Malaysia: Open for business

Malaysia’s banking sector is riding high with leading lenders posting strong results for the first half of the year and foreign players attracted to an increasingly liberalised financial environment.

Central bank figures show most banks as strongly capitalised with a low level of non-performing loans (NPLs) on the books. According to a report issued on October 29 by Bank Negara, Malaysia’s banks had a risk-weighted capital and core capital ratio at 14.8% and 13.1% respectively at the end of September, while NPLs represented just 2% of total loan portfolios.

Vincent Khoo, an analyst with UOB Kay Hian Malaysia Holdings, sees the banking industry maintaining its solid performance thanks to 7% GDP growth expected this year and forecast of 6% in 2011.

“The banking sector is benefiting from the economic momentum; profit growth will be strong,” Khoo said in an interview with the Bloomberg news agency on November 9. “There are also lots of restructuring, merger and acquisition deals, meaning there will be strong investment banking earnings.”

While loan activity, deposit levels and earnings are all up, it is the Islamic banking segment of the financial sector that is expected to make the biggest headlines in the next few months, with at least one new large scale sharia-compliant lender scheduled to enter the market before year’s end.

At the end of October, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz confirmed that the reserve had granted two conditional licenses to different foreign groups to launch new Islamic banks, with one of these licenses set to be converted into a full license by the end of the year and the second by the middle of 2011.

The so-called “mega Islamic banks” are forming thanks to a massive reform process of the financial sector launched by the government in April 2009. The process has included opening up banking to greater overseas involvement, encouraging mergers of smaller lenders and actively promoting the already high-profile Islamic banking component of the industry.

Without naming either of the prospective license holders, Zeti said the new large-scale banks represented the final steps in the process of internationalising the country’s banking industry.

“We have identified two parties who are making preparations in concrete terms in their submissions to us,” she told a press conference on October 26. “It is likely that we would announce the issuance of the first [full] license by the end of this year. These banks would engage in some retail business but the focus is international business. These licenses would also promote our linkages around the world, not only with the Middle East and Africa, but also with Europe and the US.”

However, while both banks should be granted licenses soon, Zeti said they still must meet demanding conditions for authorisation, which includes having a minimum $1bn in paid-up capital. They also demonstrate that they possess a senior management team, proper development criteria and an appropriate business plan.

The Bahrain-based Elaf Bank is seeking to enter the market. In late October, chief executive Jamil El Jaroudi announced the lender had applied for a license from Malaysian authorities to allow Elaf to operate locally.

“If they give approval tomorrow, we will open tomorrow. We are ready. We have a strategic vision that we would like to bridge the two main Islamic hubs, Bahrain and Malaysia,” he said.

The decision to seek a license was prompted by the success of the bank in securing mandates to advise on a number of financial deals in Malaysia, valued at around $1.2bn, and a further $200m in Indonesia, El Jaroudi said.

“We have a couple of mandates here in Malaysia and in Indonesia which convinced us more and more that we would like to be in South-East Asia,” he said, adding he hoped to hear from Malaysian officials regarding the license application before the end of November.

Though the increasing number of foreign Islamic banks seeking to enter the Malaysian market may ramp up competition for local lenders, the government believes that any pressure will be offset by the benefits of a bigger and stronger banking sector.

According to Zeti Aziz, the new entrants will make significant contributions to the sector by both strengthening product and human capital development and building on existing expertise in foreign exchange markets.

As long as the economy continues to expand, local banks should not feel the pinch from overseas competitors. However, should growth slacken home-grown lenders may find economies of scale and a narrow band of operations could come into play.

 

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