By Yap Leng Kuen, Hanim Adnan and Jacqueline Ann Surin at the Conference On Central Banking and Sustainable Development :
The legacy of Tun Ismail Mohamed Ali – The Star – Business 29 August 2000

MALAYSIA’s move from a production economy to a knowledge economy will require additional financing and new and innovative ways of financing growth and development, according to Finance Minister Tun Daim Zainuddin.

Broadening and deepening the financial system and instruments to meet these needs was a pre-requisite to the nation’s economic transformation, said Daim last night in a dinner address.
“The financial resources required for this transformation will indeed be substantial. Public and private investments will have to increase significantly.“ An increasingly diverse and sophisticated range of instruments will be necessary especially with regard to knowledge activities. Ideas-based start-up small and medium-sized enterprises are also likely to become more prominent in the future,: he said.

Daim said while traditional sources of funds would continue to be important, alternative forms of financing would also be required, adding that “ a more complete financial infrastructure” was therefore needed.

He said the services and cost competitiveness of banking institutions in providing traditional sources of funding had to be improved. “However, measures need to be taken to ensure that sufficiently deep and liquid equity and bond markets exist to complement the financing provided by the banking system.

“Well-developed capital markets, especially bond markets, can better serve the financing needs of large-scale and longer-term capital expenditure investments on a fixed rate basis, especially in regard to infrastructure projects with long gestation periods.

“They will also reduce the systemic risks of over-reliance on the banking system. In this regard, several major initiatives aimed at further developing the bond market have been put in place,” Daim said.

He said the government was also taking steps to address the financing of small-medium enterprises (SMEs) and new knowledge based activities including setting up specialized funds for SME financing, and promoting venture capital and angel financing which are more receptive to promising ideas and “intangible” collateral.

“In this regard we are providing full income tax exception for venture capital companies and we have launched two venture capital funds, and a fund for venture capital companies,” Daim said in his speech entitled “Financing Growth and Development”.

He said a further challenge in developing alternative financing sources would be the development of the insurance industry, adding:” In particular, its role as a mobiliser of long-term savings makes it an ideal and natural source of financing for long-term investments and should be utilized more effectively.

This, he said, would facilitate the development of the long-term bond market and the infrastructure-building activities while reducing the maturity-mismatch consequences of financing such activities, thereby contributing to greater stability.

“The end result is that the risk tolerance of the economy will increase and financing would be available at reasonable cost,” he added.

Daim reminded banks that while profits were important, they must not forget their social responsibility to provide funding to the priority sectors of the economy.

“Access to funds for priority sectors such as the SMEs is crucial to ensure they develop to become the backbone to the economy,” he said.

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