Najib’s liberalisation of financial sector disappoints again

While foreign investors, particularly foreign banks, would now have greater incentive to buy into local merchant banks and insurers, Malaysia was also likely to miss the 2010 deadline for commercial banks.

By Wong Choon Mei, Suara Keadilan

In a follow-up to last week’s disappointing baby steps to liberalise the economy and in line with WTO prescriptions, Prime Minister Najib Razak has raised the foreign ownership ceiling on merchants banks and insurers to 70 percent but kept the cap at 30 percent for commercial banks.

Najib, who is also finance minister, also announced that the central Bank Negara will offer nine new banking and insurance licences over a two-year period. Two licences each for foreign-owned Islamic banks and foreign trade banks will be issued in 2009 itself, while three new commercial banking licences will be offered in 2011.

“Nine new bank and insurance licences will also be issued to world-class players in the financial sector from 2009-2011,” said Najib, who did not give further details. The existing foreign equity limit on merchant banks and insurers is 49 percent.

His supporters have tried to paint the latest measures as sweeping new reforms offered by Najib to revamp the country’s embattled economic landscape, long-criticised for its uneven wealth distribution and protectionism of favoured ethnic groups.

But analysts were unimpressed, saying the measures were first detailed in a financial sector master plan unveiled in 2001, which requires the industry to be fully opened up by 2010 in any case. In fact, they pointed out that the measures were already late, given that a large step-up was due to have been executed by 2007.

“The government is just doing what it is supposed to do by carrying out its promises under the financial sector masterplan in accordance with the World Trade Organisation on opening-up and non-protectionism,” said Azrul Azwa, economist at Bank Islam.

“We welcome the moves but it is inaccurate to portray the latest steps as Najib introducing new reforms. This is a gross inaccuracy and the public and investors should not be in anyway misled,” said PHS Lim, president of Malaysian Investors Association.

Half-hearted and questionable

Analysts also warned that apart from equity moves and new licences, Najib needed to introduce greater operational reforms for the banking industry or risk being shunned by the biggest players.

For example, foreign banks are currently restricted from freely competing against local lenders by Bank Negara, which controls the number of ATM stations and branches that they can be open.

Said Lim: “The changes must not be on the surface. The US Senate Banking Committee recently complained their banks in Malaysia were restricted in opening branches.Why invite new players but neglect the pioneers who came earlier? Their investments here are already very significant and their  grouses should be attended to.”

“Giving out new licences when the banking industry was forced to consolidate in the late 1990s begs the question why? Is someone somewhere getting something from the new licences offered?,” asked a banking analyst at a foreign research house.

While foreign investors, particularly foreign banks, would now have greater incentive to buy into local merchant banks and insurers, Malaysia was also likely to miss the 2010 deadline for commercial banks.

“In the past with 49 percent, you don’t get control. So this was a turn off for many,” said Lim. “It’s a pity there is no similar increase for the commercial banks, though frankly, given the current economic turmoil, there won’t be many foreign investors looking to snap up equity unless there are fire-sale prices.”

“It looks like Malaysia will miss the 2010 deadline for commercial banks. This is not good news and actually shows Malaysia is half-hearted about its reforms,” said the banking analyst. “You can’t blame the economic conditions or wait for the best timing, there is no such thing. The rules must be right, the playing field must be level even before the game begins.  You can’t keep on asking for a handicap.”

At 5 pm, the benchmark Kuala Lumpur Stock Exchange Composite Index slid 1.27 percent or 12.56 points to close at 980.12 points as investors booked profit on the disappointing announcements.

Last week, Najib lifted a long-held equity condition that bumiputera (Malays and other eligible indigenous races) must hold a minimum 30 percent of the economy, but the liberalisation was for only 27 service sub-sectors, including transport, hospitality and tourism.

While important, these sectors represented only a fraction of the overall economy. “To be honest, the 27 are very small sectors. The impact of the liberalisation from these will be minimal although in the long run, their contribution can be built up,” said Lim.