On June 9, Dr Zeti Akhtar Aziz, the governor of Bank Negara, Malaysia's central bank, announced the plans at the opening of the 10th Malaysian Banking, Finance and Insurance Summit in Kuala Lumpur.
The central bank had recognised the need for foreign banks to expand beyond Malaysia's main urban centres, Zeti told reporters after delivering an address, entitled "Extending the Boundaries in the New Financial Landscape", a theme much in keeping with her announcement.
"To be commercially viable, we recognised they must have some critical mass," she said. "So, if they are prepared and they have the proposal, they can come to us to open other branches in non-urban areas."
Though not commenting on any restrictions on the number of branches that foreign banks could set up in non-urban areas, Zeti said that Bank Negara would take into consideration that there has to be a viable number for them to commercially operate these branches. The move would not only give foreign banks a greater presence in non-urban areas, but would also increase the services available to segments of the economy that were currently less well provided for in terms of banking options, she said.
The news will be welcomed by the 13 locally incorporated foreign banks currently operating in Malaysia, which have previously had limited access to the growing market beyond the major cities. The latest move to free up the sector for foreign banks comes on top of a measure announced in late 2005 that granted each of them the right to open an additional four branches during 2006. However, the central bank had set a ratio of one new branch per foreign institution in a market centre, two in a semi-urban centre, and another in a non-urban centre.
One to view the announcement favourably was Piyush Gupta, the chief executive of the Malaysian unit of US bank Citigroup, which despite limited access to the market holds 4.5% of assets in the Malaysian banking sector, along with 20% of the credit card market.
"Today is the first time we were told of the possibility that we may be able to open more branches, so now we need to go and understand the rules," Gupta said on the sidelines of the summit. "For the Malaysian market, getting to 25 to 30 branches is not unreasonable, and I would love to have many more branches than I have now."
The June 9 announcement was part of state measures to both liberalise the sector in order to promote financial inclusion and to eliminate the use of informal financial services throughout society, Zeti said.
"The foundation for the development of a more efficient, effective and stable financial system has been laid," she said.
Along with the 13 locally incorporated foreign commercial banks currently open for business in Malaysia, a further 23 foreign banks maintain representative offices within the country. While not conducting normal banking transactions, they provide liaison services and facilitate information exchange between business interests in Malaysia and their counterparts abroad. However, with the new moves to liberalise the market, some may be tempted to expand the scope of their operations and enter into competition with the 10 domestic banks and the foreign concerns already directly operating in Malaysia.
A further incentive for foreign banks will come into play next year when Bank Negara is expected to act on a plan unveiled in late 2004 to allow overseas buyouts of local banks, though the terms and conditions of such acquisitions have yet to be fully explained. At present, foreign banks are limited to holding a 30% stake in domestic banking houses.
Even though foreign banks already account for a considerable portion of Malaysia's market, being responsible for about one-fifth of all active loans, their share is predicted to rise as the new liberalisation measures take effect. The opening up of the sector is widely expected to put pressure on Malaysia's own banks to improve standards and, according to Gupta, bring consolidation to the market.
"Everybody can't offer the same services but there will be fewer banks. I am expecting more mergers and acquisitions," he said.
Bank Negara governor Zeti considers this to be positive for the sector and the country.
"The emergence of international players that possess the competitive advantage of being more technologically advanced with greater capability and capacity to offer more innovative products and services through new delivery channels will further intensify the competitive environment," she said in her keynote address to the summit.
Though the exact details of the new liberalisation package have to be fully outlined and digested, foreign banks will be looking at Malaysia with greater interest.