Cover Story: Ready for the big league

Written by Anna Taing and Joyce Goh Monday, 11 May 2009 00:00 The Edge: The recent liberalisation measures, including giving licences to two mega Islamic banks... Malaysia has been in the forefront of Islamic banking development, yet we do not have our own home-grown mega Islamic bank. Is there a reason for this? Tan Sri Zeti Akhtar Aziz: If we look at the evolution of Islamic finance in our domestic financial system, at the initial stage, it was domestic-centric, where it provided Islamic products and services for the domestic community. In this recent decade, when we have developed our domestic Islamic financial infrastructure, it became more developed, and as it became more matured — for example, the Sukuk market and Islamic money market became well developed — and we had in place the regulations, legal framework and supervisory oversight, we proceeded to liberalise, to invite the foreign players into our domestic Islamic financial system. We had three new licences and raised the stake of foreign interest in our Islamic financial institutions to 49%. A motivation for this was to diversify the products and services being offered because obviously, the new entrants had their own products and services. Secondly, it is to provide a more competitive environment because we didn’t have any foreign player. And thirdly, we want to increase our inter-linkages and these new players would be from the Middle East. We did not have any foreign presence from that part of the world and so we felt that it would enhance the economic linkages for trade and foreign direct investments between the two regions. From that, we move into the third phase of our development and that is to position us as an international Islamic financial hub. In doing so, we need to have international banks that have international business. We can either home-grow them organically, which would be a much slower process or we can bring them in by issuing new licences and it would happen within a much shorter time frame. This is the strategy that we have adopted. We believe we have all other elements in place to be an international Islamic financial hub. We have the players in place, but we also need to have the other components to undertake the international business. This means that it is not just our domestic entities, like the multinational corporations, that have international businesses, but also [those] from other parts of the world as well. In order to justify that kind of global business, the banks would have to be mega and very large entities that are highly capitalised. Of course, we can grow them and we don’t preclude that it won’t happen. But we would like to take this opportunity now, and bring it up to two new players that would give us the quantum leap forward to be an international financial hub. With them, they’ll bring expertise that will spur innovation. They’ll have their network and linkages and they’ll leverage our matured and well-developed Islamic financial system. But aren’t most of the big banks are already here?

This is because we have adequate players in the Islamic financial system at this point in time. We think they will bring benefits to us in terms of providing products and services. but actually they represent the same thing. which only recently transformed from being “windows” into subsidiaries of banks. and in enhancing the efficiency and competitiveness of our financial system. the value proposition. Our domestic players. that is. three more commercial banking licences will be issued for world-class banks.We have already been getting some interest. There was disappointment that the 30% cap on foreign shareholding in existing commercial banks was not lifted. Again. They could bring linkages to other areas where they don’t have a presence in our system. domestic financial institutions. the international talent. especially at the graduate level. international business from other parts of the world. One of the arguments is that the banking sector is getting crowded again after the 2000 consolidation. This means having branches throughout . facilitating trade and FDIs. what existed before as windows. But that doesn’t preclude a few of our local Islamic subsidiaries. They will provide linkages to new regions. they have greater focus and they have the potential to have other strategic partners. They now have a new structure. to tap and gain international sources of business. which would have to be the international business because they would not be involved in retail banking. aren’t most of the big global players already in? There are still many large banks from other parts of the world that do not have operations here. is an important part to ensure that we have financial institutions that conduct businesses based on domestic conditions and that have some commitment towards financial inclusion. this could not happen because Islamic banking was just a window structure in local banks. as they can enter into partnerships. What particularly do we want the mega banks to bring? Certainly the expertise. and they have generated a significant number of new jobs. and this includes countries that are not (as badly) affected by the financial crisis. which have also developed the expertise. And having a core of domestic banks. can they compete with these big banks? Many people have said that we are now having a proliferation of Islamic financial institutions. There are many parts of the world that don’t have representation in our financial system. that is. so is issuing new licences a contradiction? We have an important agenda for achieving balanced growth. Generating a lot of interest In 2011. (Some banks) already have shared services here. from entering into partnerships with the foreign entities to expand that line of business. Are they ready to compete? That’s the point — most of them are engaged in the retail business and domestic corporations whereas the mega banks will be doing different business. Previously.

That is why when we liberalised. These are positive things that they add and contribute to our economy. they have started to open more branches in non-urban areas. The exception or flexibility has been given to institutional shareholders. some of them were extremely vulnerable during unstable times. But that’s a very recent phenomenon. to bring world-class products and services to enhance our linkages and so on. we want to develop the core of our domestic banks and institutions before we begin the liberalisation and we have succeeded in doing that.. flexibility has been given from time to time on a case-by-case basis. they offer a wider range of products and services that are very competitive. We want to see institutionalisation of shareholding. Bafia (Banking and Financial Institutions Act 1989) mainly applies to individuals because we want… diversified shareholders. We have been transparent in our master plan. the entry of these new players will be dependent on the value propositions that they bring to our system… value propositions that can strengthen further our financial system. That is important and to all foreign institutions. any institution can have up to 70% in an investment bank (IB)? Yes. The average capitalisation is RM2. How does that reconcile? Essentially.2 billion. When our banks were really small. Our income disparity isn’t that great… The financial inclusion number that the World Bank has showed that 80% of our population have some form of banking account. we have in place what we believed are the building blocks and preconditions for a successful implementation of liberalisation. Now. when we bring foreign banks into our financial system. So in this instance.the country and continuing to reflect their business according to conditions prevailing here rather than where their parent institutions are located.. We’ve come a long way in that foreign banks are now more inclusive. Does this apply to local IBs as well? . This will continue. and the performance gap between foreign and domestic banks has narrowed significantly. I repeat to them that they benefit from the fact that Malaysia is a country that has balanced growth across economic sectors and across different communities. It is important to have diversified shareholders. To your question on whether issuing new licences contradicts the consolidation of the sector. So we don’t see any contradiction because our domestic financial institutions have reached the maturity where they are able to rise to the occasion and be competitive in this liberalised environment. the average size of our banks has increased by four times since the consolidation in 2000. That’s why individual shareholding is limited to 10% and institutional shareholding from 20%. and not to individuals. Of course. The new shareholding cap and Bafia that caps individual shareholding in banks to 10% and institutional shareholding to 20%. from RM22 billion to RM92 billion. The point I want to make is that it is very critical to have a core group of banks that will stay with us during the difficult times.

in Indonesia it’s RM27 million and in India. when a new entrant takes people from the existing talent pool — that could be destabilising… We have intensified our training so that there is a pipeline to supply talent to the system. it’s RM213 million. I just want to add that what we want to see. In Hong Kong. so does PNB and some foreign shareholders as well. so that when it does happen. So they will be evaluated based on the criteria and others as well. On shareholding. Our domestic financial system will continue to operate on an improved performance and vibrant platform. By 2011. It’s not just being able to have the funds but also to value add. even in the area of talent. the minimum capital level is equivalent to RM136 million. that is. This RM300 million is the minimum. But they would have to be institutions. what we want to encourage is institutional shareholders that have the financial capacity to value add to the institution. on average. We will monitor closely the international developments that are taking . especially for those that have two or three branches. they must be strong shareholders and they have to value add.Yes. it is. Driving consolidation in insurance The liberalisation will raise the level of competition. I should mention that while the capital requirement is only RM300 million. There is talk that Basel II may be reviewed because of the aftermath of the US banking crisis. Is that too small? At present. about RM3 billion for the larger foreign banks. the Employees Provident Fund is an institutional investor that owns more than 20% in a financial institution. all the institutions have indicated that they would adopt the standardised approach. For example. What is our stand on this? Well. It’ll depend on overall conditions because there’s only going to be a limited number of licences that’s going to be issued. we expect our economy to be expanding and the volume of business to be much larger. But there are a few financial institutions that have adopted the more advanced approach and that is to be implemented in 2010. it doesn’t disrupt the system in every respect. For example. We evaluate the situation on a case-by-case basis. The RM300 million requirement for new banks. Do you expect a major shake-up in the industry? That is precisely why we wanted all the preconditions to be in place before we liberalised. and have implemented it in 2008. This is no different from other countries. and certainly the volume of activity in the Asian region will also expand significantly. Do you see the recent liberalisation measures driving the next round of industry consolidation? We don’t think that liberalisation will be a trigger factor for such mergers. From what we have seen so far. because it doesn’t justify the operation to have more (capital) than that. We will monitor the developments of any adjustments made to Basel II. it is on track. Those that have a larger volume of business can raise their capitalisation. if we look at the existing foreign bank capitalisation in our financial system.

They can have more than 70%. This liberalisation that we just did is the final stage of what we had envisioned in the master plan. we . Of course. In other words. we have reached the final stages of that plan. so all that is on track. liberalisation seems to be aimed at driving consolidation. the private sector. We’re very pleased actually that such a blueprint was realistic. more than 90% of our master plan has been successfully implemented eight years into the plan. they are 100% completed. flexibility will be given. And we’re looking at the role to be played by the financial sector. There were times when we became extremely unpopular. and the change that must take place to achieve what we need to do to become a developed country. Have there been a lot of interest? Yes. when the central bank experienced a major change from what we were some 10 years ago. A new blueprint in 2010 The FSMP (Financial Sector Master Plan) is drawing to a close. And we’ll probably have a blueprint by 2010. and these would include issues of governance. We still have too many smaller general insurers that would benefit from the synergy and economies of scale by merging or aligning themselves with a stronger foreign partner. the smaller players will have a smaller stake in the large entity. It’s very challenging to bring about change and we know it from our own experience. So we are looking now beyond 2011. The foreign shareholding can exceed 70%. but in many other areas. some areas are still ongoing. at how the financial system is evolving and we’ll be engaging with the industry. We have 16 insurance companies that did merge but the industry is still fragmented. it will be considered on a case-by-case basis. as a central bank. that we could achieve what we set out to do and now. and the international community. regulations and the structure of the supervisory oversight. What’s next? We are very pleased with the progress that we have achieved with the FSMP. How does that work? Foreigners come in and take up a stake and inject capital. especially as a catalyst to the economic transformation.place. especially when we want to see changes. What is holding back the insurance sector from consolidating despite the fact that this has been talked about for some time now? It has happened to some extent. The new blueprint will take into account all the lessons that are learnt from the financial crisis. Moving on to the insurance sector. by the latter part of 2010. And in order to be effective. Was it difficult driving through the FSMP? Let me put it this way. If a foreign entity will come in and be part of that consolidation.

to put risk management structures in place. the role of the board. May 11-17. they’ve become resilient and they’re aware of their resilience. they are service providers.have to have the major transformation. it was critical for them to develop. I think that has been the rewarding aspects of what has been achieved. Therefore. But with all that. technology and talent development. to have very different governance practices. how they’ll be able to withstand the different conditions. For example. and the diverse environment was very challenging for some of them. Issue 754. This article appeared in the Cover Story page. and to sophisticated stress tests and we’re very pleased that they’ve reached such an advanced stage whereby they already know. it was very challenging when banks merge because of their different corporate culture. All this has to happen in the financial system and some of them were very painful exercises. They were also subjected to more stringent oversight. and mature. there’s an immense payoff for them now. the nerve centre of the economy. The Edge Malaysia. This is important because financial institutions are an important element in the financial sector. 2009. . for themselves.