ECONOMICS: Malaysia's financial sector
Far Eastern Economic Review
Aug 27, 1998
An Open Question
By S. Jayasankaran and Salil Tripathi
Should Malaysia liberalize its financial sector? That's an emotive --
some might call it unfair -- question to pose in a country that's taken
more than 25 years to reduce foreign dominance of its banking sector.
More than a third of Malaysia's banks are wholly foreign-owned. What's
more, foreigners still control about 25% of total banking assets, though
that's down from over 80% in the 1970s.
"Every other developed country that's allowed foreign competition
so from a position of complete strength," says a local banking analyst.
"Even the stricken countries that are allowing it now never had a
foreign presence like we do."
But times are changing in Malaysia, which is now mired in its worst
recession ever. The government estimates it will take 53 billion ringgit
($12.7 billion) to recapitalize the country's banks and reflate the
economy. To raise some of this cash, it planned in July to launch a $2
billion international bond offering. The launch was put on hold when
three international ratings agencies downgraded Malaysia's credit risk
-- their edicts would have made raising the funds more costly.
Economists now say opening the financial industry to full competition,
however painful, may be the easiest way to avert a banking crisis.
Indeed, Malaysian banks continue to struggle. The ringgit has
over 40% against the U.S. dollar since July last year and continues to
fluctuate. Currency worries and more attractive ringgit interest rates
in nearby Singapore have triggered capital flight from the country. And
falling demand in most industries has seen banks' bad debts balloon.
Caught between rising nonperforming loans and deposit depletion, the
banks are understandably reluctant to lend-even to healthy companies.
That's a cycle the government wants to break. To that end it
two institutions in July: Danaharta will take nonperforming loans off
the banks' books, and Danamodal will recapitalize them. Kuala Lumpur
estimates the two new institutions will need at least 41 billion ringgit
to accomplish their goals, though. In the absence of foreign capital, it
has indicated it will provide the money from domestic sources such as
Petronas and the Employees' Provident Fund.
That's the rub: Analysts agree there is enough local money to
trick -- but it's fresh foreign capital, not money already in the
system, that's needed to keep the ringgit steady while interest rates
are allowed to fall. The government recognizes that high interest rates
are hammering indebted companies. But a cut in those rates would come at
the ringgit's expense. "Borrowing money already in the system only
shifts it from one drawer to another. Total liquidity won't change,"
says David Carbon, chief economist at Credit Lyonnais Securities in
That's why economists such as Carbon argue that selling banks
foreigners is the best and easiest option. Another possibility is simply
to open up the field and grant more banking licences to foreign parties
that would then bring in new investment, thus boosting liquidity.
Foreign equity in local banks is now capped at 30%, and no foreign
institution has been granted a new banking licence since the early
1980s. While foreign banks are locally incorporated, they aren't
afforded the same privileges as local banks. Since the early 1980s, for
instance, they have not been allowed to open new branches.
The cap is causing headaches. Take AMMB Holdings, a banking
controlled by tycoon Azman Hashim. Japanese bank Tokai already holds 18%
of AMMB. Azman, through AMMB's parent, Amcorp, now wants to sell a
further 15% of the group to Fortis, a European financial-services group.
Fortis is interested -- but such a sale would leave foreigners holding
33% of AMMB. That would bust the cap and require special permission.
Opening the financial industry is anathema to Prime Minister
Mohamad. He views foreign calls for liberalization as predatory
behaviour and a form of neo-colonialism. Analysts say opening the
industry to full competition would damage the gains brought by the New
Economic Policy, which has heed build social stability by creating a
Malay middle class.
Control of the banking sector by bumiputras (largely indigenous
Malays) was seen as one of the keys in achieving this objective; whoever
had control of the money could at least dictate where some of it went.
By the early 1990s, bumiputras, mostly through trust agencies, held more
than 50% of all bank equity. To allow control of banks to pass to
foreigners, who are seen as unsympathetic to national goals, has thus
been seen as tantamount to rolling back years of progress.
But it isn't clear if these arguments still cut ice. Free-marketeers
such as economist R. Thillainathan argue that places such as Hong Kong,
where banking is dominated by foreigners, show that providing a level
playing field will not adversely affect "the growth and well-being of
Some prominent Malays are beginning to agree. Says Syed Amin
Jeffri, head of the influential Malay Chamber of Commerce of Kuala
Lumpur: "What difference does it make if you borrow ringgit from a
foreign bank or a local bank? So long as they have their money here and
are committed to this country, I don't see any problem with ownership."
Syed Jeffri, however, is talking about the issuance of new licences.
He is less sure about selling stakes in existing banks, a concern shared
by many Malaysians. Foreign interests "want to come in now because, like
vultures, they can sense rock-bottom prices," sighs a senior Malay
executive at a multinational. "We should recover first, whatever the
cost, and then sell at prices we can dictate."