Malaysia will allow foreign banks to own bigger stakes in local lenders, grant more licenses and ease short-selling rules as it seeks to triple the size of its finance sector by the end of the decade, the central bank said.
The Southeast Asian country will also let companies manage foreign currency fluctuations and allow non-residents to trade onshore interest-rate derivatives as it seeks to develop its money market under a 10-year plan announced by Prime Minister Najib Razak in Kuala Lumpur yesterday.
“The gradual removal of barriers for overseas investors will result in a level playing field and make the local financial market more competitive,” Abdul Jalil Abdul Rasheed, who helps manage $3 billion as chief executive officer at Kuala Lumpur-based Aberdeen Islamic Asset Management Sdn., said in an interview yesterday. “We have reached the stage where a lot of the local banks are already strong and can give foreign banks a run for their money.”
Bank of China Ltd., BNP Paribas SA and Sumitomo Mitsui Banking Corp. are among foreign lenders that have set up operations in Malaysia, attracted by its emergence as Southeast Asia’s biggest debt securities market and world’s largest issuer of Islamic bonds. The country accounts for 63 percent of Shariah-compliant debt sales globally, the Finance Ministry said in October.
Oversea-Chinese Banking Corp., Southeast Asia’s second-largest lender by assets, plans to expand traditional financial services as well as Islamic banking operations in Malaysia, its second-largest market by profit and assets.
“The further liberalization of the country’s banking rules is therefore positive news for us,” Jeffrey Chew, chief executive officer and director of Singapore-based OCBC’s Malaysian unit, said in an e-mailed response to questions today. “This new set of blueprints will give OCBC significant opportunities in the areas of wealth management, online and mobile banking services and payments, Islamic finance, branch network and non-branch delivery channels.”
Financing that complies with Islam’s ban on interest may account for 40 percent of the total by 2020, up from 29 percent in 2010, the central bank said. Malaysia’s debt securities market has almost tripled over the past decade to 867 billion ringgit ($273 billion), it said in yesterday’s report.
Under Malaysia’s first 10-year Financial Sector Master Plan published in 2001, local banks and brokerages were encouraged to merge as rules were gradually eased and more licenses granted.
Consolidation is continuing as foreign competition is set to increase. RHB Capital Bhd., Malaysia’s fifth-biggest lender, is in talks to buy the investment banking operations of OSK Holdings Bhd., the country’s fourth-biggest stockbroker. K&N Kenanga Holdings Bhd., a brokerage part-owned by Deutsche Bank AG, is in talks to buy the investment banking and brokerage operations of local rival ECM Libra Financial Group Bhd., two people familiar with the matter said on Dec. 1.
Malaysia’s financial system, including outstanding bonds, loans and equity-market capitalization, may grow this decade at an annual pace of 8 percent to 11 percent, or six times the rate of expansion of its gross domestic product, Bank Negara Malaysia forecast. That compares with an average 7.3 percent growth since 2001, and would give the nation a financial sector valued at as much as 9.1 trillion ringgit by 2020, it said.
Licenses will be granted to banks and insurers with specialized expertise, including Islamic finance, the report said. Existing foreign banks in Malaysia will be allowed greater flexibility in locating branches.
Strengthening Malaysia’s position as an international Islamic financial center is a pillar of the plan, yesterday’s report said. The central bank said it plans to develop new products and expand the range of globally-accepted hedging instruments.
Bank Negara left a 30 percent cap on foreign ownership of banks unchanged in yesterday’s report. Exemptions may be granted depending on the financial profile of the investor and whether it’s in the interests of the country, it said.
“The presence of strong and well-managed domestic banking groups that will account for a significant share of resident deposits will remain important for the orderly growth and development of the financial sector and the Malaysian economy,” central bank Governor Zeti Akhtar Aziz said in a speech in Kuala Lumpur yesterday.
Australia & New Zealand Banking Group Ltd. holds 23.8 percent of AMMB Holdings Bhd., while Hong Kong’s Bank of East Asia Ltd. owns 23.5 percent of Affin Holdings Bhd., according to data compiled by Bloomberg.
“Bank Negara maintained that selective ownership relaxation can be considered on a case-by-case basis, which keeps our hopes alive that foreign institutions would eventually raise their stakes in AMMB and Alliance Financial Group,” Vincent Khoo, an analyst at Singapore-based UOB-Kay Hian Holdings Ltd. said in a report today.
The central bank last eased foreign ownership limits at non-commercial banks in 2009 when the country went into a recession. It increased the maximum amount overseas investors could hold in insurers, Islamic banks, investment banks and sellers of Shariah-compliant insurance to 70 percent from 49 percent at that time.
To develop Malaysia’s money markets, the government could issue more benchmark securities and hold larger treasury-bill auctions in the coming decade, the central bank said.
Principal dealers undertaking short-selling may provide further flexibility, and non-principal dealers could be allowed to borrow and lend securities, it said.
Mahathir Mohamad fixed the ringgit at 3.80 a dollar in September 1998 during his tenure as prime minister amid the Asian financial crisis, blaming speculators including George Soros for a 34 percent plunge in the currency. A ban on offshore trading remains in force since, though the dollar peg was removed in 2005 and most other capital controls have been lifted.
Malaysia isn’t ready to free trade in the ringgit because of “instability in the foreign exchange market,” Najib told reporters yesterday.