Mahathir Is Hinting at Exceptions : Malaysia Uncertain On Bank Overhaul 
International Herald Tribune
October 7, 1999
Thomas Fuller

Malaysia's bank-restructuring program, one of the most ambitious in post-crisis Asia, is showing signs of strain less than one week after the government announced that it had obtained written promises to merge the country's 58 financial institutions into six big banks.

Prime Minister Mahathir bin Mohamad on Wednesday left open the possibility that the government would allow some banks to escape what critics have called arranged marriages on a corporate scale. "The government is not going to force this down their throats," he said.

Opposition to the merger program — mainly from unions and wealthy banking families — highlights the obstacles faced by governments throughout Asia as they try to restructure their economies.

The Malaysian controversy seems to show that even in a country where the government's sway is powerful and bank regulations relatively tough, economic restructuring does not come easy.

Softening the central bank's previous stand on the merger program, Mr. Mahathir said Wednesday that the decision to create six banking groups was "arbitrary." "It could be more," he said. "It depends on the banks."

Mr. Mahathir's comments are seen as a reaction to stiff resistance to the plan and criticism from opposition groups that the plan is tinged with politics.

"There's a lot of unhappiness out there and I think the government realizes that this kind of approach may not be politically palatable with elections around the corner," said Mohamed Ariff, a leading Malaysian economist and executive director of the Malaysian Institute of Economic Research.

Mr. Mahathir put it this way: "There seem to be some difficulties in bringing the banks together, also difficulties in determining who should be the lead bank."

The merger plan, announced in July, is estimated to cost 35 billion ringgit ($9 billion), a hefty sum at a time when the country is emerging from two years of economic crisis. Most controversial is the fact that the six banking groups were selected by the government.

Perhaps more than any other country in East Asia, Malaysia took bank restructuring head on. In late July, Malaysian officials summoned the heads of the 58 financial institutions at half-hour intervals and introduced them to their future partners.

The central bank, which organized the program, justified the radical move

by saying quick consolidation was necessary to make Malaysia's banking industry more competitive and efficient.

But opponents of the plan have criticized the composition of the future giant banks, saying the choice had more to do with politics than sound banking.

"Unfortunately, perceptions of political interference mar what is an extremely positive consolidation of a banking sector — probably on a greater scale than anything yet seen in Asia," said Dominic Armstrong, head of research for Singapore and Malaysia at ABN-AMRO.

Take the case of Multipurpose Bank, a relatively small institution chosen by the government to lead one of the six banking groups. Multipurpose has assets of 9 billion ringgit, yet the combined assets of the dozen banks the government wants it to take over amount to 107 billion ringgit. Multipurpose is controlled by an ally of the country's finance minister, Daim Zainuddin.

Last week the 58 financial institutions submitted their merger plans — agreeing to join the groups chosen by the central bank — but analysts say the hard part has just begun. Over the next few months, the banks must agree on pricing, a difficult exercise considering that it is the government, not the market, that is bringing the banks to the negotiating table.

The six banks chosen to be "anchor banks" must find ways to compensate the owners of the banks they are taking over, paying for such intangibles as the highly coveted banking license itself.

These are among other potential stumbling blocks:

The merger plan could raise Malaysia's already high debt levels if the anchor banks borrow money to finance their acquisitions. Total bank loans as a percentage of gross domestic product are already higher today than they were before the crisis hit in 1997.

Many deals will be financed through the issue of new shares, but it is uncertain whether there will be an appetite for such stock among investors, especially in the case of the smaller, less stable banks. Two large banks selected for takeover have already said they want their compensation in cash. - Preoccupied with the merger program, banks could lose focus on their day-to-day lending activities, thus possibly hampering the country's economic recovery. - Forcing bankers to give up their licenses could discourage Malaysians from entrepreneurial risk-taking. ''Three people who built up banking empires from scratch are losing their franchises,'' said the head of research at a foreign brokerage house in Kuala Lumpur. ''What kind of message does that send to the next generation of Malaysians?''

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