Economic Update
Malaysia’s banking sector is about to undergo one of the biggest shake ups in its history, with the government unveiling plans to allow greater overseas participation in the financial services industry by raising foreign ownership ceilings in some types of banks and granting new licences to international lenders.

The opening up of the banking industry comes hard on the heels of the government announcement that it was liberalising the country’s services sector, with the requirement that companies operating in 27 sub-sectors of the services industry have minimum 30% ethnic Malay ownership.

In recent years, the role of the financial services sector in the Malaysian economy has grown steadily though slower than in some countries in the region, accounting for 11% of GDP last year, up from 9.2% in 2000. However, successive governments have declared a policy of making Malaysia a centre for Islamic finance, which requires greater foreign investment and know-how.

On April 27, Prime Minister Datuk Seri Najib Razak announced a programme of reforms in the banking and insurance sectors, to be spread over three years, that foresees the issuing of licences to two new foreign commercial banks with specialised expertise this year, and three more by 2011.

While there are 13 locally incorporated foreign commercial banks, which between them control 25% of the domestic banking market, they are restricted in the number of branches they may have.

In addition to allowing five more commercial banks in, the government is to issue two new licences to foreign Islamic banks with a paid up capital of at least $1bn, along with licences to two more Islamic family insurance companies before the end of the year.

The government will also allow existing domestic Islamic banks to enter into partnerships with foreign players through an increased foreign equity limit of up to 70% and increase the ceiling for foreign equity participation in investment banks, conventional and Islamic insurers from 49% to 70%.

However, some element of protection for the local banking sector will remain, with the upper limit for foreign holdings in domestic commercial banks to stay fixed at 30%.

Though new licences will be issued, authorities have made clear they do not want domestic lenders to lose their market share. According to a statement issued by Bank Negara – the country’s central bank – on April 27, “Malaysia’s approach towards liberalisation will be selective and sequenced to ensure maximum benefits to the country.”

The Bank Negara governor, Tan Sri Dr Zeti Akhtar Aziz, went further, saying the newly licenced banks would fill gaps in the in the country’s financial system rather than pressure local operators.

“We would like a financial system that has a significant market share of domestic banks. We are not opening aggressively because the domestic agenda remains important,” said Zeti.

Announcing the move, Najib said the liberalisation of the finance sector would enhance Malaysia’s links with international economies and promote greater regional integration;
 provide greater access to a wider range of financial products and services for consumers;
 further strengthen the country’s competitive position in Islamic finance to allow it to become an international Islamic financial centre; and
 promote Malaysia as a leading global shared services and outsourcing centre.

In order to achieve the objective of attaining developed-nation status by 2020, the financial sector is expected to have a greater role in facilitating economic growth, the prime minister said.

“The financial sector is expected to support the demands of a growing economy and drive it into the next phase of development; provide world-class, high-value-added financial products and services at competitive prices; and accelerate the growth of new economic sectors, including other activities in the services segments,” Najib said.

The government’s decision was welcomed by many in the banking industry, with Chuah Mei Lin, the executive director of the Association of Banks in Malaysia, saying that the issuing of five new commercial banking licences should attract more foreign participation in the industry and boost competition.

“Our member banks look forward to any collaborative opportunities the initiatives announced may present, such as in the new areas of growth or targeted economic sectors,” she said in an interview with local media on April 28. “We also welcome healthy competition that will benefit the industry as a whole. Some member banks may opt to focus on growing niche markets and cultivating loyal customers.”

By further opening up the banking sector, the government appears to have acknowledged that domestic banks are strong enough to compete with international rivals and that Malaysia is ready to take the next step towards its goal of being a major financial centre.