Malaysias government and central bank believe its domestic banking sector is strong enough to stand up to foreign competition.
Since April, it has been taking the next steps in the liberalization of its financial sector, with new licences on offer, increased foreign equity limits, and more operational flexibility. Malaysia wants to liberalize in specific ways in order to serve its own needs, but it may find that foreign banks do not necessarily share its optimism.
We put in place all the preconditions so that we would be able to benefit from liberalization, because liberalization should bring a mutual benefit to the entities that come here and to our own economy, says Zeti Akhtar Aziz, governor of Bank Negara Malaysia. She believes it will enhance international linkages for trade and investment; diversify the range of financial products and services available in Malaysia; and will bring technology and expertise.
There should be benefits to competition, pricing and arguably regional integration. So far there has been significant integration in intra-regional trade and investment flows, but financial flows have been less significant, she says. This liberalization hopes to [encourage] financial institutions from the region to operate in our domestic system.
Malaysia has already undergone a few rounds of liberalization since the Asian financial crisis, and today foreign institutions account for about 20% of total assets and 30% of lending market share. Liberalization has always been much more beneficial to Islamic institutions than conventional: in 2005 it handed out licences to three Gulf institutions (Kuwait Finance House, Al Rajhi and Asian Finance Bank) allowing them to set up 100% foreign-owned Islamic institutions with freedom to do pretty much what they wanted, be it retail, commercial or capital markets.
The latest liberalization keeps that bias very much intact. The new licences come in two stages, with up to six to be granted this year and a further three in 2011. Of this years haul, four are Islamic, two for Islamic banking licences and two for family takaful players. The two conventional commercial banking licences on offer this year are for foreign players who can bring in specialized expertise to address gaps in the financial sector and spur the development of targeted economic sectors; its not until 2011 that the much more widely coveted broad commercial banking licences for world-class banks that can offer significant value propositions to Malaysia will be offered.
Equally, the increases in foreign equity limits are also tilted towards Islamic institutions. Domestic Islamic banks can accept 70% of their equity being held by foreigners. A 70% limit is also being applied to several areas on the conventional side, but again in more specific areas: investment banks and insurance companies (including takaful) rather than full-service banks.
Some interesting points come out of this. On the conventional side, the 2009 licences may be so specific they end up not attracting anyone. Emerging Markets interviewed Zeti in September, less than eight weeks before the October 31 deadline to submit bids for the 2009 licences; at that point, she said firm bids had been lodged for the Islamic licences but not for the conventional ones. For the specialized licences, they are engaging in discussions because they are not quite sure they can qualify, she says.
But what does specialization mean anyway? We see some gaps that still exist in our financial system, so in terms of finance for certain sectors of the economy like technology and agriculture, we are looking to see whether we can draw in expertise, she says. That need not be the only area, but they have to have a proven track record of strength in those areas.
Foreign banks active in Kuala Lumpur have widespread enthusiasm for the wider-reaching 2011 licences but not for these specialized licences, and there is some doubt both domestically and internationally about whether they will ever be awarded. Theres a difference, it seems, between Malaysias hopes for foreign participation and the way foreigners want to participate. Theres just nothing in those [specialized] licences for us, says one foreign banker. We are much more interested in the 2011 licences that will let us do things properly.
On the Islamic side, there are some curiosities too. The new Islamic banking licences, which can be 100% foreign-owned, have become known as mega-Islamic licences locally, because they require that the new banks have paid-up capital of $1 billion. Thats setting the bar pretty high: by contrast, the new family takaful licences require only RM100 million ($29 million). Why so high?
Because we already have quite a number of Islamic financial institutions, but they are all quite small in size, Zeti says. Thats fine for domestic retail and financing businesses, she says, and there is already widespread foreign involvement in the sukuk markets. What she wants is international.
In order to see the increase in international activity, you would need the kind of capitalization to be able to conduct international business that would originate out of Malaysia capitalization in terms of technology, human talent and expertise, she says.
She says there are firm submissions for those licences already, and its intriguing to ponder who they might be. The most obvious Middle Eastern institutions, Al Rajhi and Kuwait Finance House, are already present; of the multinationals, HSBC and Standard Chartered are already licensed, and while Citi Islamic does not have a licence on the scale of a new one, this seems an unlikely time for it to be putting large amounts of capital to work. It may be that an already-present player wants to upgrade to this symbolically more dramatic licence; otherwise, its puzzling to predict who else will come in. Either way, though, its highly unusual for any country to lower barriers in the middle of a global financial crisis, and there is clear confidence in the timing: as other banking systems fall, Malaysia believes it is strong enough to face the foreigners. Our banking sector continues to be resilient, Zeti says. Weve seen the worst.