Malaysian financial institutions need to be prepared to deal with multiple regulators as they regionalise, say experts

The Malaysian financial services sector could see greater regional and international participation by local banks as the country sets its sights on strengthening its future as a high-growth, high-income economy. Regionalisation and internationalisation would require Malaysian financial institutions to deal with multiple regulators and to take into account the diversity in regulatory policies in other jurisdictions, industry experts told Thomson Reuters.

Regional and international participation

In the recently released 10-year Financial Sector Blueprint 2011-2020, the Bank Negara Malaysia (BNM) has highlighted as a theme greater regional and international participation of Malaysian financial institutions. Regional participation would include facilitating cross-border financial transactions, financial integration, regional trade and investment, as well as the internationalisation of Islamic finance. Experts said the regional theme was very much a response to a number of developments in the Southeast Asian region, particularly the various regional initiatives promoted by the Asean Capital Markets Forum (ACMF).

Munir Abdul Aziz, partner at Wong & Partners in Kuala Lumpur, a member firm of Baker & McKenzie International, noted a number of reforms in the Financial Sector Blueprint that would support and strengthen regional integration, as well as efforts that seek to promote the use of more cost-efficient channels to facilitate cross-border trades. He said the Financial Sector Blueprint had included the express intent for Malaysian financial institutions to be more entrenched in the facilitation of cross-border transactions.

"It appears to me that the central bank is encouraging Malaysian financial institutions to go beyond the Malaysian market, to have a broader base of clients and assets, and not just be lending to Malaysian clients. We already have a number of key banks such as CIMB and Maybank which are regional players. Other banks should follow in the footsteps of these regional players and become more integrated in the regional economy," he told Thomson Reuters.

Soo Hoo Khoon Yean, financial services partner at PwC in Kuala Lumpur, pointed out that Malaysian financial institutions venturing overseas would need to be prepared to deal with multiple regulators and the diversity in regulatory policies.

"The regulations in every country are always peppered with national interests. It is very important for our banks to realise that when they venture overseas, they are not dealing with their home regulator alone; they will also be dealing with regulators in other countries and they will need to consider their national interests in those countries. It is important that Malaysian banks engage positively with other regulators, which may differ from one to another. There will be great diversity in regulatory policies that Malaysian banks will be expected to meet," he said.

Foreign participation

But it is not just regional and international participation by Malaysian financial institutions that the Bank Negara Malaysia is trying to encourage. Experts pointed out that the central bank has also encouraged greater foreign participation in the Malaysian financial services sector. There have been efforts since 2009 to encourage foreign equity participation in Malaysia's financial services sector, and it has been liberalised in a number of areas, namely investment banking, the insurance and takaful sectors, as well as Islamic finance. Foreign investments in Malaysian commercial banks, however, remain restricted.

Munir said although the blueprint did not set out a prescriptive approach in terms of foreign ownership in Malaysian commercial banks, the central bank might consider granting foreign ownership or new licences on a case-by-case basis. Such an approach, he said, would reflect the central bank's objective of allowing foreign ownership so that foreign investors could bring expertise and new products to the Malaysian financial sector.

"The central bank will take into account the greater interests of the Malaysian economy. At the same time it will be protective of the local banks and the interests of Malaysian consumers. That is why it emphasised expertise and products in the Financial Sector Blueprint. But equity participation in commercial banks will likely remain at 30 percent unless exemptions are granted on a case by case basis," he said.

Liberalisation of foreign exchange rules

The Financial Sector Blueprint has also proposed further liberalisation of foreign exchange rules with the intent of further promoting greater regional and international integration. Munir said such measures would allow corporations to manage their foreign currency exposure for their overseas operations more effectively. He also noted that the relaxation of foreign exchange rules would also allow institutional and retail investors to trade in foreign currencies.

Munir said implementing measures in the form of new legislation, statutory amendments and central bank guidelines were expected to follow the release of the Financial Sector Blueprint. "The Financial Sector Blueprint represents continuity of policy formulation and evolution by Malaysia's financial services sector regulators," he said.

While the Financial Sector Blueprint has sought to strengthen and promote growth of Malaysia's financial services sector, Soo Hoo noted that consideration has also been given to accountability. "The message is very clear; the central bank is keen to encourage growth and innovations, but it also centres on the need to be safe, to have good governance structure and sophisticated risk management infrastructure. If you look at the blueprint, it has been peppered with all these. Regulators are not about generating profit. They have to consider national interests too; it has to manage growth while making sure that it does not get out of hand such that it becomes systemic risk," he said.

 

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