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OCTOBER 25, 2004
Malaysia Rolls Out The Red Carpet Foreign banks, once shunned, now are wooed as catalysts for change Malaysia has never aspired to be the freewheeling financial hub that Hong Kong and Singapore have become in Asia. For nearly 30 years, the country has been closed to all but a handful of foreign banks -- and they were mostly outfits like HSBC Bank Holdings PLC (HBC ) and Standard Chartered Bank that had been there since colonial times. During the Asian financial crisis of 1997-98, foreign banks pared back operations even more. But there is a new government in Kuala Lumpur, and its leaders are now extending the same warm welcome to bankers that they have long offered to foreign manufacturers. The idea is to use the international financiers to spur reforms in the local banking industry that will make it more competitive, in anticipation of a complete opening of the sector to outsiders by 2008 in line with World Trade Organization rules. Global banks are responding eagerly, hoping to tap a booming retail banking market. "It's an exciting time to be a foreign banker in Malaysia," says Zarir Cama, CEO of HSBC Bank Malaysia. In an early sign of the new attitude, Prime Minister Abdullah Badawi's government in May issued three new foreign licenses to Islamic banks -- one of which went to a leading lender in the Muslim world, Kuwait Finance House. That move fast-tracked a Financial Sector Masterplan for reform, which was first announced by Bank Negara Malaysia, the central bank, in February, 2001. The first stage of the plan will allow existing foreign banks to build up their branch network starting in 2007, before the market is opened to other foreigners the following year. HITTING THE MALL That's a big change from the days when Kuala Lumpur viewed most foreign banks with suspicion. Starting in the 1970s, the government imposed regulations to give an edge to local lenders. Foreign banks' share of the market fell steeply, hitting a low of 18% in 1998. To grow, foreign banks had to innovate by leveraging their global expertise and marketing clout. Citibank Malaysia, for example, pushed into phone and Internet banking. It even made efforts to sign up new customers by canvassing shopping malls. Although it has just three branches, Citi is now the sixth-largest bank in Malaysia by assets, and fifth-largest by profits. It is also a major player in credit cards -- where it enjoys a 25% market share. "Because we didn't have the branches, we were forced to move into alternative distribution channels," says Citibank Malaysia CEO Piyush Gupta. Like the rest of Asia, Malaysia has in recent years seen a rapid expansion in retail banking. Citi has nearly tripled its Malaysian loan book since the financial crisis, and HSBC and Standard Chartered have more than doubled theirs. The bulk of these are loans to cash-hungry individuals. "The key really has been growth in consumer lending," says HSBC's Cama. Some top Malaysian banks have been slow to react, while others have become more customer-driven. Local banks now offer sophisticated wealth-management products and meet with clients in sleekly designed branch offices. "The gap between foreign and local players is narrowing," says Tan Boon Hien, a partner at IBM Business Consulting Services in Kuala Lumpur. But to really compete the locals will have to consolidate. Observers say only three or four of the 10 big Malaysian banks are likely to survive once the market is fully deregulated in four years. The rest are expected either to merge with bigger institutions or become niche players. When that happens, Malaysia's weak financial sector may finally be robust enough to go toe-to-toe with foreign rivals.  By Assif Shameen in Kuala Lumpur Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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