The face of Malaysia's banking sector is set to change next year, with a number of new overseas banks in line to receive licences to enter the market, a move that is expected to increase competition and stimulate domestic lenders to improve services.
Malaysia has not issued any new licences to foreign operators since 2000, though the 13 locally incorporated conventional foreign banks and three foreign Islamic banking institutions operating in Malaysia hold more than 25% of the domestic banking market.
Both the number of foreign operators and market share will be affected by the major overhaul of the financial sector unveiled by Prime Minister Datuk Seri Najib Razak in late April. It includes plans to issue seven new banking licences, two of them for Islamic banks, and an easing of foreign ownership rules by raising the limits of equity ownership from 49% to 70%.
The new licences are part of a wider series of reforms by the government aimed at improving Malaysia's links with international economies, promoting greater regional integration, and providing greater access to consumers to a wider range of financial products and services.
The country's central bank, Bank Negara Malaysia (BNM), will grant six new licences in the first half of 2010, with two going to commercial banks, two for Islamic banks and another two for takaful or Islamic insurance service providers.
Though applications for the licences do not close until the end of the year, BNM's governor, Tan Sri Dr Zeti Akhtar Aziz, said that interest was already high.
"We are still receiving applications and evaluating them," she said on November 14. "The evaluation process will take a few months, with the results announced in the first half of next year. The numbers have been healthy."
While it will not be until the new year that the identities of the newcomers are known, one new entrant to the market has already been named. The Industrial and Commercial Bank of China (ICBC), China's largest bank, was granted a banking licence by BNM, and is planning to establish a subsidiary in Malaysia in 2010.
In a statement issued to announce the decision by BNM on November 20, ICBC officials said that the subsidiary would work to integrate itself into the local financial market and play an active role in servicing bilateral economic exchanges and trade.
"The move would also boost Malaysia's economic development through leveraging ICBC group's extensive customer base, capital strength, network and state-of-the-art technology," the statement said.
However BNM made it clear that the Chinese bank's entry into the market is not a part of the measures announced by Najib in April. BNM governor Zeti said the licence was granted as a result of a bilateral arrangement between the central bank and the China Banking Regulatory Commission earlier this year, and was one of a limited number of licences that Malaysia may occasionally issue under such arrangements.
"It is separate from the new commercial banking licences that will be issued under the liberalisation initiative," said Zeti.
The criteria applied for such a bilateral arrangement include the level of trade and investment linkages, the extent of existing participation of the country in the Malaysian financial sector and the value addition it would contribute to the overall development of the Malaysian financial system and the economy, she said.
While the government's efforts to further open up the banking sector to foreign players will increase competition in the local market, most analysts believe Malaysian lenders were strong enough to cope with any influx of rivals.
According to Promod Dass, the head of financial institution ratings at RAM Rating Services, Malaysia's domestic banking sector had good fundamentals and was well-prepared for liberalisation thanks to its strong capitalisation levels and profitability, he told a press conference on November 5.
"The local banks are in a good position to handle the liberalisation and the products niche, and are almost on par with the global banks," he said. "They have moved ahead to expand regionally and the Islamic banking system will be another advantage."
With Malaysian officials flagging further reforms for the financial sector, the deputy finance minister, Datuk Dr Awang Adek Hussin, said on November 10 that the present measures were by no means the end of the process. Indeed, as the market opens up, Malaysia stands to benefit from the advantages that foreign companies can bring, including new capital, technology transfer and increased competition.
