This chapter was prepared by Michael K. Moore (ext. 38631) who is available to answer questions.
Malaysia has one pure Islamic bank—Bank Islam (assets RM 5.7 billion)—and financial institutions are able to offer Islamic bank products of interest-free leasing, hire purchase, profit-sharing, and joint-venture financing. At end-1998, Islamic banking represented less than 4 percent of the banking system assets.
Foreign banks also have minority interests in 12 other domestically owned banks.
These included MBf Finance (assets RM 16.9 billion) and the smaller Kewangan Bersatu (assets RM 2.3 billion).
Eligibility criteria consider an individual institution’s systemic importance and the authorities’ goal to achieve further consolidation and rationalization of the banking system. Danamodal will recapitalize MBf Finance, Arab-Malaysian Finance (assets RM 16.5 billion) and United Merchant Finance (assets RM 7 billion), as each alone has a size that represents a significant share of the finance company segment.
The high NPL ratio is not unique in Malaysia’s recent history. NPLs grew dramatically as a result of the recession in the mid-1980s, with NPLs reaching as high as 30 percent of loans in 1988, before declining to below 4 percent in 1997.
By regulation, collateral securing an NPL must be valued annually by an independent appraiser. In addition, Danaharta will value collateral for individual loans over RM 5 million as part of its negotiations to acquire NPLs. Malaysia’s legal environment is stable and provides good protection to secured lenders.
For example, the level of NPLs at MBf Finance and Arab-Finance alone account for 44 percent of the aggregate level of NPLs among finance companies.
The exchange rate depreciated from RM 2.5 per U.S. dollar in June 1997 to RM 4.4 per U.S. dollar in January 1998.
Total bad-debt provision is the aggregate of provisions for general, specific, and interest-in-suspense.
Replacing the guarantee with a deposit insurance system funded by the industry will be considered in the context of a study on deposit insurance.
Certain regulatory approvals will be required for certain asset purchases, e.g., the purchase of a stock-brokering company requires the approval of the Securities Commission.
The special management arrangement stems from the government-assisted merger of Sime and Bumiputra with stronger banks, RHB and Bank of Commerce, respectively. BNM will retain ownership of the NPLs that are to be managed by Danaharta. At year-end 1998, Danaharta was managing RM 11.6 billion in NPLs on behalf of Sime. Arrangements for Bumiputra have not been finalized.
Salomon Smith Barney is also working closely with Danamodal to complete a blueprint for the banking system. The blueprint helps to guide Danamodal in determining which institutions to assist and under what terms.
Funding comprised of RM 8 billion in zero-coupon bonds and RM 3 billion in capital provided by BNM.
Four institutions will receive official support outside of the Danamodal process. Bank Bumiputra and Bank of Commerce will be merged with government assistance, Perwira Affin is to be merged with BSN Commercial and will not receive separate recapitalization, and Utama Merchant will be recapitalized by its existing shareholders. Bumiputra and Perwira Affin have substantial government ownership.
Under the current framework, foreigners can buy up to 30 percent of the equity of an individual banking institution.
The 13 foreign banks operating in Malaysia are ABN Amro Bank, Bangkok Bank, Bank of America, Bank of Nova Scotia, Bank of Tokyo-Mitsubishi, Chase Manhattan Bank, Citibank, Deutsche Bank, Hongkong and Shanghai Banking Corporation, Overseas Chinese Banking Corporation, Overseas Union Bank, Standard Chartered Bank, and United Overseas Bank.
More details are provided in Chapter IV: “Issues in Corporate Sector Restructuring.”
CAMEL is a rating methodology used by many supervisors to evaluate a bank’s condition along five key measures: Capital adequacy, Asset quality, Management, Earnings, and Liquidity.
Of the 78 banking institutions, 21 have retained the three-month NPL classification criteria, and they account for 46 percent of the total system loans.
Annual examinations were already required for financial institutions on BNM’s watch list.