Malaysia Retools Finance

Zeti Akhtar Aziz, Malaysia' s central bank governor, outlines plans to ease restrictions on foreign involvement in the country' s financial sector.

KUALA LUMPUR -- Malaysia unveiled a liberalization of its financial sector, promising to issue new licenses for up to nine financial institutions by 2011 and allowing higher foreign-equity participation in select sectors.

The move underscored Prime Minister Najib Abdul Razak's intent to attract foreign investment and diversify sources of growth, though it fell short of scrapping restrictions on foreign shareholdings in Malaysian banks.

Malaysia will grant up to two new licenses to conventional banks this year, the first time in more than a decade that licenses are being offered to foreign operators. The country also will grant two licenses to foreign investors to operate Islamic banks; two for new takaful, or Islamic insurance, operations; and three additional conventional bank licenses in 2011, Mr. Najib said at a news conference.

Prime Minister Najib, who took office this month and also is the finance minister, said the licenses will be issued to "world-class banks" that offer a "significant value proposition" to Malaysia.

Additionally, the cap on foreign-equity shareholdings in local Islamic banks, investment banks, conventional insurance and takaful operators will be raised to 70% from 49% now, he said. But the 30% foreign-equity shareholding cap for conventional banks will be retained, he added. Current rules also prohibit a single foreign investor from holding more than a 20% stake in a local bank.

Mr. Najib said the new Islamic banks must have a minimum of $1 billion in paid-up capital.

The liberalization measures, to be implemented between this year and 2012, are in line with plans to "promote structural change within the economy," he said. The government last week said foreign investors putting money in some segments of the services sector will no longer need to partner with ethnic-Malays, scrapping a decades-old requirement.

Analysts said the latest measures indicate that the authorities see domestic banks as ready to compete with international players.

"The award of new licenses should bring about competition and promote expertise on the domestic sector, which is healthy," said Lim Sue Lin, a banking analyst with Hwang-DBS Vickers Research.

TA Securities banking analyst Wong Li Hsia said the liberalization wouldn't have an immediate impact on local banks, but could create "a more competitive" environment in the years to come.

"It will be more challenging but good for the local finance sector, as it requires banks to become even more efficient," she said.

Some foreign competitors who had been hoping to raise their stakes in local financial institutions could be "a little disappointed" after the decision to retain the cap on foreign shareholdings in conventional banks, Ms. Wong said.

Central Bank Gov. Zeti Akhtar Aziz said the nine new licensees will be exempted from the foreign-equity rules, which means they are allowed to be 100% foreign-owned.

Ms. Zeti also said foreign-owned conventional banks operating in Malaysia will each be allowed to open up to four new branches by the end of 2010.

"A higher foreign-equity limit beyond 70% for insurance companies will be considered on a case-by-case basis for players who can facilitate consolidation and rationalization of the insurance industry," she said.