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A Grim Reminder By Bank Negara

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KUALA LUMPUR: In his maiden keynote address as the new central bank governor here, Datuk Muhammad Ibrahim spoke about the potential impact of technological disruptions to the financial sector and warned that an estimated 10% to 40% of overall banking revenues could be at risk by 2025 due to financial technology or fintech innovations.

Fintech is a line of business based on using software to provide faster and cheaper financial services and fintech companies are generally start-ups founded with the purpose of disrupting incumbent financial systems and corporations .

“Fintech is challenging the status quo of the financial industry. New business models will emerge. Delivery channels will challenge existing norms. Transaction costs will be reduced.

“Rather than looking at the fintech revolution as unwelcoming, financial institutions ought to embrace it as an opportunity,” Muhammad said yesterday at the Global Islamic Finance Forum 5.0 (GIIF 5.0).

He explained that fintech innovations are fundamentally altering the way consumers experience and deliver financial products and services.

“According to a recent McKinsey report, the number of fintech start-ups globally has now exceeded 2,000, more than twice the number less than a year ago.

“Such growth is expected to continue as innovators tap into the preferences of millions of technology savvy millennials who are more receptive to new ways of consuming financial services.”

Referring to the example of payment services, Muhammad said that e-payments have revolutionised payment mechanisms through convenient and accessible channels.

“In Islamic finance, a recent initiative in Malaysia has been the Investment Account Platform (IAP) that was launched in February this year.

“It is an important example of a collaborative strategy by the industry to bring game-changing innovations to the market.

“The IAP is the first Islamic banking-intermediated internet-based platform that combines the expertise of Islamic banks and efficiency of technology to channel funds from investors to viable economic ventures.

“It promotes risk-sharing financial transactions by providing the platform for musharakah and mudharabah-based equity financing.

“The platform has strong prospects to support cross-border investments and increase global connectivity through the participation of banks worldwide,” he said.

He added that Bank Negara was currently studying the need for regulatory changes required to address the risks associated with the evolution of financial technology (fintech) in Malaysia.

Muhammad said Bank Negara had commenced a review of the changes and additional guidance needed to ensure the regulatory framework remains appropriate to manage the risks, while encouraging productive innovation that would drive costs down and improve the quality of service to consumers.

“We are looking at this from several perspectives – first, the impact of fintech strategies on the management of risks by financial institutions; second, the potential for fintech start-ups to introduce new risks to the broader financial system as a result of regulatory arbitrage; and third, the impact to consumers.”

He noted that the adoption of fintech was not without risks, particularly in the wake of rising cyber security threats that could compromise safeguards that protect financial assets and customer data.

“On its part, Bank Negara has been actively engaging with fintech firms to better understand their activities and provide guidance on the regulations that may apply to them,” he said.

Muhammad said the central bank would provide more information to the market on its approach to the regulation of fintech developments as its review progresses.

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