Asiamoney.com: Malaysia finally picks its mega-bank

Asiamoney.com, October 27 2010

Dr Zeti Akhtar Aziz, governor of Bank Negara Malaysia, told Asiamoney today that the first of two long-awaited Islamic megabank licences is expected to be granted to a foreign bank by the end of the year – but, at this stage, only two credible applicants are in the frame and one of them is not yet close enough to the exacting conditions Bank Negara requires to be licensed.

The two megabank licences were the most eye-catching element of a raft of bank liberalization measures announced by Bank Negara and the Malaysian government in April 2009. They included a new foreign equity ownership ceiling of 70% for Islamic banks; new family takaful (the Islamic equivalent of insurance) licences for foreigners; and some limited new licences on the conventional side – but as has been the pattern for some years in Malaysia, all the best breaks and most generous deals for foreigners came in Islamic finance.

From the outset, the idea of the megabank licences seemed to be asking a lot. Bank Negara required that the institution have a minimum of US$1 billion of paid-up capital – the new takaful operators were given a minimum one tenth of the size – along with other requirements in terms of the strength of the management team they would bring in to Malaysia and the scope of their business plans.

Zeti admits: “They are very demanding conditions. It [the licence offer] did draw interest, but of course it is very challenging given the requirements we placed them under. Not only the capital requirements but the team they would bring in, their proposed business plans, and so on.” The reasoning was that Malaysia already has plenty of decent institutions doing retail business, but what it lacked was international business, and that only institutions of sufficient scale, with such a major financial commitment, could be counted on to develop that. Zeti calls it: “The final piece of our jigsaw.”

For a while there was a fear that nobody was going to make the grade. All the biggest Islamic financial institutions are already in Malaysia in one form or another: HSBC, Citi and Standard Chartered are present in various licensed forms; and the biggest Islamic players in the Gulf, Kuwait Finance House and Al Rajhi, came in with almost complete freedom to do what they wanted in Islamic finance in a previous round of liberalization. On top of that, other Middle East candidates like Saudi Arabia’s National Commercial Bank and Egypt’s EFG Hermes were hit by the fact that the financial crisis hurt the Middle East much later than the rest of the world (and it’s still hurting now). The first deadline for licence applications came up on October 31 last year, and although firm bids were lodged, it has taken a long time – a year, almost to the day – to get to any firm expression of when one might be awarded.

Today, Zeti said two realistic candidates had been identified – not a huge field to choose from given there are two licences available – and that “They are making preparations to meet, in concrete terms, what they have proposed in their submissions to us. It is very likely that this year we will announce the issuance of the first licence.” The other, though, appears too far from meeting Bank Negara’s onerous requirements to expect to be licensed before 2011. She describes the two as having “conditional licences”, and “upon meeting the requirements they will be issued the full licence.”

“They will do some retail, but the focus is on international business,” Zeti says. “This is the objective of our liberalization, to enhance our linkages around the world – not only from Asia to the Middle East and Africa, but also to Europe, which has shown great interest in participating in the Islamic financial system, and also the US.” This remark may suggest that it is multinationals, rather than Middle Eastern institutions, that are in the frame. It is also possible that a bank that is already there – such as HSBC and Standard Chartered – would choose to upgrade itself to “megabank” status, or that it would be a wholly new bank set up by a group of backing shareholders. There has been some discussion of Japanese interest too: Nomura has made Malaysia the global hub for its Islamic asset management business, while there are growing signs of Islamic finance gathering momentum in Japan itself. In short, the rumour mill in Malaysia is taking a rather scattershot approach at the moment.

When they come, the megabanks will represent the latest strategy to attract international capital into Malaysia, as a way of building from the already highly sophisticated domestic industry the country has built. The Malaysia International Islamic Financial Centre, a key part of this initiative, has so far licensed seven foreign fund management groups to set up Islamic asset management subsidiaries, and has provided seed capital to many of them through the Employee Provident Fund, Malaysia’s main pension fund and institutional investor. While it has attracted big names, it has yet to demonstrate that it is also attracting foreign money into the country, rather than forming a conduit for it to leave.

For her part, Zeti appears considerably more excited about a new forthcoming global initiative than the new megabanks. She has been at the heart of development of the International Islamic Liquidity Management system (ILLM), probably the single most constructive Islamic initiative to have come out of the financial crisis. This creates a new body to issue short term paper and provide liquidity to the Islamic financial system when it needs it, with central banks and regulators as the shareholders who can then nominate primary dealers to distribute the securities where needed.

Zeti clearly has no doubts it is going to be a success: “These instruments will be so highly liquid and attractive that we don’t want a pension fund in California to buy up the whole issuance, because we want it to be dispersed around the world,” she says. “They can buy it through the secondary market.” Considering the central banks are still only at the stage of offering a contract to a potential CEO, and the market will not start until next year (the first tranches will be in dollars and euros) , that optimism may be jumping the gun. But if it works, it’s likely to be a more important achievement for global Islamic finance than two heavily capitalized new foreign banks.