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I welcome the opportunity to address this gathering of bankers to discuss the challenges facing the banking industry. In the past, the banking industry had undergone tremendous changes. The severe recession of the mid - 80s had left many imprudent players high and dry in the financial system. The episode of the infamous 24 deposit-taking and co-operatives and the experience of several ailing banking institutions are well documented. It was a turbulent era. Fortunately, that is all behind us now. On reflection, the recession was a blessing in disguise. It was during that period that many inefficient players were shaken up and the unaffected players were reminded of the need to observe prudence and tighten controls. Following consolidation and reorganization, the banking industry emerged from it all, leaner yet much stronger.

Malaysia is now entering a new era of development and striving to become a fully-developed nation by the year 2020. This goal is both pragmatic and realistic, and will require the concerted and coordinated efforts of all sectors. What is important for the banking industry to realize is its crucial role as an effective financial intermediary. In performing this critical function, the banking industry will no doubt have to face many challenges.

To my mind, the single most important challenge facing the banking industry in the decades ahead is simply to perform effectively its fundamental role of mobilizing the scarce savings of the nation for deployment in productive ventures. The Second Outline Perspective Plan has specified a target of raising the level of gross national savings from the current level of 30 per cent to 36 per cent of the GNP by the year 2020. Equally important, the banking industry must ensure that the nation's scarce pool of savings is made available at reasonable cost to the productive sectors of the economy, particularly the manufacturing sector, in order to generate higher and higher value-added goods and services. Under the Sixth Malaysia Plan alone, about $200 billion of private investment will be required to sustain the process of economic and industrial development. Given this enormous challenge, the banking industry and the entire domestic capital market will need to adapt and innovate.

First and foremost, bankers must remember that the provision of finance cannot be done indiscriminately in the pursuit of profit alone. Funding for the production of value-added tangible goods and services must always take priority over the granting of credit for speculative investment and conspicuous consumption, no matter how profitable the latter may be. It is futile and, in the long-run, destructive to focus on the creation of paper fortunes by merely shifting money around. Because, as funds are increasingly used to finance speculative activities, less of the nation's scarce savings would be available to finance real productive investment for research, development and the production of real goods. If this goes on uncontrolled, the economy would regress. Funding of non-productive ventures must, therefore, be contained within a narrow prudent limit even though, in the short-run, individual banking institutions may find the financing of such ventures to be extremely lucrative.

As an emerging Newly Industrialized Country (NIC), there is definitely no lack of viable new industries and productive projects available for financing. With the planned establishment of the Asean Free Trade Area (AFTA), intra - and inter-Asean trade and investments can be expected to increase with greater intensity. For the banking industry, this can only be translated to mean greater lending and investment opportunities. The banking industry must also be willing to support industrial research and development to enable Malaysian industries to increase its productivity and enhance its competitiveness.

Equally important is the commitment to promote new industries by providing financing for innovative high technology ventures with vast growth potential. At the same time, the financing needs of the small and medium scale industries (SMIs) must not be brushed aside merely because of their small operating scale and lack of proven track record. SMIs are important linkages in an economy, as they play the role of providing competitive feeder industries for the larger industries, and stand in a strategic position to also provide the necessary ground support for the production of competitive Malaysian-made products.

In the years ahead, it is crucial that the banking industry devise a broader and more flexible range of financial instruments and techniques to meet the increasingly complex savings and financing needs of a more and more sophisticated society. Competition in the banking industry will most certainly intensify further as the traditional demarcation line segregating the various groups of financial institutions becomes increasingly blurred. While the government continues its commitment to greater deregulation by judiciously removing operational restrictions, banking institutions must respond to the escalating competitive pressures by further upgrading efficiency and sophistication in the services and delivery system. We have every confidence in the banking industry's ability to rise to the occasion, seeing that in recent years, the rapid pace of automation has already had a profound impact on raising the standard of banking services.

The challenges go beyond the traditional role of banks. There is the need for top management to give some priority also to human resource development. There will be new industries and emerging trends in the marketplace which demand new skills and techniques. In this regard, I would highlight the challenge arising from the phenomenon of securitization. Undoubtedly, in the years ahead, more corporations with good credit standing will also source their funds directly from the capital market instead of just borrowing from the banking institutions. This is so simply because it makes good business sense for large corporations to raise long-term fixed-rate funds directly from the capital market to finance large-scale industrial projects with a long gestation period. The trend towards greater securitization is, therefore, expected to accelerate as the industrialization process gains momentum. The implication of this phenomenon is that banks would be disintermediated on both sides of their balance sheets.

First, bank would lose their deposit-taking business as investors, looking for high yielding investments, would view some high quality papers to be just as secure as bank deposit and yet offering higher returns. Secondly, banks would also lose some of their lending business as companies with high credit rating can borrow from the market by issuing debt securities at competitive prices.

Consequently, banks may no longer be assured of an easy and comfortable income margin from collecting low yielding deposits for on-lending to well-established corporations. Thus, the banking industry must necessarily need to compete more rigorously for deposits, and at the same time upgrade their credit evaluation and monitoring skills to manage loans with a higher risk profile. Nonetheless, increasing securitization would accord the banking industry with the opportunity to also earn income from fee-based activities, such as arranging and underwriting securities. This would require the development of new expertise to provide skill-intensive fee-based activities. There will also be opportunities to deal in securities in the secondary and derivative markets. In short, increasing securitization poses a challenge for the banking industry to upgrade its traditional skills and to develop new skills.

In the context of developing skilled professionals for the banking industry of the future, I feel it appropriate and even necessary at this point to express the general concern of the public over the recent spate of scandals and failures involving financial institutions. The banking community must assume the main responsibility in inculcating the highest standards of integrity and honesty throughout the industry. The importance of maintaining the confidence and trust of the public cannot be over-emphasized. There is no substitute for professional and honest bankers in the maintenance of a safe and sound financial system. This is even more crucial in an emerging newly industrialized country, where a single disastrous miscalculation can cause a severe set-back in confidence in the economy.

Thank you.