In late March, the deputy finance minister, Datuk Chor Chee Heung, told the parliament that the country's banking sector was operating from a position of strength and was well placed to maintain a good flow of loans into the economy.
The country's banks were well capitalised and, thanks to close monitoring and regulation by the central bank – Bank Negara – had near record low levels of non-performing loans, Chor said. As of January this year, non-performing loans represented just 1.7% of the total loan portfolios of Malaysia's banks, he said.
This sound position was despite Bank Negara's decision to shorten the non-performing loan classification period to three months from six months, said Chor.
"We can see that with Bank Negara introducing guidelines and systems that need to be complied with by banking institutions, we can control the ratio at 1.7%," he said on March 29.
A recent assessment by local finance consultancy RAM Ratings supported the minister's view, saying Bank Negara's vigilance during the recent global financial turbulence had been instrumental in safeguarding the Malaysian banking system.
RAM's report, issued on March 23, said the outlook for the banking sector was stable for the rest of the year.
"For 2010, our core insights on the domestic banking sector include an 8-10% loans growth, healthy asset quality, improving profitability, ample liquidity, sturdy capitalisation and more mergers and acquisitions," the report said.
These sound indicators have prompted strong interest in the sector by overseas operators, with banks from Europe, Asia and the Middle East all having lodged applications with Bank Negara to take up the seven new licences that will be made available by the middle of this year.
Soon after coming to office in March last year, Prime Minister Najib Razak unveiled an extensive package of reforms for the country's finance services industry, including opening up the sector to wider competition by allowing more direct involvement by foreign lenders.
This opening up process is about to take a major step forward, according to Tan Sri Dr Zeti Akhtar Aziz, the governor of Bank Negara, with a final decision on the issuing of five conventional banking licences and two for Islamic banks to be made soon.
"We're at the final stages of assessing the applications and expect it to be completed by mid-April – sometime in May, early June, an announcement will be made," Zeti said on March 24.
It is hard to say what impact this new wave of foreign banks entering the market will have on local lenders and how they will deal with the increased competition.
Though the central bank chief said she was in favour of consolidation, Zeti states that any round of merging by the country's banks was an issue that would be driven by market forces.
Currently, there are 22 commercial banks operating in Malaysia, of which 13 are foreign-owned and nine locally based, though the domestic lenders between them control around 75% of all assets held by the combined banking sector.
Malaysia also boasts a powerful Islamic banking sector, with 21 sharia-compliant lenders in the market, of which nine have links with local commercial banks and two more are independent Malaysian entities. Added to this are some 15 investment banks, all locally owned and nine of which have ties with commercial lenders.
With Bank Negara predicting that the economy will grow by between 4.5% and 5.5% this year, a rate that is expected to be equaled or bettered over the coming few years, there could well be enough room in the expanding economy for both existing banks and the newcomers.
This is especially the case given the government's measures to diversify the economy and increase per-capita income from the present level of $7000 to $15,000 within a decade. One such measure is the development of Malaysia as an international finance hub, central in the flow of capital across the region and beyond. In order to achieve this, Malaysia will need more foreign banks and the expertise they bring. While the government's open-door policy may make life harder for some local lenders in the short term, the benefits of competition and a stronger economy will repay any sacrifices with interest.