Domestic financial stability was sustained amid bouts of heightened financial market volatilityKey potential sources of risks to domestic financial stability stemmed from high levels of domestic debt, elevated property prices in some segments of residential property, an oversupply of commercial property, and heightened volatility in financial markets.
Growth in household debt moderated further as households scaled back borrowings in line with loan affordability.
• Total household debt as a proportion of gross domestic product (GDP) was lower at 88.4% (from 89.1% in 2015), as the pace of moderation in debt slowed below nominal GDP growth for the first time since 2010.
• The debt burden of households was eased by slower growth in average house prices which increased by 5.3%, compared to an average of 9.5% during 2010-2015.
• The debt servicing capacity of businesses continues to be well-supported with a median interest coverage ratio (ICR) of 9.4 times, comfortably above prudent standards.
• Banking system liquidity comprising placements, reverse repos and statutory reserves with Bank Negara remains ample at RM167.4bil, which can be released to meet liquidity needs.
• In 2017, conditions are expected to remain challenging for some businesses and households.
• There is likely to be some deterioration in loan performance, but this is not expected to be broad-based given the strong asset quality of banks, stable labour market conditions and continued economic growth.
Banking Sector
• Outstanding financing by the banking system expanded by 5.3% to RM1,521.5bil in 2016, mainly driven by financing to the household sector.
• Banks continue to lend to SMEs, which grew by 9.2%.
• Financing by development financial institutions to targeted growth sectors, including the agriculture sector, expanded by 5.7%.
• Transactions conducted through the agent banking network increased to over 100 million transactions valued at RM8.5bil, performed at more than 7,900 agent banks across the country.
• The profitability of banks improved in 2016, supported by gains from treasury activities and strong financing growth from Islamic banking operations.
Insurance and Takaful Sector
• The insurance and takaful sector continued to show positive growth in 2016 supported by strong overall capitalisation.
• Overall insurance penetration, however, has remained flat within the range of 54% to 56% over the last five years.
• In the general insurance and takaful sector, growth was supported by the fire business which offset the impact from slower growth in the motor and marine, aviation and transit business segments
• The industry moved into the first phase of liberalisation of the motor and fire tariffs from 1 July 2016, where new motor and fire products may be offered at market-based prices while existing motor products under the tariff will continue to be available to the public at prevailing tariff rates.
• In the second phase which will commence on July 1, 2017, tariffs will be removed for all existing motor products except compulsory motor third party products where tariff rates will be gradually adjusted
• By the end of 2017, more than three quarters of insurance and takaful policies for personal lines of business are expected to be simplified using plain language.
Islamic Finance Development
• Islamic banking and takaful institutions remain resilient, maintaining healthy financial buffers.
• Investment intermediation activities saw encouraging growth: Investment accounts (IA) managed by Islamic banks increased to RM73.7bil to account for 12.2% of total Islamic deposits and IA within the Islamic banking system in 2016 (compared to RM47.1bil and 8.6% in 2015).
• Over the next two years, the development of the Islamic finance industry will continue to focus on enabling greater business diversification, driven by technology, to sustain its growth trajectory and deliver better customer value.
• An example of this has been the operationalisation of the Investment Account Platform which has facilitated RM20mil of fund-raising exercises since April 2016 to support a variety of business ventures across different industries.
• Another important development priority is in the area of trade finance facilitation where the Bank aspires for syariah-compliant trade financing to support 10% of total trade in the next three years.
Cross-Sector Developments
• Malaysia’s debt securities market remains a key source of financing for corporates, rising to account for 37.4% of total corporate financing as at end-2016.
• New issuances of corporate bonds during the year were led by firms in the finance, insurance and real estate; infrastructure; and electricity, gas and water supply sectors.
• In the FX market, the implementation of measures by the FMC in December led to improved onshore liquidity and curtailed the disruptive influence on ringgit volatility from speculative transactions in the ringgit NDF market.
• Local currency settlements in ringgit and renminbi have continued to increase in volume, reducing costs for businesses and contributing to the development of deeper regional financial markets
• Bank Negara set up the Financial Technology Enabler Group to provide a safe and supportive regulatory environment for financial technology (FinTech) innovations - it is tasked to formulate policy measures and strategies for the adoption of technological innovations in the financial services industry.
Payment and Settlement Systems
• Amid the growing threat of cyberattacks globally, effective management of cyber risks was a key focus of Bank Negara’s oversight activities.
• Progress continues to be made towards achieving the electronic payment (e-payment) targets set out in the Financial Sector Blueprint 2011–2020, driven by increased adoption of credit transfers and payment card transactions.
• A key strategic priority for Bank Negara in 2017 will be to facilitate open and fair access to shared payment infrastructures by banks and non-bank payment service providers with the view to create a more competitive payment landscape that fosters continuous improvements in payment services.
• Total household debt as a proportion of gross domestic product (GDP) was lower at 88.4% (from 89.1% in 2015), as the pace of moderation in debt slowed below nominal GDP growth for the first time since 2010.
• The debt servicing capacity of businesses continues to be well-supported with a median interest coverage ratio (ICR) of 9.4 times, comfortably above prudent standards.
• Banking system liquidity comprising placements, reverse repos and statutory reserves with Bank Negara remains ample at RM167.4bil, which can be released to meet liquidity needs.
• In 2017, conditions are expected to remain challenging for some businesses and households.
• There is likely to be some deterioration in loan performance, but this is not expected to be broad-based given the strong asset quality of banks, stable labour market conditions and continued economic growth.
Banking Sector
• Outstanding financing by the banking system expanded by 5.3% to RM1,521.5bil in 2016, mainly driven by financing to the household sector.
• Banks continue to lend to SMEs, which grew by 9.2%.
• Financing by development financial institutions to targeted growth sectors, including the agriculture sector, expanded by 5.7%.
• Transactions conducted through the agent banking network increased to over 100 million transactions valued at RM8.5bil, performed at more than 7,900 agent banks across the country.
• The profitability of banks improved in 2016, supported by gains from treasury activities and strong financing growth from Islamic banking operations.
Insurance and Takaful Sector
• The insurance and takaful sector continued to show positive growth in 2016 supported by strong overall capitalisation.
• Overall insurance penetration, however, has remained flat within the range of 54% to 56% over the last five years.
• In the general insurance and takaful sector, growth was supported by the fire business which offset the impact from slower growth in the motor and marine, aviation and transit business segments
• The industry moved into the first phase of liberalisation of the motor and fire tariffs from 1 July 2016, where new motor and fire products may be offered at market-based prices while existing motor products under the tariff will continue to be available to the public at prevailing tariff rates.
• In the second phase which will commence on July 1, 2017, tariffs will be removed for all existing motor products except compulsory motor third party products where tariff rates will be gradually adjusted
• By the end of 2017, more than three quarters of insurance and takaful policies for personal lines of business are expected to be simplified using plain language.
Islamic Finance Development
• Islamic banking and takaful institutions remain resilient, maintaining healthy financial buffers.
• Investment intermediation activities saw encouraging growth: Investment accounts (IA) managed by Islamic banks increased to RM73.7bil to account for 12.2% of total Islamic deposits and IA within the Islamic banking system in 2016 (compared to RM47.1bil and 8.6% in 2015).
• Over the next two years, the development of the Islamic finance industry will continue to focus on enabling greater business diversification, driven by technology, to sustain its growth trajectory and deliver better customer value.
• An example of this has been the operationalisation of the Investment Account Platform which has facilitated RM20mil of fund-raising exercises since April 2016 to support a variety of business ventures across different industries.
• Another important development priority is in the area of trade finance facilitation where the Bank aspires for syariah-compliant trade financing to support 10% of total trade in the next three years.
Cross-Sector Developments
• Malaysia’s debt securities market remains a key source of financing for corporates, rising to account for 37.4% of total corporate financing as at end-2016.
• New issuances of corporate bonds during the year were led by firms in the finance, insurance and real estate; infrastructure; and electricity, gas and water supply sectors.
• In the FX market, the implementation of measures by the FMC in December led to improved onshore liquidity and curtailed the disruptive influence on ringgit volatility from speculative transactions in the ringgit NDF market.
• Local currency settlements in ringgit and renminbi have continued to increase in volume, reducing costs for businesses and contributing to the development of deeper regional financial markets
• Bank Negara set up the Financial Technology Enabler Group to provide a safe and supportive regulatory environment for financial technology (FinTech) innovations - it is tasked to formulate policy measures and strategies for the adoption of technological innovations in the financial services industry.
Payment and Settlement Systems
• Amid the growing threat of cyberattacks globally, effective management of cyber risks was a key focus of Bank Negara’s oversight activities.
• Progress continues to be made towards achieving the electronic payment (e-payment) targets set out in the Financial Sector Blueprint 2011–2020, driven by increased adoption of credit transfers and payment card transactions.
• A key strategic priority for Bank Negara in 2017 will be to facilitate open and fair access to shared payment infrastructures by banks and non-bank payment service providers with the view to create a more competitive payment landscape that fosters continuous improvements in payment services.
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