DFIs should strive for financial independence

This article first appeared in The Edge Financial Daily, on August 10, 2018.
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KUALA LUMPUR: Development financial institutions (DFIs) should re-engineer their business models by diversifying their funding sources to be sustainable in the long run instead of relying on the government for continued fiscal support to deliver their mandates, said Bank Negara Malaysia (BNM) governor Datuk Nor Shamsiah Mohd Yunus.

“As policymakers, Bank Negara envisions an environment where DFIs are financially independent from the government with enduring business models that can continue to deliver positive benefits to the economy and broader society,” Nor Shamsiah said in her welcoming speech at the Forum on Performance Measurement for DFIs that was jointly organised by BNM and the World Bank yesterday.

“What we should seek is not short-term fixes but enduring business models that will deliver positive impacts to the economy and society as the economic landscape changes,” she said.

DFIs’ business models should also be firmly grounded in strong governance and a culture of professional management, the governor said. “To achieve this, DFIs should strive to strengthen behaviour and risk culture within the organisation. Strong governance entails crafting well-defined mandates that will insulate the organisation from undue external interference,” she said.

DFIs, she noted, play an important role in bridging financing gaps by participating in developing sectors and markets not adequately served by the private sector, which are often characterised by high risks and uncertainties. Hence, she said, using mere financial indicators to evaluate DFIs would be inadequate to capture their contributions to the nation’s economy and growth.

They must also be measured “by the additionalities they create”, she said, citing as examples employment opportunities created and a rise in income levels, investments attracted to new growth sectors, and the creation of an enabling environment for targeted segments to flourish through the sound design and implementation of public policies.

“To this end, Bank Negara has pioneered the measurement of development impact to complement financial performance by implementing the value-based intermediation scorecard with selected banks. The scorecard contains components of qualitative and quantitative measures of impact to cultivate an impact-driven mindset and drive improvement within the banking industry. We hope that this will be a stepping stone to enhance the contribution of the financial sector to public welfare,” she said.

She went on to pledge that BNM is committed to cultivating a regulatory framework to support DFIs in realising their full potential, through the application of proportionality in its regulations that can take the form of reduced reporting burdens or simplified rules for some institutions.

“Proportionality, however, does not necessarily mean less stringent regulations. For some institutions, it may mean lower leverage, additional safeguards and prudential measures,” she said.

The concept is not new as the central bank, she said, has been been practising this proportionality in regulating DFIs and intends to further enhance this application to reflect developmental outcomes.

“The bank is refining its methodology for DFIs to support greater differentiation at the individual institution level based on the nature, size, complexity and, most importantly, the unique roles and mandates of each DFI. The balance that we aim to strike can only be achieved if DFIs also lift their game to ensure strong internal controls and risk and performance management,” she added.