Malaysia breaks from its old ways, starting with the banking sector
International Herald Tribune
July 5, 2005
Wayne Arnold

KUALA LUMPUR After reading Nazir Razak's biography, one might be tempted to dismiss him as part of the same old Malaysia.
 
At 38, he is chief executive and managing director of the country's largest investment bank, Commerce International Merchant Bankers. His father was prime minister. His brother is Malaysia's deputy prime minister and defense minister.
 
But while Nazir will never be able to escape his pedigree, even if he wanted to, he is part of a new generation of business and political leaders trying to shake up the system of patronage that once typified Malaysia, starting with its financial sector.
 
Last month, Commerce International, or CIMB, engineered a complex takeover of its sister commercial bank, Bumiputra-Commerce Bank, to beef up and to compete regionally with the likes of DBS Bank in Singapore and global heavy hitters like Citigroup and HSBC.
 
"This deal is part and parcel of accelerating the development of domestic banks," Nazir said. "There are a lot of synergies to be derived from the integration."
 
The first to swing the wrecking ball at Malaysia's old-boy network was the very man who helped build it, Mahathir bin Mohamad. While still prime minister, Mahathir began dismantling his 20-year program to aid the country's formerly economically disadvantaged ethnic Malays. Decrying complacency and a sense of entitlement, he began removing their privileges and deposing the most privileged Malay tycoons.
 
With China and India breathing down Malaysia's neck in seeking investment and trade, Mahathir's successor, Prime Minister Abdullah Ahmad Badawi, has been holding to that course since taking office in late 2003, cracking down on corruption, ripping up political pet projects and pursuing greater integration with the global economy.
 
Cleaning up and consolidating the banking sector to make it internationally competitive is a crucial part of these changes. After three years of dramatic progress, though, the industry has become bogged down in inertia and bureaucracy, bankers and analysts say.
 
That's where the CIMB-Bumiputra deal comes in, they say. "They want to kick-start the stalled consolidation process," said Ambreesh Srivastava, director for Asian banks and financial institutions at Fitch Ratings in Singapore.
 
Once used to channel the country's savings into favored projects run by politically connected business executives, Malaysia's banks were laid low by the Asian financial crisis of 1997 and 1998.
 
Thanks to government-led efforts to buy up more than $5 billion in nonperforming loans, the proportion of loans at Malaysia's banks has dropped from roughly one-quarter after the crisis to roughly 7 percent today.
 
Still, analysts and bankers say, there are simply too many banks for a nation of 25 million people. In 1999, the government conducted "shotgun weddings" of some of its banks, and 21 banks and 50 other financial institutions have been cut down to 10 anchor banks and 11 specialist institutions. Most of the remaining entities live in the shadow of the three largest institutions, Maybank, Public Bank and Bumiputra-Commerce, surviving on less than 5 percent of the market.
 
In 2001, the central bank adopted a financial master plan to winnow out all but the strongest. Why the push? Under its obligations as a member of the World Trade Organization, Malaysia plans to throw its financial industry open to foreign competition by 2007. It is also negotiating free trade agreements with several trading partners, agreements that typically include more access to the market for financial services.
 
Phase 1 of the master plan was intended to strengthen the banks and the financial system, and analysts say that has been accomplished handily. But Phase 2, in which regulators induce the banks to consolidate further, has run into problems. Scrapping limits on lending rates has enabled banks to lend to riskier ventures, and the adoption of an overnight lending rate has enabled banks to adjust lending rates for their best customers more accurately.
 
Other tax incentives are intended to encourage stockbrokerages to merge with merchant banks and other securities trading houses.
 
Still, tax carrots and competitive sticks have yielded few deals. "The central bank isn't cracking the whip," said Gan Kim Khoon, executive director at AmResearch.
 
Banking combinations also offer little more than a bigger balance sheet. New potential growth and cost cuts are hampered by the fact that most banks already offer the same kinds of products to the same customers. "You only want to acquire a bank if it has a niche you don't have," Gan said.
 
What is likely to produce more rapid results, bankers and analysts say, is Phase 3 of the master plan: the introduction of foreign competition. Malaysia has already begun lifting barriers to foreign entry, but only slowly, bankers say.
 
Foreign institutions have succeeded in obtaining brokerage licenses, and foreign banks have been allowed to join the interbank electronic transfer system so their customers can transfer money to accounts at Malaysian banks and vice versa.
 
Yet while some foreign banks, like Citibank, have fought their way to the top in Malaysian mortgage lending and consumer finance, they still face barriers. There are still restrictions on where and how many branches they can open, and they can put cash machines only where they have branches.
 
Moreover, unlike South Korea and Indonesia, where foreign investment has helped revitalize the banking sector, Malaysia still has a 30 percent limit on foreign ownership of any local bank.
 
While the authorities have signaled their willingness to let foreigners own as much as 49 percent, foreign bankers say nothing short of majority control is enough.
 
"The next stage of consolidation is unlikely to be driven by local players," said Piyush Gupta, chief executive of Citibank Malaysia. "It'll be driven by international players. And for that they'll need to change the rules."
 
Nazir is not waiting for the foreigners to come; he is taking CIMB to them. A Cambridge-educated son of Abdul Razak, Malaysia's prime minister in the early 1970s, Nazir spent 16 years at CIMB working his way up through the ranks, and he bristles at any suggestion that he owes his position to family connections.
 
"My brother has his own career," he said of Defense Minister Najib Razak, who got the additional title of deputy prime minister when Abdullah took office. "Our paths have rarely crossed in the past two years."
 
Nazir disagrees with the idea that his bank's takeover of Bumiputra-Commerce is reminiscent of that bank's previous bailouts. CIMB is providing no assets, he says. Typical of Malaysian restructurings, the deal is confusing. But the result is that CIMB and Bumiputra-Commerce remain separate legal entities under a single management, headed by Nazir and operating under the CIMB brand.
 
"It makes the investment bank stronger because it makes our balance sheet stronger, and it makes the commercial bank stronger with changed management," Nazir said.
 
As complex as the deal may be, the aim is simple, Nazir says: to help CIMB compete for regional business. CIMB has already bought a securities house in Indonesia and recently bought a retail brokerage in Singapore that also has Indonesian operations.
 
Nazir's hope is that by being larger, CIMB can compete for deals around Southeast Asia, beyond business as usual at home. As for his family history, he said, "Don't hold it against me."

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