Interview: Nazir Razak
What are the obstacles to accelerating development of Malaysia’s corporate bond market?
NAZIR RAZAK: Malaysia has arguably the best domestic currency bond market in the developing world. That said, we shouldn’t beat ourselves up so much over the fact that it is illiquid below a certain credit grade. Some reform on the buy side would significantly improve liquidity. Historically, reform measures have been quite focused on intermediaries and exchanges, with little attention given to the buy side. Regulators are cognisant that work has to be done here, and the launch of Malaysia's voluntary private pension industry will, it is hoped, be the first step in accelerating these previously neglected areas.
As more regional banking giants are created in ASEAN, what major issues will regulators face?
RAZAK: First, due to the disparities within ASEAN, there is always the worry that if you remove barriers it will be a curtain call for smaller banks. Second, global regulation is becoming more national and insular in the aftermath of the financial crisis, so regulators must contend with this as well. There are also the regulations that exist from other jurisdictions that are outside the purview of banking laws. For instance labour laws can complicate efforts to create a unified company across ASEAN as human resources cannot be moved into certain positions due to laws protecting various domestic labour market. Another challenge is protection against outsourcing, where some countries impose regulations that prohibit outsourcing beyond their borders.
Which potential new measures could help Malaysia to capitalise upon increasing regional economic and financial integration?
RAZAK: ASEAN banks are finally beginning to experience the reality of cross-border synergies, meaning that the concept of banking being a scale game is now becoming applicable on a regional level. Some of the present regulatory barriers in ASEAN countries – while not designed for the purpose of inhibiting regional players – create obstacles due to the fact that they were originally designed only for domestic banking activities. The largest banks in Malaysia have been pushing hard for the development of a regional banking framework in ASEAN. Expediting this process is of utmost important so that financial institutions know what they can and cannot do across borders. We hope that such cross-border regulation can emerge from an ASEAN platform, which must be introduced ahead of economic integration scheduled for 2015. ASEAN needs pillar banks to truly prosper under the integration agenda that has been tabled, as banks will be essential to fuelling cross-border trade, investments and other activities.
How do you evaluate the sustainability of the current domestic credit expansion? Are growth opportunities greater in certain segments?
RAZAK: The consumer credit growth rate has undoubtedly undergone too sharp of an expansion in recent years, and therefore must be cooled. Judging by the current pricing of certain loans in the domestic market, it is difficult to believe that some banks are running their risk-adjusted return numbers properly. As we have seen globally, there is always a risk of banks becoming exceedingly aggressive and overly focused on profitability. Pushing the envelope in this way is normally indicative of overly competitive behaviour, and regulators should be constantly attuned to this. Bank Negara’s recent issuance of new regulations on responsible lending, has essentially taken the air out of the bubble – if indeed there was one forming. Consequently, we are expecting a period of slower growth on the consumer front, but room for expansion remains in other sectors, particularly with small and medium-sized companies and larger corporations. The corporate sector is generally quite underleveraged in Malaysia, indicating significant potential for expansion. The slowdown in the consumer market may also accelerate efforts among banks to look beyond the domestic market for loan growth.
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