Malaysia's Banking Sector - Staying Strong Despite the Global Financial Crisis
By focusing on low risk profiles and strong capitalization, Malaysia has positioned its banking sector to maintain healthy liquidity in an uncertain international marketplace.
When I visited Malaysia's Central Bank earlier this year, I had a long meeting with officials about the nation's exposure to the U.S. subprime fiasco. We also discussed how lessons Malaysia learned from the Asian financial crisis of 1997-1998 - and the financial system restructuring that followed - have positioned the nation to weather the global economic storm. I was impressed with what I learned, and I'm seeing Malaysia's best-laid plans pan out now.
Indeed, as Western nations struggle with a credit crunch of mass proportions, defaults on high-risk loans, and recession, Malaysia has managed itself to avoid a full fallout with a relentless focus on high loan quality, low risk profile, large international reserves, strong capitalization, low external debt, and a significant current account surplus. The result is healthy liquidity in the Malaysian banking sector.
Consider the statistics: Malaysia reports a strong capital buffer, with a risk-weighted capital ratio (RWCR) of 13 percent as of September 2008. And Malaysia's loans-to-deposits ratio is an impressive 74.3 percent. That translates to a capital excess of 41 billion Malaysian ringgits (US$11.8 billion).
Household loans make up 54 percent of the market, compared to 25 percent in August 2007. This is an important number because small home loans diversify the risk of larger corporate loans. What's more, property loans, which tend to be better collateralized, account for 35.3 percent of the banking system's gross loans today versus 18.4 percent in August 1997.
Beyond Malaysia's internal data, a recent Standard & Poor's report entitled, "Asia Equity Market Outlook 2009: Two Halves," reveals Malaysia's banking sector has little or no exposure to the U.S. subprime mortgages and other toxic financial instruments. S&P concluded Malaysia is more resilient and less dependent on the U.S. market for exports - and there is no property or asset bubble in the nation.
Of course, Malaysia is not completely immune to the global financial crisis, but analysts predict its strong fundamentals will buoy it above other developing nations, as well as many developed nations, during the recession. Malaysia has also implemented plans and policies to deal with the international financial and economic crisis.
Specifically, Malaysia passed an economic stabilization plan on November 4, 2008 that includes a 7 billion-ringgit (US$2 billion) stimulus package, an interest rate cut, strategic measures to boost private consumption and investment, and steps to further liberalize the economy. Malaysia is also making moves to preserve confidence in the financial system. The Central Bank is offering a blanket guarantee on all local and foreign currency deposits with financial institutions regulated by the Central Bank and the Malaysia Deposit Insurance Corporation (MDIC) until December 2010.
Despite the likelihood of a global recession, Malaysia's strong financial and banking systems, and its proactive government, have positioned the nation for continued growth even as other Asian nations experience deep impacts from the collapse of Western economies. In light of its new policy measures, the Malaysian economy is expected to grow by 3.5 percent in 2009, a reasonable and even impressive rate amid a challenging global economy.
Malaysia is not without its banking industry challenges. Slower loan growth, rising default rates, and a slowdown in the capital markets are affecting every nation in the world. But Malaysia's banking system is proving its resilience and ability to move quickly to respond to global markets and has so far positioned itself away from the sharp economic deterioration other nations are witnessing.
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