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Finance in Asia After GFC: Malaysia

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 University. Domestic Financial Liberalization Measures. Credit controls and allocation Interest rate deregulation

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Finance in Asia After GFC: Malaysia

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  1. 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 University

  2. Domestic Financial Liberalization Measures • 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

  3. Exeternal Financial Liberalization Measures • Free entry of foreign fin services • Liberalization of capital flows • Wider & deeper integration to regional and international financial markets

  4. 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

  5. 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

  6. Number of Financial Institutions in Malaysia • Source:Bank Negara, MSR, Mar2013

  7. 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%

  8. Financial Structure in Malaysia

  9. 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

  10. 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

  11. 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 given

  12. 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%

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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.

  19. 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

  20. 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

  21. Outward Direct Invsts exceed Foreign Direct Invsts > 2007

  22. 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 RM30,000

  23. 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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