By Michael Shari In the weeks leading up to the announcement of its "master plan" for fixing the country's financial system, there was hope that Bank Negara, Malaysia's central bank, would finally take the painful steps necessary to clean up a $26 billion pile of nonperforming loans and get banks over their fear of lending. No go. Instead, in a direct violation of World Trade Organization rules, the Mar. 1 plan prevents foreign banks that don't already have branches in Malaysia from entering the market until 2007.
In a further disappointment, the plan failed to address concerns that a two-year-old government program to consolidate all of Malaysia's troubled 54 domestic banks and other financial institutions into 10 viable "anchor banks" had run aground. The irony is that a couple of years ago, Bank Negara had justified the consolidation program on grounds that Malaysia needed to build strong banks to compete globally when its financial-services market opens up in 2003 under WTO rules.
BRINK OF EXTINCTION. Trouble is, Malaysia can't afford to wait until 2007 or even 2003 to build strong banks anymore. Consolidation -- forced or voluntary -- is badly needed to bring the banking system back from the brink of extinction, where it has been teetering since the Asian crisis of 1997.
Loan growth was sluggish at 5% last year, and nonperforming debt remains high at 24% of loans in the banking system. But consolidation has been held back by a strong desire from within the ruling United Malays National Organization, or UMNO, to make sure that trusted members of the party control all 10 anchor banks.
Then there are all the obstacles that dog bank mergers in any country, such as clashes of corporate culture and disputes over pricing. Standard & Poor's (a unit of The McGraw-Hill Companies, owner of BusinessWeek) concluded - tactfully -- in a Mar. 5 report that by failing to address such issues, the master plan "could produce a period of some instability."
QUESTIONS OF SURVIVAL. Confounding financial analysts, the consolidation plan has been progressing in fits and starts. In late February, shortly after the lead banks in the 10 proposed consortia had signed all the court documents required for their respective mergers, two banks and a finance company peeled themselves away from a proposed merger with Eon Bank, which specializes in car loans, and dropped out of the program.
Now, desperately, Bank Negara is trying to merge the three errant institutions -- Utama Banking Group, AMMB Holdings, and MBF Finance -- into an 11th anchor bank. The question now is how Eon Bank will survive, given recently raised minimum-capital requirements. "Eon Bank won't be able to make it alone," says a banking analyst at a foreign brokerage in Kuala Lumpur.
Many of the bank mergers are plagued by political snags. Bank Utama, for example, is partly owned by the government of the remote Malaysian state of Sarawak, which is scheduled to hold a local election this year. The problem is that if the merger had gone through, Bank Utama would have come under the control of a bank based in Western Malaysia, not in Sarawak.
REJECTED. The banks that run into the worst trouble are seen to have had ties to former Finance Minister Anwar Ibrahim, who was excommunicated from UMNO in late 1998 for complaining about cronyism and is now serving a prison sentence for sodomy. Take RHB Bank. In February, founder Rashid Hussein attempted to regain control of RHB by purchasing a stake from the government's bank-recapitalization agency, Danamodal Nasional. Even though Rashid offered a 38% premium on the stake, which Danamodal acquired in exchange for a $263 million recapitalization move, the Finance Ministry turned him down.
Analysts say Danamodal and two other government agencies now own a total of 45% of RHB, and the government intends to merge it with the largest of the planned anchor banks, which is led by Maybank and already represents 20% of assets in the banking system. In recent interviews with Malaysian newspapers, Bank Negara Governor Zeti Akhtar Aziz declined to comment on the government's strategy for RHB.
Rare breakthroughs in the merger process seem to coincide with well-connected individuals getting treated right. Consider Phileo Allied, a bank once linked to Anwar. In January, Maybank's long-delayed acquisition of Phileo Allied went through after Maybank agreed to pay cash to Avenue Assets, a company controlled by Mokhzani Mahathir, son of Prime Minister Mohamad Mahathir, to acquire an 18.4% stake in Philieo Allied. The deal saved the Maybank merger, but it also caught the attention of financial analysts in Kuala Lumpur, who note that all other mergers involved in the consolidation program were settled with share swaps, not cash.
MISSED DEADLINES. From the beginning, foreign bankers, financial analysts, and diplomats have questioned the legitimacy of the program. In 1999, the central bank proposed forming six anchor banks. These in turn would have been led by major commercial banks known to be run by associates of Finance Minister Daim Zainuddin, who also happens to be UMNO Treasurer. After all the banks missed deadlines to merge, the central bank proposed increasing the number of anchor banks to 10. Daim fought that amendment because it gave the banks more freedom to find partners -- and thus limited UMNO's control over the financial system by leaving party cronies at the mercy of market principles, say diplomats in Kuala Lumpur.
Even if the consolidation program does work in the end, it remains doubtful that it will fix the financial system. For starters, the biggest corporate debtors -- such as infrastructure developer Renong, which has defaulted on more than $7 billion in debt and is linked to Daim -- have been left out of the restructuring process. And even if Malaysia were operating under the best of circumstances, the country is "hopelessly overbanked," as one foreign banker puts it, with most branches of domestic commercial banks operating at a loss in small Malaysian towns. All in all, this "master plan" is a disappointment. Shari covers Malaysia for BusinessWeek from Singapore