Financial Restructuring to Be Overhauled : Banking Merger Plan Collapses in Malaysia 
International Herald Tribune
October 21, 1999
Thomas Fuller

Malaysia announced Wednesday that its bank merger plan had met with "strong objections" and would be overhauled, scuttling what had been East Asia's most ambitious financial restructuring program.

Malaysia's 55 financial institutions had last month agreed, under considerable government pressure, to merge into six groups hand-picked by the central bank, a move that officials said would improve the efficiency of the banking system.

But Wednesday's announcement effectively shredded those deals.

Ali Abul Hassan bin Sulaiman, Malaysia's central bank governor, said banks would "now be given the flexibility to form their own merger groups and to choose their own leader in each group to lead the merger process."

A statement released by the central bank late Wednesday did not specify the number of banking groups the government was seeking but gave a deadline of January for banks to submit fresh merger proposals. If the banks fail to meet the January deadline, the central bank said it would "intervene directly to select the merger partners." Once banks find fresh partners, they will have until December 2000 to complete their mergers.

The announcement Wednesday was a rare reversal for the Malaysian government, which enjoys such an overwhelming majority in Parliament that once a policy decision is announced, it is usually implemented soon after.

The reversal is a sign, political analysts said, that the government is feeling intense pressure and lobbying before elections, which must be called before June next year but may be held sooner.

"The plan was perceived as a combination of greed and a desire to control the financial system," said K.S. Jomo, a professor of economics. "There's also the whole question of insensitivity to the needs of the Chinese community."

Opposition groups had criticized the merger plan for being politically motivated and for concentrating control over the banking system in the hands of banks with strong links to the government.

The plan also would have stripped control of several smaller Chinese-owned banks that lend to the Chinese business community in Malaysia.

Prime Minister Mahathir bin Mohamad has actively sought the support of Chinese voters in the past year, following the erosion of his support among Malays, who make up slightly more than half the country's population. Ethnic Chinese make up about a quarter of the population of 22 million.

Mr. Mahathir is competing with a nascent alliance of opposition parties that is also wooing Chinese voters. Recently, the opposition alliance derided the government's merger plan and offered a more market-driven plan that was circulated among some bankers in the capital.

The opposition also criticized the government's initial plan for its political overtones. Many Malaysians interpreted the details of the proposed mergers as stripping control from bankers who had close ties to Anwar Ibrahim, the former finance minister and deputy prime minister who fell out of favor with Mr. Mahathir last year and is now in jail for abuse of power.

"The fact that the four main victims of the original merger plan had received their bank licenses from Anwar suggested an element of personal political vendetta," Mr. Jomo said.

In addition, the government was being pressured by unions, which had warned of layoffs if the mergers were to take place.

That pressure appears to have been effective. "There should be no forced retrenchment in this bank consolidation exercise," Mr. Ali Abul said in his statement late Wednesday.

But politics aside, many analysts said the plan was flawed from a purely financial point of view.

"The idea was to strengthen the whole system but somewhere along the line they missed the point," said Mohammed Ariff, executive director of the Malaysian Institute of Economic Research.

"They thought the bigger the better. That's where things went wrong. They wanted to create banks that were too big to fail. But that's a wrong assumption, because if a big bank fails, it causes big waves. If a small bank fails, it only causes ripples."

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