27th DFSWG and 17th GSPWG Meetings – Opening Remarks by Bank Negara Malaysia Assistant Governor, Suhaimi Ali

Bismillahirrahmanirrahim and a very good morning,

Dr. Alfred Hannig, Executive Director of the Alliance for Financial Inclusion (AFI); Chairs and Members of the AFI Working Groups; and Distinguished guests,

On behalf of Bank Negara Malaysia, I wish you a warm welcome to Kuala Lumpur and to Sasana Kijang. It is our pleasure to host you for the AFI Digital Financial Services and Global Standards Proportionality Working Group Meetings. It is also great to see all of you physically here for the meetings after a few years of COVID-19 restrictions.

Congratulations to AFI for jointly organizing this important Working Group Meetings. The topics are highly relevant as we continue to progress in the age of digital advancements.

Malaysia, as with other countries in the world, has seen the pandemic as a catalyst for the adoption of digital financial services or DFS. Digital transactions per capita in Malaysia have accelerated, increasing from 150 transactions per capita before the pandemic to over 290 transactions per capita in 2022. More recently, the World Bank, in its Global Findex 2021 Report revealed that 79% of Malaysian adults use digital payments. Out of this, 42% did so for the first time during the pandemic. Similar trends are seen in other developing economies, where 40% of those who made a digital payment did so for the first time during the pandemic.

Digitalization has made financial services accessible anywhere and anytime. The evolution of DFS also provides immense opportunities to deepen financial inclusion for the previously unserved segments. This can be done by providing more convenient, fast, secure, and tailored financial services.

Recognizing the role of DFS in driving financial inclusion, Bank Negara Malaysia has given focus on enabling the entry ‘digital-first’ financial service providers to maintain the digitalization momentum. In line with the principle of proportionality, we strive to ensure that our regulatory frameworks remain conducive to support responsible innovations in a safe and sound manner.

In April 2022, we announced the five successful applicants for digital bank licenses in Malaysia. The digital banks are expected to address financial inclusion gaps, particularly in expanding meaningful access to and promoting responsible usage of suitable financial solutions for the unserved and underserved segments. The digital banks are currently undergoing operational readiness checks prior to the commencement of their operations which will be subjected to a more simplified regulatory regime during the initial years of operations.

We are also currently working on licensing digital insurers and takaful operators (DITOs). Like digital banks, we are developing a proportionate regulatory framework for DITOs, that will unlock their full potential, while ensuring appropriate safeguards are in place to address associated risks. The framework aims to attract new digital players that can offer digital innovative solutions in the insurance and takaful sector, and to address critical protection gaps among the unserved and underserved segments.

Proportionate regulation involves the calibration of regulatory requirements for models which promotes innovation to serve underserved segments, without compromising safety and soundness of the financial system or consumer rights. This includes according proportionality to institutions which pose lower risks to financial stability, such as Development Financial Institutions (DFIs) that serve segments of the population with small ticket transactions. Another approach is by adopting a sandbox or pilot approach for new innovations, which limits contagion risks to the public at large. These can effectively promote financial inclusion while simultaneously upholding appropriate levels of prudential oversight.

In Malaysia, the DFIs are the key drivers to pilot or implement game-changing financial inclusion strategies. Recognizing the important role of the DFIs in advancing financial inclusion, our priorities include strengthening the role of DFIs and to develop fit-for-role regulations for DFIs to sustainably deliver their developmental mandates.

As our lives become increasingly digital, financial scams and frauds have also been on the rise. In fact, this has become a global issue, not just unique to Malaysia. For Bank Negara Malaysia, our priority is to ensure that banking and payment channels remain safe and secure. As tactics used by criminals rapidly evolve, we continue to step up efforts including rolling out preventive measures and raising public awareness. These include requiring banks in Malaysia to adopt high standards of security, issuing security advisories to the public and for banks to implement additional security measures to protect their customers.

The government had also recently established the National Scam Response Centre or NSRC, a command centre to coordinate rapid response for online financial scams. NSRC brings together resources and expertise from government agencies, financial institutions, and the telecommunication industry to combat financial scams more quickly and effectively.

We are all aware of the great potential of DFS in deepening financial inclusion. Nevertheless, this potential can only be realized if consumers are equipped to use DFS effectively and responsibly. Consumers will need a higher level of financial sophistication to effectively use digital financial products to avoid miss-selling and falling victim to frauds such as phishing, hacking attacks and unauthorized use of data. At the same time, having digital and financial literacy can also facilitate better financial management and prevent issues such as excessive borrowing.  

The recently completed Financial Capability and Inclusion Demand Side (FCI) Survey commissioned by Bank Negara Malaysia in 2021 highlighted that digital financial literacy amongst the population has not significantly improved over the years. Of concern is the lack of cyber hygiene among the respondents when conducting online transactions. For example, about one-third of the respondents are willing to share their passwords or personal identification number of bank accounts with close friends, which exposes users to the risk of online fraud, including being used as ‘mule accounts’, while about 60% of respondents do not pay attention to the security features of bank websites when performing online banking transactions.

These findings are alarming as consumers could be misled into providing their banking credentials through fake websites that enable scammers to use their information to commit fraud. The widespread implications of these findings necessitate urgent efforts to ramp up digital financial literacy initiatives for Malaysians to navigate the DFS sphere. The Bank and the National Financial Education Network (FEN) have embarked on initiatives to ensure targeted and effective interventions for the vulnerable segments, based on the findings of the FCI Survey.   

Early last year, Bank Negara Malaysia launched a five-year Financial Sector Blueprint (Blueprint). The Blueprint outlines the vision and strategies for the development of Malaysia’s financial sector underpinned by three broad outcomes of “finance for all”, “finance for transformation” and “finance for sustainability”.

Allow me to briefly highlight a few key strategies that are of relevance to financial inclusion:

Firstly, we will seek to future-proof key digital infrastructures. This includes building our capability on the use of central bank digital currencies (CBDC), supporting the implementation of national digital IDs, introduction of the eKYC and eKYB frameworks and development of an open data ecosystem.

Second, we will seek to support a more vibrant DFS landscape. This includes enhancing pathways for digital innovations to test, scale and exit such as through the Regulatory Sandbox. We will also facilitate greater digitalization of business models in financial services, prioritizing those that can advance greater financial inclusion by better meeting the needs of the unserved and underserved.

Third, we will seek to elevate the financial well-being of households and businesses. This includes initiatives to enhance financial capability, access to and effective usage of financial services.

To further drive the achievement of the Blueprint goals, we had just issued a Discussion Paper for the second Financial Inclusion Framework early this month. The Framework will serve as a strategic roadmap and principle-based guidance to advance financial inclusion in the next few years.

What I just shared with you are just a few developments and initiatives that the Bank is prioritizing to forge ahead with financial inclusion. I believe my colleagues will share more of our experiences in the next 4 days.

AFI, as a large network expanding over 75 countries, enables us to tap into a reservoir of knowledge and expert resources to explore new opportunities and ideas, and strengthen existing collaborations to take the financial inclusion agenda forward.

On that note, let me end here by wishing everyone a very productive and fruitful discussion for the next 4 days and I hope that you have a pleasant stay in Kuala Lumpur.

Thank you.