Finance in Asia After GFC: Malaysia

Mah-Hui LIM

Workshop on Financial Evolution, Regulatory Reform and Cooperation

in Asia May 17-18, 2013

Seoul National University1

Domestic Financial Liberalization Measures

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Credit controls and allocation Interest rate deregulation Entry Barriers –domestic & foreign Govt regulation & ownership Competition in finance Ease of financial innovation Diversification of financial services

Exeternal Financial Liberalization Measures Free entry of foreign fin services Liberalization of capital flows Wider & deeper integration to

regional and international financial markets

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Brief History of Financial Libzn in malaysia Prior to 1985 banks regulated but

finance companies lax. 1985 fin crisis & recession > bailout and closing of finance cos

1990s -1997 – robust recovery & surge in capital inflows >AFC

Again bail out, restructure, recapitalization & consolidation

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Consolidation in Financial Industry 54 banks & fin cos merged into 9

banking groups 1986 –2011:

Tot no. banks from 38 > 24 Domestic banks 22 > 8 Foreign banks remain at 16 Insurance cos fr 63 > 36

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Number of Financial Institutions in Malaysia

Source:Bank Negara, MSR, Mar20136

Financial Sector Master Plan 2001-2010Financial Sector Blueprint 2011-2020 Objectives: Create more open, competitive,

diversified, liberalized, efficient financial system

Develop and deepen capital markets – bond, stock markets

1997-2010: Bond mkts doubled to 96% of GDP while banking assets declined fr 289% to 230%

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Financial Structure in Malaysia

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Percent of GDP 1997 2000 2010 2020 FBanking Assets 289 220 229 300Debt Securities Market 47 68 96 NAStock Market Cap 133 125 160 NATotal Financial Assets 469 413 485 600GDP RM billion 282 356 795 NA

Financial Sector Growth Sukuk (Islamic bonds) now 55% of debt

securities market 2010 – cap mkts 46% of tot financing 2020 – target 52% Fin sector major driver – since 2001

grew at av 7.3% p.a. faster than GDP growth. Expected to grow btw 8-11%pa with total fin assets to reach 600% of GDP in 2020

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Internationalization of Financial Sector Reduce entry barriers to finance and

create level playing field for foreign and domestic fin players

Malaysian banks to expand overseas Deeper and wider integration with

regional & int’l financial markets

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Greater presence of foreign banks Number of Islamic banks foreign owned

rose fr 0 to 12 btw 1986-2011 2009 – up to 2 new Islamic bank and 2

new commercial bank licenses offered to foreign institutions and 3 new licenses offered in 2011

Equity participation of foreign interest raised to 70% for joint ventures

Greater operational flexibility given11

Internationalization of banks Foreign banks account for 25% of total

bank assets and deposits Foreign ownership of Msian

government bonds reached 28% in 2012 (20% Indonesia; 7% Thailand)

Msian banks overseas expansion 2002-2010. Overseas assets rose 73x fr RM3bn to RM240bn; pretax income fr -4.3% to 13.6%

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Other Internationalization Efforts Expand use of local & regional currency

payments, integrating settlement systems, common stds for cross border payments, harmonization of regulatory & supervisory, prudential stds

Regional coopn to share info, surveillance, crisis prevention, liquidity crisis mgt, reg supervisory colleges & network

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Capital Account Controls -1998 Ringgit pegged to US$ 1= 3.8 Offshore ringgit account and trading

banned Moratorium on repatriation of proceeds fr

sale of securities All off-shore ringgit repatriated home Foreign currency borrowing by residents

ltd to RM5mm equivalent Rgt borrowing by NRs limited

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Post 1998 – gradual liberalization of capital account 1999 10% exit levy to replace

moratorium, this levy abolished in May 2000

Since then no controls on capital inflows and capital outflow

Controls still on borrowing of ringgit by non residents & borrowing of foreign currency (FXC) by residents

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Transactions Involving Non-Residents (NRs) Ringgit Borrowing by NRs

In 2000-intraday credit to NR stockbrokers increased to RM200m and limit abolished in 2007

2001-NR companies cd borrow up to RM5m for use in real sector in Msia

2007- increased to RM10m By 2008 can borrow ANY amt for use in

real sector WITHIN Msia

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Ringgit borrowings by NRs 2010- allowed international trade to be

settled in ringgit on shore. Also banks can lend ANY amount of ringgit to NRs for trade financing

But NRs still not allowed to borrow ringgit for financial speculation

2004 NR cos can issue ringgit bonds for ANY amt for onshore use or subject to outward invst rules if used offshore

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Foreign Currency Borrowings by Residents -control currency mismatch Msia less affected during AFC because of limit

to FXC borrowing of up to RM5 mm equivalent before AFC

2005 – this limit raised to RM50mm for resident group of cos & RM10mm for individuals

2007 – limit raised to RM100m fr banks equivalent for cos. Still applies today

2010- no limit if resident cos borrow FXC fr parent or related cos that are non resident and non-bank.

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FXC borrowing by Residents If residents have own FXC, no limit on

outward direct investments If residents have domestic currency

borrowing then can only borrow up to RM50m equivalent in FXC

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Residents ODI (Outward Direct Investments) 1998- residents who invest overseas in

excess RM10,000 equivalent required BN approval

In 2007, residents outward invst of own money in excess of RM50mm equivalent abolished

Residents can even borrow to invst in FXC up to RM100mm in FXC and RM50mm in ringgit equivalent

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Outward Direct Invsts exceed Foreign Direct Invsts > 2007

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Internationalization of Ringgit Ringgit is partially internationalized – can

use ringgit for international trade (exporter can receive ringgit onshore)

But access to ringgit is still limited No offshore ringgit trading No offshore ringgit account Non-resident banks no access to Rgt Travellers limited to take out or bring in

up to RM30,00022

Conclusions Financial sector and capital account

become more liberal after the AFC and this process is proceeding

But restrictions apply to the accessibility of ringgit although it is now used for international trade settlement

Emphasise principles & risks based regulations & dependence on prudential measures

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