Malaysia
Selected Issues
Author:
International Monetary Fund
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Publication Date:
04 Nov 1998
eISBN:
9781451828290
Language:
English
Keywords:
ISCR; CR; government; Malaysian authority; discount house; state government; long-term debt; primary sector; court order; broad money; merchant banking
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This Selected Issues paper undertakes a brief examination of poverty trends in Malaysia since the early 1970s and the policies that may have contributed to its reduction. The paper presents trends in poverty, and describes some of the policies that may have generated the poverty outcome. It analyzes the legal framework for bankruptcy and insolvency, highlighting that the legal framework in Malaysia appears to be generally comprehensive, especially by regional standards, and has been largely modeled on the United Kingdom system.

Abstract

This Selected Issues paper undertakes a brief examination of poverty trends in Malaysia since the early 1970s and the policies that may have contributed to its reduction. The paper presents trends in poverty, and describes some of the policies that may have generated the poverty outcome. It analyzes the legal framework for bankruptcy and insolvency, highlighting that the legal framework in Malaysia appears to be generally comprehensive, especially by regional standards, and has been largely modeled on the United Kingdom system.

I. Malaysia: Successful Poverty Reduction 1

A. Introduction

1. In 1971, with the launching of its New Economic Policy (NEP), the Malaysian government announced its twin objectives of eradicating poverty and restructuring society by eliminating the “identification of race with economic function” and “reducing existing imbalances in income, employment, and the ownership and management of productive assets in the economy” 2 Economic growth and structural change were seen as integral to the success of the New Economic Policy. In addition to investment incentives aimed at improving the economic status of the bumiputra (ethnic Malay) population, policies were focused on rural development and improving the provision of education and health services. The National Development Policy (1991–2000) aimed to continue the upliftment of the bumiputra community while striking “an optimum balance between the goals of economic growth and equity.” 3

2. In conjunction with an impressive growth performance, these policy objectives have rendered Malaysia’s record on poverty reduction and social indicators a remarkable one by any developing country standards, including other East Asian countries. Income inequality also declined during the NEP period, although clearcut conclusions have not yet been reached about trends in the 1990s. 4

3. This note undertakes a brief examination of poverty trends in Malaysia since the early 1970s and the policies that may have contributed to its reduction. The paper is organized as follows: Section B presents trends in poverty. Section C describes some of the policies that may have generated the poverty outcome. Section D contains some concluding remarks.

B. Trends in Poverty and Income Distribution

4. Poverty has traditionally been concentrated in rural areas amongst households with low educational attainment. In 1970, more than 88 percent of the poor lived in rural areas. Also, poverty was overwhelmingly concentrated amongst Malays (78 percent of the poor were Malays). About 77 percent of the poor were farmers and about 97 percent had not gained education beyond the primary level. The groups that were most vulnerable to poverty were paddy farmers, farm laborers, rubber smallholders and rubber estate laborers.5 More recent information suggests that remaining poverty in Malaysia is still a predominantly agricultural phenomenon associated with low levels of education.

5. By far, the most notable trend is the dramatic reduction in poverty from almost 50 percent in 1970 to less than 10 percent in 1995 (Table A). 6 During this period, there has been a significant reduction in rural poverty which fell from close to 60 percent to 16 percent.

Table A.

Households below the Poverty Line, 1970–95

(In percent of all households)

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Source: Fifth, Sixth and Seventh Malaysia Plans.

Data refer to Peninsular Malaysia only.

6. The incidence of poverty fell in all of the states. However, states which were less developed and characterized by a dominance of traditional agricultural and fishing industries (mainly Kelantan, Kedah, Perlis, Sabah and Perak) continued to exhibit higher poverty levels and lower poverty reductions than the more industrialized states (Table B).

Table B.

Incidence of Poverty by State, 1976 and 1984

(In percent of total, unless otherwise indicated)

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Source: Mid-term Review of the Fifth Malaysia Plan, 1986–90

7. All occupational groups, agricultural and non-agricultural, registered a decline in the incidence of poverty. Between 1970 and 1984, the percentage of paddy farmers who were poor fell from 88 percent to 58 percent. For manufacturing workers, the percentage declined from 23½ percent in 1970 to 8½ percent in 1984.

8. The drop in poverty in Malaysia has been accompanied by substantial improvement in other social indicators. Life expectancy at birth increased from 61½ years in 1970 to 71 in 1993 and the infant mortality rate fell from 45.2 per thousand to 11.8 per thousand over the same period. Primary enrollment rates increased from 84 percent in 1970 to 89 percent in 1995, while secondary school enrollment rates increased from 25½ percent in 1970 to 56 percent in 1995 (Table C).

Table C.

Social Indicators of Development, 1970–95

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Source: The World Bank, Social Indicators of Development Database.

9. Income inequality which increased through the mid-1970s has fallen sharply through the 1980s. The Gini coefficient rose from about 0.50 in 1970 to 0.53 in 1976, and then fell steadily to 0.51 in 1979, 0.48 in 1984 and 0.45 in 1990. It has since risen slightly, reaching 0.46 by 1995, the latest year for which data are available. 7 Quintile shares echo the trends in Gini coefficients. The ratio of the income of the top quintile to that of the bottom quintile rose until the mid-1970s, before falling steadily during the period since then. Between 1976 and the early 1990s, the bottom quintile had increased its share of income from 3 percent to 5 percent of total income and the top quintile experienced a decline in its share from 57 percent to 54 percent over the same period.

C. Factors Underlying the Success with Poverty Reduction

Employment generation through growth and diversification

10. A sustained period of rapid economic growth, characterized by the diversification of the productive base, strong labor-intensive export-orientation and broad-based productivity increases (including in agriculture) have been at the root of Malaysia’s achievements in poverty reduction.

  • Malaysia’s outstanding growth performance is clearly an important factor contributing to the reduction in poverty and the increase in the incomes of the poor. 8 Real per capita GDP growth averaged 4½ percent from 1960 to the present. Since the mid-1970s, with the exception of the recessionary period 1985–87, per capita growth has averaged 6½ percent.

  • At the same time as this growth took place, there was significant diversification in the composition of output. The general thrust of policies was to enable a shift of resources away from low productivity, traditional agricultural activity to higher productivity farming and manufacturing activity (Table D).

  • The record of rapid growth has also resulted in a steady decline in unemployment, the latter typically strongly positively correlated with a decrease in poverty. Unemployment averaged 5.8 percent in the 1970s, 6.3 percent in the 1980s when average real GDP growth rates were the lowest, and 3.3 percent from 1990–95, when growth rates picked up. The labor market has grown increasingly tight in the 1990s and in 1995, the unemployment rate fell to a record low of 2½ percent. Most of the new jobs created in the late 1980s and 1990s were in the manufacturing sector, confirming the trends in Table E which shows an 8 percent increase in the share of manufacturing sector employment between 1990 and 1995 alone.

  • A significant boost to the growth process came from labor intensive export-oriented manufacturing activity, increasingly financed by foreign direct investment inflows. Since independence in 1957, Malaysia has been a fairly open economy, with low rates of effective protection. After a brief period of import substituting industrialization, the policy regime switched to one of export orientation in the late 1960s. 9 Investment rates averaged 30 percent in the 1980s and 35 percent in the 1990s, increasingly financed by foreign direct investment (FDI). Much of this FDI—which increased from an average of 3 percent of GDP between 1975 and 1988 to more than 7 percent of GDP in 1989–95—was concentrated in export-oriented manufacturing industries. Exports rose from about 43 percent of GDP in the mid-1970s to nearly 80 percent of GDP in the mid-1990s. The share of manufactured exports rose dramatically from 16 percent in 1960 to nearly 80 percent in 1995, with most of the increase occurring since the mid-1980s (Table F). In the 1990s alone, the proportion of labor absorbed by the manufacturing sector increased annually by 9 percentage points. By the mid-1990s, official estimates are that more than half the total number of jobs generated in Malaysia were generated from FDI Of the latter, almost two-thirds were in the electrical and electronic products industry.

  • Policies were also geared toward achieving productivity increases in agriculture. The rate of growth of agriculture was about 3–5 percent over the 1970s and 1980s, more rapid than in other developing countries in the region, and contributed to the reduction of rural poverty in Malaysia. While growth in the manufacturing sector provided employment and higher real earnings for the population, in contrast with many other ASEAN countries, the rapid development of the manufacturing sector has not been at the expense of the agricultural sector which provided the livelihood for the majority of the poor.

  • Specific measures to increase productivity in agriculture included a range of policies designed to widen the agricultural base and encourage the use of modern inputs (e.g., high-yielding varieties of seeds, chemical fertilizers, etc.), price supports, irrigation facilities, input subsidies, credit availability, extension services, and technological support. For example, for rubber smallholders, the government established the Rubber Industries Smallholders Development Authority (RISDA) which facilitated the adoption of high-yielding rubber trees and better production technology. In addition, the agricultural diversification drive was intensified through (i) the development of large tracts of undeveloped forest lands; and (ii) the establishment of the Agricultural Bank, the expansion of the activities Federal Agricultural Marketing Authority (FAMA), and (iii) the creation of the National Paddy and Rice Authority; and the Rubber Industry Replanting Board, the latter designed to further rejuvenate the rubber industry. The effect of these policies was particularly strong on rice production where both total output and yields rose sharply. More generally, the achievements of the pro-agriculture policies were to increase productivity in agricultural smallholdings both through the adoption of better techniques in existing crops and through diversification. An important example of this success was the development of the oil palm plantations and the palm oil industry; Malaysia is currently the world’s largest producer of palm oil.

Table D.

Malaysia: GDP by Sector of Origin, 1960–95

(Percent of GDP)

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Source: Malaysia Five Year Plans.
Table E.

Employment of Sector of Origin, 1965–95

(Percent of total employment)

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Source: Malaysia Five Year Plans.
Table F.

Composition of Exports, 1960–97

(Percent of the value of total exports)

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Source: Malaysia Five Year Plans.

Focus on human resource development, rural development, and targeted poverty reduction programs

11. In addition to overall economic growth and diversification, there have been several sector specific initiatives focused on human resource development, rural development, and targeted programs to alleviate hardcore poverty. Public expenditure in these sectors has been maintained at about 8–10 percent of GDP since the early 1980s, at the same time that significant fiscal consolidation has taken place.

12. Expenditures on health and education in Malaysia were aimed toward enhancing the quality of human capital and served to increase the degree of progressivity inherent in fiscal policy. As stated in the NEP, the strategy for eradicating poverty entailed “providing a wide range of free or subsidized social services designed to raise the living standards of the low income groups.” 10 In the mid-1980s, these services constituted nearly 10 percent of household income and the bottom quintile of the population received the largest share (about one-third) of total expenditure.

  • Education was an important focus of the early Malaysia plans. The first nine years of education (primary and lower secondary) are provided free of charge by the government. Participation rates for education at all levels have grown steadily (Table C). Furthermore, Malaysia’s spending on education, which has remained steady at 5–6 percent of GDP since the early 1980s is much higher than in its ASEAN neighbors (2 percent in Indonesia, 3 percent in Thailand and 2–3 percent in the Philippines). At the same time, because the demand for an educated workforce has remained buoyant, the return to education has not diminished with the expanded coverage of the education system. One area of relative weakness in the education system is in the provision of higher levels of education. While Malaysia’s primary and secondary school enrollment ratios are higher than its neighbors, it lags behind in tertiary enrollment rates, which stood at about 8½ percent in the early 1990s compared to the all Asia average of 10 percent. To fill this gap, there has been an increase in the role of the private sector in higher levels of education, specifically aimed at providing the labor necessary for the growing high-tech industry sector.

  • Education services have been relatively efficiently delivered. The bottom quintile of the population received a larger share of primary and secondary education expenditure, and the public subsidy is estimated to have improved the income share of this quintile by almost 1 percentage point. In sum, the available evidence suggests that Malaysia’s success in reducing poverty and income inequality can be attributed in part to education policies which provided the poor with the scope for income mobility through the acquisition of human capital.

  • Access to health services has also contributed to improving social indicators. Federal government public health expenditure as a percent of GDP has been steady at about 1½ percent of GDP over the past two decades and has typically been higher than Malaysia’s ASEAN neighbors. Moreover, it has been relatively well-targeted with an estimated quarter of total health expenditures reaching the poorest quintile of the population.

13. Rural development occupied a primary role in the government’s poverty eradication efforts. In particular, the government’s efforts were focused on the development of new land to enable smallholders to cultivate high-value crops. As such, it was recognized as the key to alleviating poverty and was accorded a central role since the New Economic Policy was launched.

  • The primary vehicle for new land development was the Federal Land Development Authority (FELDA) whose main objective was to settle farmers in new land thereby increasing their incomes and preventing overcrowding in existing farmland and confiscation of land from large private estates. For these purposes, land is first vested with FELDA for development. FELDA then prepares detailed land use plans, employs contract labor (many of whom would eventually be settled in these areas) to clear jungles, plant and maintain the crops for the first few seasons, and build villages and community centers, rural roads, clinics and schools. FELDA also provides occasional income supplements to compensate for income variations due to commodity price fluctuations. These efforts supplemented the above-mentioned measures to improve agriculture through land development, consolidation schemes to enable smallholders to cultivate high value crops, and a range of subsidies (including fertilizer, credit and price subsidies) to increase incomes within occupation groups, including paddy farmers, rubber smallholders and fishermen. A study by the World Bank in 1991 indicates that these rural development programs tend to be relatively well-targeted at the poor, but could prove increasingly cost-ineffective as they require development of more and more marginal land. 11

14. Since the late 1980s, the authorities have launched several anti hard-core poverty programs which provide targeted assistance to those households classified as the hard core poor. 12 The most important hardcore poverty alleviation programs include special assistance to malnourished children, textbooks and scholarships for students, health care for the elderly, priority access to land through the various land development programs, access to marketing and credit programs, low-cost housing assistance and training in cottage industry and handicrafts. In addition, Project Ikhtiar—launched in the late 1980s and modeled after the Grameen Bank experience in Bangladesh—provides small loans to very poor households to enable them to undertake productive activities. The project is run by a private trust but is partially funded by the Malaysian government’s hardcore poverty program. Project Ikhtiar has been especially successful with female borrowers and has gradually been expanded throughout the country.

D. Conclusions

15. The most dramatic declines in poverty in Malaysia took place between the mid-1970s and the mid-1980s, following the launching of the NEP. Available information suggests that the reduction in poverty can be attributed to rapid growth and employment and the emphasis on agriculture and rural development. As for other specific social expenditure programs, widespread access to publicly funded education over the NEP period appears to have contributed to reducing poverty and reducing income disparities.

II. Legal Framework for Bankruptcy and Insolvency13

A. Overview and Summary

16. Bankruptcy procedures in Malaysia are governed by the Bankruptcy Act, 1967 (applying to individuals and partnerships), the Companies Act, 1965 (for corporate entities), and the Banking and Financial Institutions Act (BAFIA), 1989 (providing specific rules for banking and financial institutions). These laws are interlinked and contain cross references to one another.

17. The legal framework governing bankruptcy and insolvency appears to be generally comprehensive, especially by regional standards, and has been largely modeled on the U. K. system. Notwithstanding the generally comprehensive overall framework, there are some areas for improvement, including the lack of a comprehensive framework for rehabilitation of troubled companies (although a number of options exist in practice); a bias in favor of creditors; relatively wide discretionary powers in providing assistance to troubled financial institutions; and overlapping powers over financial institutions between Bank Negara and the Minister of Finance.

18. The Companies Act and the BAFIA are of particular interest as corporate and financial entities will experience increasing difficulties in the period ahead as the impact of the economic slowdown intensifies. The provisions in these two pieces of legislation relating to bankruptcy and insolvency are set out below (Sections B and C). Finally, a more detailed description of areas for improvement is set out in Section D.

B. The Companies Act, 1965

19. The provisions of the Companies Act apply to all “companies” as defined in the Act, that is any entity incorporated pursuant to the Act or pursuant to any corresponding previous enactment. As such, the Companies Act applies to all corporate entities in Malaysia, including banks and finance companies insofar as its provisions are not derogated by those of the BAFIA.

Winding up provisions

Modes of winding up

20. A company may be wound up either by the Court (referred to as “compulsory winding up”) or voluntarily by resolution of its shareholders.

21. A winding up by the Court is initiated through a petition, which may be filed by a range of interested parties, including any creditor of the company. In addition, Bank Negara is given the locus standi to petition for the winding up of any bank, financial institution, or insurance company. The grounds on which a petition to wind up a company can be filed include failure of the company to pay its debts, defined to encompass situations where the debtor company fails to discharge a debt in excess of RM 500 within three weeks of a written demand from a creditor.

22. In contrast, the voluntary winding up of a company is initiated through a resolution of the shareholders. Within 7 and 10 days after passing the resolution, the company must, respectively, lodge a written copy of the resolution with the Registrar and give public notice of the resolution in a newspaper. After the voluntary winding up has commenced, the company must cease carrying on business (unless continuing its business would be beneficial to the winding up process) and appoint (after having called a meeting of its creditors) one or more liquidators to wind up its affairs and distribute its assets.

The liquidator

23. The winding up process centers on the liquidator, who essentially assumes control of the company concerned, disposes of its assets, and pays its debts. A liquidator is usually appointed, in the case of a compulsory winding up, at the time the Court orders the winding up and, in the case of a voluntary proceeding, at the time the shareholders’ resolution is passed. However, if it is desired to preserve the assets and activities of the company pending the final court order or shareholders’ 5 resolution for the dissolution of the company, a provisional liquidator may be appointed. The appointment of a provisional liquidator precludes the commencement or continuance of any legal proceedings against the company without special permission from the Court. In practice, provisional liquidators are usually appointed when a company has already become insolvent and there is a desire to keep its tangible assets intact for equitable distribution among creditors.

Repayment priorities and ranking of debts

24. The rules in the Companies Act relating to the rights of unsecured creditors, debts provable, and valuation of annuities applicable to corporations correspond closely to those in the Bankruptcy Act. The Companies Act in addition has special rules governing preferential debts, the most relevant of which are summarized below.

25. As a general rule, the winding up process does not affect any security held by a creditor of the company (such as a mortgage over property of the company). Unless restrained by a court order, secured creditors are not required to prove their debts and can realize their security in full satisfaction of their debts. If their security is insufficient for the full value of their debts, creditors may make unsecured claims for the balance.

26. An important aspect of Malaysia’s bankruptcy legislation relates to the right to set off mutual claims, which clearly favors creditors. Specifically, when a creditor (secured or unsecured) has mutual dealings with the debtor company and is also its debtor, the creditor must first set off the debt and claim only the balance, if any. This is of particular relevance for banking institutions, because the portion of the claim being paid through set-off will in fact be paid in full as the set-off amount is not subject to any reduction resulting from the bankruptcy proceedings. However, under case law, a bank’s right to set-off does not extend to funds credited to an insolvent company’s account after the commencement of liquidation proceedings as such funds will have been taken over by the liquidator. Another important aspect of the set off is that creditors having both preferential and nonpreferential claims must set off ratably between the two.

27. Creditors with floating charges 14 over the undertakings and assets of the insolvent company are normally given priority over unsecured creditors in regard to assets subject to those charges, except with regard to the specific classes of debt noted below.

28. With regard to the payment of unsecured debt, the Companies Act establishes a priority order among the various classes of unsecured debts, which applies to all types of winding up. Unsecured debts are to be paid in the following order:

  • The costs and expenses of winding up, including the liquidator’s remuneration. In addition, creditors whose claims were properly incurred during liquidation (including expenses related to carrying on the business) have priority over other unsecured creditors.

  • Wages and salaries (including wages paid in lieu of notice of termination).

  • Workmen’s compensation (in the event of liquidation, employees have a direct right of action against the insurers).

  • Vacation leave.

  • Superannuation and provident fund contributions.

  • Federal taxes.

Under this preferential repayment system, each class of debt is paid in full one-by-one in the order set out above. When it is not possible to pay a particular class of debts in full, the various creditors are paid pari passu. All other unsecured debts not noted above are paid pari passu between themselves.

29. The provisions relating to payment of unsecured debts have a number of other important features. In particular, when a third party makes a payment to an employee of a company on its behalf in respect of wages, salary, or vacation leave, the third party has the same right and priority in seeking repayment as the employee would have if the payment had not been made. Accordingly, if a bank had made a loan to a company for the purpose of paying wages or other types of salary, and the proceeds of the loan are used for that purpose, the bank would be entitled to recover its loan as a preferential debt to the same extent that the employees would have had they not been paid. In addition, while creditors holding floating claims over the undertakings and assets of a company securing a loan are entitled to all the assets of the company subject to such charges, there is an exception to this principle that allows wages, salaries, remuneration due as vacation leave, and superannuation and provident fund contributions to be paid out of assets subject to the floating charge in cases where the assets available to the general creditors are insufficient.

Voidance of certain transfers/transactions

30. The Companies Act provides for the recovery of assets transferred by the debtor company to the prejudices of creditors in the period immediately preceding bankruptcy, in line with contemporary international practice. For example, certain voluntary conveyances, transfers, and gifts made no later than two years prior to commencement of winding up proceedings are absolutely void. Similarly, certain transfers, charges, and payments made by an insolvent company in favor of some of its creditors in preference to other creditors are void if made within six months of presentation of the winding up petition or commencement of the winding up process. 15 Transactions will be voided if it can be demonstrated that an undue preference has been given to a specific creditor (over other creditors).

Arrangements and reconstructions

31. There are no comprehensive provisions in the Companies Act for the rehabilitation of troubled companies. However, a “compromise or arrangement” may be concluded between a company and its creditors. To validate such a plan, an application must first be made to the Court for an order to call a meeting of the affected creditor or class of creditors. For the compromise or arrangement to be validated, it must be approved by “a majority in number representing three-fourths in value of the creditors or class of creditors” present and voting at the meeting. Thereafter, the plan must be submitted to the Court for approval, which may be granted “subject to such alterations or conditions as it thinks fit”. Once approved, the agreement is binding on all creditors. Pending the approval of a compromise or arrangement, the Court may restrain any winding up proceedings against the company in question.

32. In addition, the provisions for the reconstruction of troubled companies are limited. In particular, there are no detailed provisions for the rehabilitation of troubled companies through judicial management, such as the appointment of independent managers to devise a comprehensive recovery plan and the automatic suspension of claims against a troubled company pending its rehabilitation.

Other provisions protecting creditors’ interests

Registration of charges

33. There are detailed rules and requirements for the registration of charges on a company’s assets. Registration is to be done within thirty days of the creation of the charge. Failure to register a charge within that time period will render it void as against a liquidator or any other creditor of the company. The charge registration requirement is intended to protect all persons who deal with potentially troubled companies, especially banking institutions with outstanding loans securitized by the company’s assets. As the charges registered against a company are generally public information, any potential creditor should be able to ascertain the true financial condition of a company before undertaking business with it.

Receivers and managers

34. The power of creditors to appoint a Receiver or manager over the property of a company is typically derived from a debenture. A debenture is usually an instrument issued to a creditor creating a charge over a company’s property in consideration for loans extended by the creditor. The Receiver’s role is limited, in that possession of the company’s property is entered into purely for the purpose of realizing the security of the appointing creditor in order to satisfy the creditor’s claims. Receivership as a resolution approach is therefore completely separate from the winding up process.

C. The Banking and Financial Institutions Act, 1989

35. The BAFIA establishes rules for the licensing and regulation of institutions carrying on banking, finance company, merchant banking, discount house, and money broking business.

Licensing of institutions

36. Any entity conducting banking, finance company, merchant banking, discount house, and money broking business must hold a valid license, which is granted by the Minister of Finance on the recommendation of Bank Negara Malaysia, and must be a public company (with the exception of the money broking business, which may only be conducted by a corporation).

Revocation

37. The Minister of Finance may, on the recommendation of Bank Negara, revoke a license if it appears that, inter alia, the interests of persons dealing with, or are about to deal with, the institution (i.e., depositors and creditors) are threatened in any way; a “composition or arrangement” with creditors has been made against the institution; a receiver or manager has been appointed; possession has been taken by, or on behalf of, any holder of a secured debenture, of any property of the institution; or the institution has insufficient assets to meet its liabilities.

38. In contrast, the Minister must revoke a license if a winding up order has been issued against an institution, or a resolution for its voluntary winding up has been adopted by its shareholders.

39. Any banking institution dissatisfied with a decision taken by the Minister to revoke its license may appeal to the High Court, which in turn may uphold the decision, overturn it, or impose restrictions on the license (see below).

Imposition of restrictions in lieu of revocation

40. In cases where revocation is not obligatory, the Minister (or the High Court, in cases of appeal) may impose restrictions on a license if the circumstances do not appear to warrant revocation. In such cases, the Minister, on the recommendation of Bank Negara, may impose: a limit on the duration of the license; specific conditions to protect the interests of the institution’s creditors, depositors, customers, or other persons dealing with the institution; or both a limit and specific conditions. Specific conditions that may be imposed include: requiring the institution to take certain actions or refrain from taking certain actions; restricting the scope of its business; limiting the acceptance of deposits, the extension of credit facilities, or making particular investments; prohibiting the solicitation of deposits or entering into particular types of transactions; or removing any director, controller, or manager. 16

Notification of intended action

41. The Minister is obligated to provide written notice of his intention to revoke an institution’s license or impose restrictions, specifying the nature of the proposed action and the grounds for the decision, and provide the institution the opportunity to respond in writing. No prior notice is required in cases where revocation is mandatory or the Minister considers, on the recommendation of Bank Negara, that revocation or the imposition of restrictions is urgently required.

Minimum capital funds requirement

42. A license may not be granted if the institution’s capital funds (i.e., its paid-up capital and reserves) unimpaired by losses or otherwise are below the legally prescribed minimum (which varies by type of institution).

Changing the status of licensed institutions

43. No agreement or arrangement for the purpose of changing control of a licensed institution; selling, disposing, or otherwise transferring the whole or part of the institution’s business; merging the institution with another; or reconstructing the institution can be entered into unless it is in writing and has been approved by the Minister.

Supervisory and control powers

Examination and investigation

44. Bank Negara is obligated to examine, from time to time, each licensed institution’s books, accounts, and transactions. The Minister has the power to direct Bank Negara to conduct an examination if the institution is suspected of carrying on its business in contravention of the BAFIA or the Central Bank Act 1958, or to the detriment of its depositors and creditors, or that the institution has insufficient assets to cover its liabilities.

Obligation to inform

45. Institutions are obligated to immediately inform Bank Negara that they are insolvent, or are about to suspend payment or otherwise become unable to meet any of their obligations.

Interventions by Bank Negara

46. When Bank Negara is so informed, and has determined that the institution in question is conducting its business in a manner detrimental to its depositors or creditors, etc., the Bank may, in writing and with prior concurrence of the Minister, take action against the institution, including prohibiting further extension of credit (or closure of particular credit facilities), and remove management and appoint replacements. In addition to, or in lieu of these actions, Bank Negara may recommend that the Minister, by order published in the Gazette, allow it to assume control of all or portions of the institution’s property, business, and affairs. Alternatively, Bank Negara can make application to the High Court to appoint a receiver or manager to do the same, or petition the High Court to initiate winding up proceedings. However, no order may be made unless the licensed institution has first been given the opportunity to make representation in respect to the proposed order.

Powers to reduce share capital

47. Whenever Bank Negara (or its designee) assumes control of a licensed institution and the paid-up capital of that institution is lost or unrepresented by available assets, it (or its designee) may petition to the High Court for an order to reduce the institution’s share capital by canceling any portion of its paid-up capital that is lost or unrepresented by available assets.

Lending powers

48. When Bank Negara considers that a licensed institution is likely to become unable to meet any or all of its obligations, or that it is about to suspend any payments, it may, with the concurrence of the Minister and after having consulted an Advisory Panel, 17 grant loans to that institution against the security of its own shares or any other shares, purchase the shares of the institution for the purpose of controlling it, or grant loans to another licensed institution for the purpose of purchasing shares, properties, or liabilities of the troubled institution.

Moratorium

49. The Minister may, on the recommendation of Bank Negara, issue orders (to be published in the Gazette) prohibiting an institution from carrying on all or part of its business or from performing any act or function connected with its business, authorizing the Bank to apply to the High Court for a stay of execution (to stop the commencement or the continuance of any actions and proceedings of a civil nature against the institution), suspending the institution’s license, or providing for any other matters of an incidental nature. Such orders may be modified, altered, or replaced from time to time provided the institution concerned has been given a reasonable time to make representations in respect of the proposed order.

Depositors receive priority

50. Whenever an institution becomes insolvent, its assets in Malaysia are to be made available to meet all liabilities in respect of deposits in Malaysia in priority over other liabilities of the institution.

Linkage to the Companies Act, 1965

51. To the extent that any licensed banking or financial institution is also a company as defined in the Companies Act 1965, any provisions of the Act are in addition to the provisions of the BAFIA and not in derogation thereof. In cases of conflict or inconsistency between the provisions of the two, those of the BAFIA prevail.

D. Areas for Improvement

Lack of a judicial framework for rehabilitation

52. A major limitation of Malaysia’s bankruptcy legislation is the lack of a comprehensive framework for the rehabilitation of troubled companies (similar to reorganization under Chapter 11 of the US Bankruptcy Code) to re-establish them as going concerns. Despite the lack of comprehensive legal provisions, several options exist in practice for the rehabilitation of troubled companies in Malaysia, including:

  • Financial workout, whereby a company and its creditors voluntarily work out an agreement to pay creditors and keep the concern afloat, where such an agreement is approved by the Court under the aegis of the Companies Act.

  • Corporate restructuring, whereby a company’s business is reorganized, including cutting out non-viable or non-core businesses, usually following a business or financial review, initiated either by the company itself or by its creditors. The latter would be based on a due diligence report focussing on the company’s future cash flow position.

  • Management restructuring, under which management reforms are implemented to improve the company’s business profitability and cash flow.

  • Executory arrangements such as receivership or liquidation. Creditors generally have the right to appoint receivers and managers to take control of the assets of troubled companies, especially when there are risks that the assets could be lost.

A major drawback of these practical options is that by the very nature of their informality they generally require consensus by all parties concerned, which could unduly slow the reorganization process, thus precluding the possibility of successful rehabilitation. The rehabilitation options by their informal nature could also result in a lack transparency. The main advantage of judicial management is that the courts can impose the rehabilitation plan, thus speeding up implementation of the rehabilitation process while providing full transparency.18

Bias in favor of creditors

53. Many features of the bankruptcy laws can be construed as “pro-creditor”, which could create aspects of moral hazard in that financial institutions may engage in high risk lending knowing that they will receive preferential access to the borrowers assets in the event of insolvency. These features include the mandatory use of set off between mutual claims arising between a debtor and a creditor (which in practice gives preference to the creditor to extent of the amount of the set off), the subrogation of rights of employees in cases of loans granted to a company to make wage payments, and the deferment of floating charges for repayment of specified unsecured debts in the event of insufficient assets to repay creditors.

Wide discretionary powers

54. The degree of discretion allowed in deciding whether and how to provide assistance to troubled financial institutions is extensive under the BAFIA, and also leads to some aspects of moral hazard given the expectation of full depositor protection. Moreover, such wide discretion with regard to taking remedial action creates risks that various institutions may not be treated equally, or that the regulatory authorities will be influenced or prevented from taking action for political or other reasons (e.g., favoritism).

Overlapping powers over financial institutions

55. On many issues that are critical to effective and independent banking supervision, such as licensing, deciding ownership, implementing lending limits, reorganizing institutions, and taking action against banks, the Minister of Finance plays a central role, in that Bank Negara’s actions must have the concurrence of the Minister, which in principle could result in tensions between the two. Further, Bank Negara and the Minister must petition the High Court for some measures before they can act to resolve troubled institutions, which might result in unwarranted delays in taking preemptive action in times of crisis.

Table 1.

Malaysia: Expenditure on Gross Domestic Product in 1978 Prices, 1993-97

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Source: Data provided by the Malaysian authorities.

Annual change as a percent of GDP.

Table 2.

Malaysia: Expenditure on Gross Domestic Product in Current Prices, 1993-97

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Source: Data provided by the Malaysian authorities.

Annual change as a percent of GDP.

Table 3.

Malaysia: Gross Domestic Product by Sector of Origin in 1978 Prices, 1993-97

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Source: Data provided by the Malaysian authorities.

Finance, insurance, real estate, and business services.

Community, social and personal services, private nonprofit services to households and domestic services of households, less imputed bank service changes and plus import duties.

Table 4.

Malaysia: Composition of Investment and Saving, 1993-97

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Source: Data provided by the Malaysian authorities.
Table 5.

Industrial Production Index, 1993-97

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Source: Data provided by the Malaysian authorities.
Table 6.

Malaysia: Total Proposed Capital Investment in Approved Manufacturing Projects, 1993-97 1/

(In millions of ringgit)

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Source: Data provided by the Malaysian authorities.

Includes equity and loans.

Table 7.

Malaysia: Ongoing and Planned Investment in Infrastructure-Main Projects

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Source: Data provided by the Malaysian authorities.

According to the authorities’ classification. Many private sector infrastructure projects are undertaken at the behest of the government and are financed by government-guaranteed loans.

Table 8.

Malaysia: Labor Market Developments, 1993-97

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Source: Data provided by the Malaysian authorities.

Finance, insurance, real estate, and business services.

Table 9.

Malaysia: Registered Unemployed by Occupation, 1993-97

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Source: Data provided by the Malaysian authorities.
Table 10.

Malaysia: Changes in Average Wage Rates, 1993-97 1/

(Percentage change)

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Source: Data provided by the Malaysian authorities.

For supervised personnel.

Table 11.

Malaysia: Average Domestic Prices and Taxes on Energy-Related Products, 1993-97

(Cents per liter; unless otherwise indicated)

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Source: Data provided by the Malaysian authorities.

Duties on kerosene and fuel oil were abolished on October 10,1994.

Prices of fuel oil and natural gas (liquefied) are not available.

Table 12.

Malaysia: Consumer Price Index, 1993-97

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Source: Data provided by the Malaysian authorities.
Table 13.

Malaysia: Producer Price Index, 199-97

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Source: Data provided by the Malaysian authorities.
Table 14.

Malaysia: Federal Government Revenue and Grants, 1994-98

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Source: Data provided by the Malaysian authorities.

Includes effects of tax measures contained in the 1997 and 1998 budgets.

Refers to budget plans announced in December 1997.

Consists of income taxes on cooperatives and other direct taxes.

Excludes expenditure refunds and net lending.

Excludes privatization receipts. From 1994 on, privatization receipts are not included by the authorities in revenues. They accrue to the off-budget government investment fund, Khazanah.

Table 15.

Malaysia: Economic Classification of Federal Government Expenditure and Net Lending, 1994-98

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Source: Data provided by the Malaysian authorities.

Refers to December 1997 budget plans. March revisions not yet available.

Includes expenditure refunds.

Includes defense expenditures shown in the development budget and some net lending shown in the current budget.

Excludes contributions to the sinking funds.

Consists of subsidies, indemnities, refunds and write-offs, transfers to statutory bodies, and other transfers.

Includes repayments of loans from revenue and loan funds, and revenue from sales of shares.

Table 16.

Malaysia: Functional Classification of Federal Government Expenditure and Net Lending, 1994-98

In millions of ringgit

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Source: Data provided by the Malaysian authorities.

Refers to December 1997 budget plans. March revisions not yet available.

Includes government pensions.

Includes general administration, regulations and research, mining, manufacturing and construction, and utilities.

Includes expenditure refunds and net lending items.

Table 17.

Malaysia: Federal Budgetary Developments, 1994-98

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Source: Data provided by the Malaysian authorities.

Refers to budget plans announced in December 1997.

Includes taxes on property.

Includes “other tax revenue.”

Includes capital revenue and foreign grants.

Includes adjustment for accounts payable.

Overall balance plus interest payments.

Table 18.

Malaysia: Federal Government Operations, 1994-98

In millions of ringgit

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Source: Data provided by the Malaysian authorities.

Refers to December 1997 budget plans. March revisions not yet available.

Excludes net lending shown in the current budget.

Includes reimbursements to state governments.

Net of claims and deposits from Pension Trust Fund (which are included in monetary survey figures).

Insurance companies are currently required to hold 25 percent of assets in government securities.

After 1994, all privatization receipts have been transferred to Khazanah, an off-budget government investment fund.

Table 19.

Malaysia: Operations of Statutory Bodies, 1994-98

(In millions of ringgit)

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Source: Data provided by the Malaysian authorities.

Refers to December 1997 budget plans. March revisions not yet available.

Table 20.

Malaysia: Operations of State Governments, 1994-98

(In millions of ringgit)

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Source: Data provided by the Malaysian authorities.

Refers to December 1997 budget plans. March revisions not yet available.

Table 21.

Malaysia: Operations of Local Governments, 1994-98

(In millions of ringgit)

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Source: Data provided by the Malaysian authorities.

Refers to December 1997 budget plans. March revisions not yet available.

Table 22.

Malaysia: General Government Operations, 1994-98 1/

(In millions of ringgit)

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Source: Data provided by the Malaysian authorities.

Includes federal, state, and local governments, and the statutory bodies.

Refers to December 1997 budget plans. March revisions not yet available.

Net of transfers.

Table 23.

Malaysia: Operations of Nonfinancial Public Enterprises (NFPEs), 1994-98 1/

(In millions of ringgit)

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Source: Data provided by the Malaysian authorities.

As a result of privatization, the number of enterprises declined from 44 in 1992 to 31 in 1996.

Refers to December 1997 budget plans. March revisions not yet available.

Privatization receipts from the sale of Petronas Dagan in 1993 and Petronas Gas in 1995.

Table 24.

Malaysia: Consolidated Public Sector, 1994-98 1/

(In millions of ringgit)

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Source: Data provided by the Malaysian authorities.

Consists of the federal, state and local governments, statutory bodies, and NFPEs.

Refers to December 1997 budget plans. March revisions not yet available.

Net of transfers.

Excludes capital revenue and foreign grants.

Table 25.

Malaysia: Outstanding Federal Government Debt, 1993-96

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Source: Data provided by the Malaysian authorities.

Consists of project loans and suppliers credit.

Table 26.

Malaysia: Operations of the Employees’ Provident Fund, 1993-97

(In millions of ringgit)

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Source: Data provided by the Malaysian authorities.
Table 27.

Malaysia: Monetary Authorities’ Account, 1993-97 1/

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Source: Data provided by the Malaysian authorities.

Bank Negara Malaysia accounts plus Treasury IMF operations. Data are reported according to the Fund monetary statistics framework. See footnote 1 to Table 31.

1997 figures exclude valuation gains on foreign currency reserves.

Non-monetary financial institutions (finance companies, merchant banks and discount houses).

Includes BNM deposits at banks and NFIs.

Contribution to reserve money growth.

Table 28.

Malaysia: Deposit Money Banks - Consolidated Statement of Assets and Liabilities of Commercial Banks and Bank Islam, 1993-97 1/

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Source: Data provided by the Malaysian authorities.

Data are reported according to the Fund monetary statistics framework. See footnote 1 to Table 31.

Valued at current exchange rates.

Non-monetary financial institutions (finance companies, merchant banks, and discount houses).

Includes deposits of non-residents, state and local governments, statutory bodies, and the Employees Provident Fund (EPF).

Table 29.

Malaysia: Monetary Survey, 1993-97 1/

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Source: Data provided by the Malaysian authorities.

Consolidation of the accounts of the monetary authorities, commercial banks and Bank Islam. Data are reported according to the Fund monetary statistics framework. See footnote 1 to Table 31.

1997 figures exclude valuation gains on official foreign currency reserves; financial institution net foreign assets valued at current exchange rates.

Includes deposits of non-residents, state and local governments, statutory bodies, and the Employees Provident Fund (EPF).

Quasi-money is equal to Bank Negara time deposits plus bank time and savings deposits plus bank repos.

Includes bank negotiable instruments of deposit (NIDs).

Contribution to M2 growth.

Table 30.

Malaysia: Nonmonetary Financial Institutions - Consolidated Statement of Assets and Liaibilities of Finanance Companies, Merchant Banks and Discount Houses, 1993-97 1/

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Source: Data provided by the Malaysian authorities.

Data are reported according to the Fund monetary statistics framawork. See footnote 1 to Table 31.

Valued at current exchange rates.

Includes deposits of non-residents, state and local governments, statutory bodies, and the Employees Provident Fund (EPF).

Table 31.

Malaysia: Banking Survey, 1993-97 1/

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Source: Data provided by the Malaysian authorities.

Consolidation of the accounts of the monetary authorities, commercial banks and Bank Islam, and NFIs (non-monetary financial institutions, comprising finance companies, merchant banks, and discount houses). Note that data are reported according to the Fund monetary statistics framework, although this framework is currently being revised for Malaysia in light of the new report forms submitted by financial institutions to Bank Negara.

1997 figures exclude valuation gains on official foreign currency reserves; financial institution net foreign assets valued at current exchange rates.

Includes deposits of non-residents, state and local governments, statutory bodies, and the Employees Provident Fund (EPF).

Nonmonetary financial institutions (finance companies, merchant banks, and discount houses).

Includes bank and NFI negotiable instruments of deposit (NIDs).

Contribution to M3 growth.

Table 32.

Malaysia: Money and Banking Indicators, 1993-97

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Source: Data provided by the Malaysian authorities.

Commercial banks.

Deposits include repurchase agreements and negotiable instruments of deposit; loans exclude housing loans sold to Cagamas.

The minimum RWCR is currently 8 percent for all institutions; before 1994, it was 8 percent for finance companies and domestic banks, and 10 percent for foreign banks. Compliance was mandatory by end-December 1992.

As a percent of total loans including housing loans sold to Cagamas. Figures reported are under the old system of classification, which counted loans as non-performing if payments were overdue for six months or more. As of January 1,1998, this period was shorted to three months; under the new classification, the 1997 Q4 figures would be 5.3 percent and 9.9 percent for commercial banks and finance companies, respectively.

As a percent of total loans including housing loans sold to Cagamas, less interest-in-suspense and specific provisions. The minimum required provision of 1 percent was increased to 1 1/2 percent as of January 1, 1998.

General plus specific provisions.

Table 33.

Malaysia: Direction of Financial Institution Lending, 1993-97

(In millions of ringgit; end of period)

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Source: Data provided by the Malaysian authorities.
Table 34.

Malaysia: Developments in Malaysian Exchanges, 1993-97

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Source: Data provided by the Malaysian authorities.

Value often largest equity issues divided by total market capitalization of respective Boards, times 100.

Table 35.

Malaysia: Funds Raised in the Capital Market, 1993-97

(In millions of ringgit)

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Source: Data provided by the Malaysian authorities.

Excludes funds raised by the exercise of Employee Share Options scheme, transferable subscription rights, warrants, and irredeemable convertible unsecured loan stocks.

Issues to Bumiputera investors and selected other investors.

Excludes bonds issued by the banking institutions.

Includes all straight bonds, bonds with warrants, convertible, and Islamic bonds.

Table 36.

Malaysia: Commodity Exports, 1993-97 1/

(In millions of U.S. dollars, unless otherwise indicated)

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Source: Data provided by the Malaysian authorities.

Customs data; volumes are expressed in 1988 prices and unit values are based on 1988 = 100.

Includes tin-in-concentrate.

Excludes export of processed palm oil and other oil products.

Crude and partly refined.

Table 37.

Malaysia: Manufactured Exports, 1993-97

(In millions of U.S. dollars)

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Source: Data provided by the Malaysian authorities.
Table 38.

Malaysia: Gross Imports, 1993-97 1/

(In millions of U.S. dollars)

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Source: Data provided by the Malaysian authorities.

Customs data.

Trade basis imports are c.i.f.; balance of payments basis imports are f.o.b.

Petroleum products are a component of “other imports” in both consumption and intermediate goods categories.

Table 39.

Malaysia: Oil and LNG Trade, 1993-97 1/

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Source: Data provided by the Malaysian authorities.

Figures are reported on a trade basis.

Table 40.

Malaysia: Investment Income, 1993-97

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Source: Data provided by the Malaysian authorities.
Table 41.

Malaysia: Services Account, 1993-97

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Source: Data provided by the Malaysian authorities.

Includes contract and professional charges, agency fees, commissions, rents, royalties, and salaries.

Table 42.

Malaysia: Balance of Payments, 1993-97

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Sources: Information provided by the Malaysian authorities and staff estimates.

Including errors and omissions.

Table 43.

Malaysia: International Reserves, 1993-97

(In millions of U.S. dollars)

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Source: Data provided by the Malaysian authorities.
Table 44.

Malaysia: Disbursed and Outstanding External Debt by Borrower, 1993-97

(In millions of U.S dollars)

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Source: Data provided by the Malaysian authorities.

Includes prepayments and refinancing.

Includes both loans guaranteed by the federal government and loans not guaranteed by the government.

Following privatization, debt owed by the Malaysia Airline System was shifted from NFPE debt to private sector debt in 1994.

Obligations of less than one-year maturity.

Includes other private sector.

Table 45.

Malaysia: External Debt Service by Borrower, 1993-97

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Source: Data provided by the Malaysian authorities.

Excludes prepayments and refinancing.

Excludes interest on short-term debt.

Table 46.

Malaysia: Interbank Swap Transactions, 1995-98 1/

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Sources: Data provided by the Malaysia authorities and Bank Negara Monthly Bulletin.

Representative three-month swap effected through foreign exchange brokers at the end of the month.

Average of commercial bank buying and selling rates at noon, end of period.

Ringgit per RM 10,000 over a three-month period; a positive number implies a forward premium and a negative number implies a forward discount on the US$ relative to the ringgit.

In millions of ringgit.

1

Prepared by Amrit Singh.

2

Mid-Term Review of the Second Malaysia Plan, 1971-75, 1973.

3

The Second Outline Perspective Plan, 1991-2000, 1991.

4

Some observers believe that income inequality may have worsened because of the rise in the premium on skilled labor and the fact that growing migrant labor could be depressing low-skill wages.

5

Source: Sudhir Anand, Inequality and Poverty in Malaysia, Oxford University Press (1983).

6

Recent World Bank (“Everyone’s Miracle? Revisiting Poverty and Inequality in East Asia” World Bank, 1997) calculations corroborate these trends. Based on a poverty line of $1 per day per capita at 1995 prices, these calculations show that, among the group of East Asian countries, Malaysia recorded the largest percentage reduction in poverty—95 percent over the period 1975–95. The headcount index declined from 17 percent to less than 1 percent over this period. In contrast, Thailand’s headcount index fell by 90 percent, Indonesia’s by 82 percent and China’s by 63 percent over the same period. These data are not strictly comparable to the official estimates cited above, because the authorities’ estimate of the poverty line is higher than that used by the World Bank.

7

Recent World Bank calculations (World Bank, 1997, op.cit.) indicate that Malaysia was the only East Asian country in which there was a pronounced decline in inequality.

8

Cross-country evidence indicates that economic growth is associated with declining poverty. See Deininger, K. and L. Squire: “A New Dataset Measuring Income Inequality,” World Bank Economic Review, Vol 10, No. 3, pp. 565–91 (1996).

9

To promote exports and investment in export-oriented activity, Malaysia set up several incentive schemes. Important amongst these were the Pioneer Status scheme (offering tariff and tax exemptions for 5–10 years), the Investment Tax Credit scheme which offered tax exemptions equivalent to the amount of investment incurred in the incentive period, and free trade zones.

10

Second Malaysia Plan, 1971–75

11

“Growth, Poverty Alleviation and Improved Income Distribution in Malaysia: Changing Focus of Government Policy Intervention,” World Bank, January 1991.

12

Those whose monthly household income is less than half the official poverty line (RM 212 per month in 1995 prices).

13

Prepared by Pascale De Boeck, Legal Department.

14

A general and continuing charge or lien against all assets, as opposed to specific assets, of a company. This type of securitization is common in bank lending to companies which have continuously changing asset base (i.e., inventories in stock).

15

To the extent set off is allowed where there have been mutual dealings, preferential payments (through set off) to banks over other creditors may be retained, although such payments would otherwise have been voided had they been made directly outside of a set-off situation.

16

The Minister may at any time, on the recommendation of Bank Negara, impose new conditions or revoke any previously imposed conditions. Failure to comply with any conditions imposed by the Minister are grounds for revocation of the institution’s license.

17

As established in the Central Bank of Malaysia Act, 1958.

18

While Chapter 11 in the United States is not without its limitations—namely, reorganization under it can be contentious, excessively costly, and also very slow—inclusion of a formal frame work for rehabilitation through judicial management would nevertheless be desirable for Malaysia and enhance transparency.

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Cover IMF Staff Country Reports
Malaysia: Selected Issues
Author:
International Monetary Fund
Volume/Issue:
Volume 1998: Issue 114
Publisher:
International Monetary Fund
ISBN:
9781451828290
ISSN:
1934-7685
Pages:
68
DOI:
https://doi.org/10.5089/9781451828290.002