MALAYSIA: Banking to open further

Malaysia's government has sought to play down concerns that opening up the country's finance industry to greater foreign participation will squeeze local lenders, with senior ministers instead talking up the benefits of a more competitive banking environment and greater opportunities on offer in an expanding economy.

Under reforms unveiled by Prime Minister Najib Tun Abdul Razak at the end of April 2009, the Malaysian finance sector is to be gradually opened up over a three-year period, with as many as five new licences to be granted to foreign commercial banks, along with two licences to Islamic banks and two to firms providing sharia-compliant insurance services.

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

While the banking industry has generally welcomed the reforms, some in the sector have raised concerns about the possible adverse impact of increased competition. On balance officials argue the move is a net positive for the sector.

According to the deputy finance minister, Awang Adek Hussein, any disadvantages to local lenders that might arise from the issuance of new licences will easily be outweighed by the positive effects of opening up the sector.

By allowing more foreign operators in the market, Malaysia would strengthen and improve economic and financial ties with other countries, attract foreign investments and increase job opportunities for locals, he told members of the Dewan Negara, the upper house of the Malaysian parliament, on August 2.

As local banks are adequately capitalised, committed to good corporate governance, possess efficient internal structure and risk management, and also have various sources of income, they are well equipped to rise to the challenges posed by operating in a liberal business environment, he said.

"Their strong capacities have enabled them to expand overseas and enjoy the benefits of new business opportunities," Awang Adek said. "All these have enabled the local banks to be ready to face competition, locally and in the region."

It is not only conventional banks the government is seeking to attract. Having set the goal of becoming one of the world's leading sharia-compliant finance centres, it is vital that more opportunities are provided to establish Islamic banks in the country, said Awang Adek.

"We cannot rely on one or two banks like Bank Islam or Bank Muamalat but need to set up a system with enough banks to develop Islamic banking," Awang Adek said.

The same day that Awang Adek was promoting the government's banking reforms, another minister was calling on the sector to better address the needs of clients, especially the small and medium-sized enterprises (SMEs) that are the backbone of the Malaysian economy.

Instead of giving priority to established companies when providing loans, banks need to consider the potential of SMEs, according to the second finance minister, Ahmad Husni Mohamad Hanadzlah.

The state has long undertaken the role of financing and supporting the small business sector, and it is now time for private sector banks to take over, Ahmad Husni said. "The private sector can serve a far more effective role than the public sector ever can," he said.

The latest figures from Bank Negara, the country's central bank, suggest that the minister may have a point, with banks still focusing on larger businesses when distributing credit.

The reserve bank's report on loan activity, issued on July 30, showed that while there had been a 7.2% year-on-year increase in lending to businesses, much of the funding had gone to companies outside of the SME classification.

In the first six months of 2010, banks had provided $22.8bn worth of loans to businesses across the economy, based on applications amounting to $41bn. However, of the loans that had been approved, just $9bn went to SMEs, even though they represented 50% of all business credit requests.

Bank Negara also highlighted a steep rise in consumer loans, which rose 12.9% in the first half of the year, with $27bn worth of credit extended to households, a figure some analysts found worrying.

"For the nation to achieve its desired GDP growth over the next few years, as well as the vision of a high income nation, more of the banking sector's lending would need to be channelled to non-retail sectors with high multiplier effects," Promod Dass, the head of financial institution ratings at local ratings agency RAM Ratings, told local media.

By having a deeper pool of banks operating in the country, there is greater potential for this channelling to occur, helping to achieve the government's objective of achieving high-income nation status and giving banks a larger slice of a bigger pie to tuck in to.

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