Thursday 28 Mar 2024
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KUALA LUMPUR (Aug 9): 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 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 today.

"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 on 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. She cited examples such as created employment opportunities and income level rise, attracted investments to new growth sectors, as well as the creation of an enabling environment for targeted segments to flourish through 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," Nor Shamsiah said.

BNM is also committed to nurturing a culture of innovation that will support the achievement of development impact which DFIs strive for, she said.
This is done through the application of proportionality in regulations, which could result in reduced reporting burdens or simplified rules for some institutions.

This does not necessarily mean less stringent regulations, she added. 

“For some institutions, it may mean lower leverage, additional safeguards and prudential measures. Thus, proportionality entails an adjustment to the complexity of the rules, taking into account the risks and externalities posed by financial institutions," she said.

The central bank has been been practising this proportionality in regulating DFIs and intends to further enhance this application to reflect developmental outcomes, she added.

"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. 

"Prudential and conduct standards applicable to DFIs will also continue to be renewed and adapted where relevant. The balance that we aim to strike can only be achieved, if DFIs also lift their game to ensure strong internal controls, as well as risk and performance management," she said. 

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