The Annual Dinner of Financial Institutions, 7 December 1993
1994 could be a crucial year in the history of our financial institutions. Firstly, if GATT successfully concludes its Uruguay Round, it would have a direct impact on our services industry, of which the financial sector constitutes a major component. We have already offered to GATT a liberalization package which will open up virtually the whole of our financial services sector to foreign competition. Even if the Uruguay Round was to collapse again, we will still proceed unilaterally for gradual liberalization, in the same way as we slashed or removed import duties on more than 1000 items in the last two Budgets.
Secondly, by September 1994, the banking industry of Malaysia would have undergone a major structural change. The 16 foreign bank branches currently operating in Malaysia would have been incorporated locally in compliance with the requirements of the Banking and Financial Institutions Act, 1989 (BAFIA). We are confident that the entire local incorporation exercise will proceed smoothly and be completed on time. Although there is no requirement for the foreign banks to sell down their stakes in the locally incorporated subsidiaries, we would encourage and facilitate the sharing of equity with suitable local partners. At the same time, with or without domestic content we expect the management of the new locally established banks to take full cognizance of the socio-economic realities in Malaysia.
The requirement for local incorporation of foreign banks is to provide a greater degree of protection to Malaysia depositors. Malaysia is not alone in requiring the local incorporationof foreign banks on prudential grounds. We cannot overemphasize the importance of the foreign banks in this country. They have established a strong presence in the retail banking sector. Their combined share of the retail banking market, measured in terms of total deposits mobilized by the commercial banks from the household sector in Malaysia, was nearly one-third as at the end of September 1993. Therefore it would not be unreasonable to expect the foreign banks to invite participation of local partners, to grow together in tapping the enormous potential of the Malaysian economy. Thus we are gearing up the administrative machinery to help expedite the local incorporation exercise.
We are confident these measures will significantly contribute to enhancing the sophistication and competitiveness of Malaysia's financial institutions and capital market. This is necessary to accelerate industrialization and modernization of our physical and social infrastructure. They will no doubt create new challenges in monetary policy. But our stance will continue to centre on managing excess liquidity in an effective manner. At this time, the monetary situation is well under control. While we would like to see the rate of monetary expansion lower, nevertheless, we feel rather comfortable with the current position, bearing in mind that private investment thrives best in an environment of ample liquidity. Without it, capital outlays will not be as forthcoming. In the final analysis, our strong capital spending can provide the stable basis for us to grow.
For us in Malaysia the pursuit of growth must always be balanced with the necessity to ensure equitable distribution of the fruits of development among the rakyat. The crucial role of the financial institutions in powering development also means that, with proper guidelines, they also could become effective instruments for the promotion of social justice and the sharing of the country's wealth and prosperity. It is with this general concern in mind and the specific objective of providing affordable homes for lower and middle income groups that we announced in the 1994 Budget a RM1.4 billion housing package for the construction of low cost houses, to be provided by four parties, the Treasury, Bank Negara, the financial community and the private corporate sector. We are pleased that Bank Negara has responded by contributing RM150 million to the fund. Tonight, it is with great pride and deep sense of joy that I announce that 8 financial institutions have come together to pledge on behalf of their business groups a total of RM110 million to this fund. I have been informed only just now that more financial institutions have indicated their willingness to contribute. Our banking community has a track record of competitiveness and agressiveness to secure new businesses to ensure greater profitability and better returns to shareholders. While this characteristic will continue, our bankers have now proven themselves equally capable of undertaking a new dimension of competition, that is to rival one another in doing good works, to manifest greater societal concern especially towards the poor and the less fortunate. We have often been told that bankers are hard headed people but the participations of several financial institutions in this low cost housing programme, the recently announced special loans scheme for the hard core poor, and contributions to social and cultural activities, have proven to the society at large that some of them have genuine softness of heart.
We are confident that the Malaysian economy will remain strong this year and will stay on course next year. I take this opportunity to announce that Real GDP growth in the third quarter of this year remains robust at 8.1 per cent. Growth in manufacturing and construction continues to be strong, while we are achieving our 16th consecutive month of trade surplus. Reflecting this healthy state of the economy, the stock market has been extremely bullish, posting record levels in the various indices. Thus, the prospects in the medium term are certainly promising. The average annual growth of 7.5 per cent target for the Sixth Malaysia Plan is likely to be surpassed and the target of 7 per cent growth for the period 1991-2000 should therefore be easily within reach.