if global convergence and mutual recognition is achieved. Government and regulators will drive this process, including shaping the agenda of international bodies (e.g. IIFM, the Accounting and Auditing Organization for Islamic Financial Institutions, AAOIFI) to speed up their progress and expand their memberships to more countries.
• Become a centre of excellence for Islamic finance research, development and education
  The Government, regulators, and private players have made significant investments to further Malaysia’s aspirations to become a centre of intellectual excellent in Islamic finance. For example, several human capital development institutions including International Centre for Education in Islamic Finance, International Shari’ah Research Academy for Islamic Finance and the Asian Institute of Finance have already been established.

  We will continue to invest in cementing Malaysia’s position as the centre of excellence for Islamic finance, research and education. Our priority areas going forward include:

  • Legal
    Study the potential to re-engineer the KL Regional Arbitration Centre into a competitive global arbitration centre with specific expertise in Islamic finance or to create a dedicated global Islamic finance arbitration centre and ensure our legal framework is expanded to accommodate more innovative Islamic products;
  • Human capital
    Islamic Banking and Finance Institute Malaysia will create globally recognised accreditation and certification programmes (e.g. Syariah Risk management certification); Malaysia International Islamic Financial Centre (MIFC) will expand the scholarship and research grants programme to attract international students and experts and Ministry of Education will increase the capacity and quality of Islamic finance higher education institutions with more focus on drawing foreign students; and
  • Research, development and innovation
    Leverage the International Shari’ah Research Academy for Islamic Finance ISRA to spearhead innovation in Islamic finance; Islamic financial institutions to increase their R&D budgets and MIFC to increase the prominence of awards programmes (hosted in Kuala Lumpur) to recognise innovation in Islamic finance.

   

• Expand Islamic banking to priority markets
  Malaysia's Islamic financial institutions will expand into key markets with high potential such as Indonesia, the Middle East, North Africa and the Indian subcontinent. The Government and BNM will continue to facilitate this expansion.

  International expansion requires significant capital and capability. Having a Malaysian mega Islamic bank that will become a flagship will make international expansion more feasible. Furthermore, having a flagship in the global top 10 will strengthen Malaysia's claim to being the undisputed leader in Islamic finance.

• Actively participate in the enhancement of global Islamic liquidity management
  Malaysia will actively participate in efforts to enhance global Islamic liquidity management, which is currently impeding the growth of Islamic finance. Specific measures include:
  • Bursa's Syariah compliant commodity trading platform, Bursa Suq Al Sila will tie up with platforms in key Muslim countries and extend its opening hours;
  • MoF will increase use of foreign currency Islamic instruments to fund projects under the Tenth Malaysia Plan;
  • Influencing the International Islamic Financial Market (IIFM) to include more countries and shape IIFM’s agenda to speed up convergence in Islamic liquidity management; and
  • Government to persuade other key Islamic countries to issue more foreign currency instruments to create cross-border liquidity.
• Develop Islamic fund management
  With RM18.2 billion (USD5.2 billion) AuM, Malaysia currently accounts for 10% of the global Islamic fund industry. However, most fund managers are still subscale with average AuM of under RM50 million (USD14.3 million). The plan to accelerate further development includes:
  • Actively attracting leading international fund managers to build up operations in Malaysia by having GLICs give significantly large mandates;
  • Growing the Islamic wealth management industry; and
  • Positioning Malaysia as the Islamic product innovation hub with the distribution of products through reputable foreign financial institutions and private banks
• Expand takaful products overseas
  Malaysia is currently the third largest takaful market globally with an 11% market share, most of which is domestic. Takaful is among the most undersold Islamic product accounting for only 3% of Islamic Syariah compliant assets globally. Malaysia will therefore transform takaful into an international business.

  In the first phase, the industry will enhance the competency of the takaful workforce and develop innovative products. For example, local operators can ride on the rapid growth of medical tourism to offer medical and health takaful policies to Muslim health tourists.

  In the second phase, takaful operators will focus on penetrating key untapped markets. The Government will facilitate entry into these markets through inter-governmental relationships and by offering Malaysia’s expertise in the development of regulatory frameworks for takaful.

  Finally, takaful operators will establish relationships with financial advisors, brokers and intermediaries to broaden distribution. For example, takaful products can be included in retirement and wealth management plans.

• Strengthen Malaysian retakaful capacity
  Retakaful is a vital part of the takaful industry, acting as a risk-mitigation mechanism for takaful operators by spreading risks across other institutions. As Malaysia develops to achieve global leadership in takaful, the retakaful industry must develop in tandem.

  Today, local takaful operators are encouraged to protect their risk through retakaful. However, many takaful operators still depend heavily on conventional re-insurance due to limited capacity and lack of ability to provide additional technical expertise.

  Efforts identified to strengthen the retakaful industry include establishing a retakaful syndicate among retakaful operators with Lloyd’s of London and serving the growing needs for retakaful outside Malaysia.

Over the next 10 years, the commercial banking segment is expected to maintain a moderate growth of 7% per annum. Most of the incremental GNI of RM29.6 billion (USD8.5 billion) in 2020 is anticipated to come from baseline growth with contribution from the following business opportunities:

• Innovation in the delivery of financial services including new business models to tap underserved segments and new branch formats including branchless banking;
• Increased financial inclusion via the national literacy programme;
• Commercial banks supporting the growth of SMEs, which will be strengthened as engines of growth and innovation under the Tenth Malaysia Plan; and
• Fast growing personal finance segment

This business opportunity requires RM64.9 billion (USD18.5 billion) in funding, of which approximately RM61.2 billion (USD17.5 billion) will be sourced from the private sector.

The outlook for investment banking is anticipated to remain positive with strong growth of 15% per annum throughout 2010 to 2015, slowing to 10% over 2016 to 2020. Incremental GNI impact is expected to be RM5.2 billion (USD1.5 billion) in 2020. Most of the GNI value is expected to be derived from baseline growth, with additional contribution from several business opportunities:

• Increase in IPOs due to a push for innovation under the Tenth Malaysia Plan;
• Integration of capital markets (e.g. exploiting the advantage of QDII status with China and mutual recognition agreements with Hong Kong and Dubai); and
• Increase in merger and acquisition activities due to expected consolidation in several key sectors

This business opportunity requires RM10.2 billion (USD2.9 billion) in funding, of which approximately RM9.5 billion (USD2.7 billion) will be sourced from the private sector.

The Islamic banking segment is expected to contribute RM11.1 billion (USD3.2 billion) in incremental GNI for 2020. This will be supported by strong growth of 15% per annum from 2010 to 2015, slowing down to 12% over 2016 to 2020. Most of the GNI value is expected to be derived from baseline growth, with additional contribution from several business opportunities:

• Islamic pawn broking (ar-rahnu); and
• Migration of money lending business to conventional or Islamic banks following the proposed amendment to tighten the money lending business

This business opportunity requires RM50.2 billion (USD14.3 billion) in funding, of which approximately RM46.9 billion (USD13.4 billion) will be sourced from the private sector.

This segment is expected to create incremental GNI of RM13.1 billion (USD3.7 billion) in 2020. Industry growth for conventional insurance and reinsurance is expected to remain stable at 6% whereas takaful and retakaful will register stronger growth at 20% over 2010 to 2014, slowing down to 15% over 2015 to 2020. Most of the GNI value is expected to be derived from baseline growth, with additional contributions from several business opportunities:

• Greater insurance take-up arising from Government’s efforts to educate the public on financial planning and the importance of protection;
• Expected further consolidation and rationalisation will create strong institutions and platform for growth; and
• Micro insurance will become more viable with cheaper distribution models.

This business opportunity requires RM17.3 billion (USD4.9 billion) in funding, of which approximately RM16.5 billion (USD4.7 billion) will be sourced from the private sector.

The asset management and wealth management (AMWM) services is estimated to contribute RM1.9 billion (USD543 million) in incremental GNI in 2020. This will be driven by an average 8% growth over 2010 to 2020. Whilst most of the GNI value is expected to be derived from baseline growth, several opportunities within the segment will be expected to give rise to GNI:

• Increase in access to funding for innovative start-ups arising from creation of a RM500 million (USD143 million) Mudharabah Innovation Fund under the 10th Tenth Malaysian Plan;
• Outsourcing opportunities arising from the creation of the RM20 billion (USD5.7 billion) public-private partnership fund to support the 10th Tenth Malaysian Plan;
• Growing Malaysian wealth will require asset management and wealth management AMWM services;
• Increase in demand for unit trusts, mutual funds and wealth management services among foreign workers and returning Malaysians; and
• Growing awareness and critical mass for retail aggregators that can negotiate lower fees for unit trust products, e.g. FundSupermart.

This business opportunity requires RM1.3 billion (USD371 million) in funding, of which approximately RM1.2 billion (USD342 million) will be sourced from the private sector.

The remaining segments in the financial services sector, such as DFIs, private equity and venture capital businesses, are estimated to account for RM11.0 billion (USD3.1 billion) incremental GNI in 2020. Most of the GNI value is expected to be derived from baseline growth, with several business opportunities identified under the following 10th Tenth Malaysian Plan initiatives:

• Investment activities under 1Malaysia Development Berhad’s RM100 million(USD28.6 million) business development fund;
• Opportunities in private equity and venture capital for innovation and green financing, with a strong emphasis on projects in renewable energy, especially biofuels;
• Value chain impact to private equity and venture capital as the capital market becomes more vibrant and IPO becomes easier;
• Significant underground money lending and remittance business will move towards formal money lending and money transfer business as the economy evolves; and
• Back-office centralisation will enable financial institutions to focus on more productive and higher value-added activities

This business opportunity requires RM1.9 billion (USD543 million) in funding, of which approximately RM1.8 billion (USD514 million) will be sourced from the private sector.