[Malaysia] Malaysia Tightens Reins on Lenders

Malaysia Tightens Reins on Lenders
Financial Firms Must Get More Senior Appointments Endorsed by Central Bank

By LESLIE LOPEZ
ASIAN WALL STREET JOURNAL
October 11, 2005

KUALA LUMPUR -- Malaysia's central bank has expanded its already wide-ranging powers over financial institutions here with new rulesthat require banks to seek its endorsement for key management appointments -- a move some bankers say could hinder the country's effort to become a Southeast Asian financial center.

In unpublicized guidelines issued last month to local and foreign-owned banks, insurance companies and other financial institutions, Bank Negara, as the Malaysian central bank is known,s aid it must vet all senior management appointments for the posts of deputy chief executive officer and chief financial officer.

In the guidelines, the central bank said that because the two positions or other jobs with "equivalent designations" carried "significant powers," it was "of crucial importance for a licensed financial institution to appoint a qualified person to hold the position."

Bank Negara already has the final say over the appointments of board members and chief executives at Malaysia-based financial institutions. It said the new rules were part of an overall strategy to improve corporate governance standards.

Bank Negara spokeswoman Lee Poh Fong, in an email replying to questions about the new guidelines, said the central bank "only assists in the vetting process" of proposed management candidates, because financial institutions "may not have access to certain information with respect to the individuals" nominated for key posts. She said the procedure is "not an approval requirement but only to facilitate the process."

Still, several domestic and foreign bankers said the new guidelines are likely to harden the perception of Malaysia among investors as one of Southeast Asia's more heavily regulated banking environments. "It's hard to reconcile Malaysia's stated policy of pushing for greater deregulation when the central bank appears to be micromanaging financial institutions," said the CEO of a Malaysian commercial bank.

Bank Negara already has sweeping powers over domestic financial institutions and foreign banks operating in the country, which include HSBC, Standard Chartered Bank and Citibank. Apart from rules governing senior management appointments, financial institutions must obtain Bank Negara's approval before making public their audited annual financial statements.

Merger-and-acquisition activities of financial institutions are also tightly controlled by Bank Negara. Rules stipulate that any financiali nstitution intending to acquire or merge with another financial concern obtain the central bank's permission before it can initiate merger negotiations or mount a takeover bid.

But it's the central bank's power over management appointments that has drawn the most flak from bankers in recent months. "Approvals for CEO and board appointments already take so long," said a senior executive at a foreign recruitment firm that helps Malaysian banks head-hunt for managers. "Banks face the risk of turning away good talent because few people will want to go through extensive scrutiny by Bank Negara."

Questions over the central bank's prerogative to intervene in banks' management surfaced recently when Bank Negara used its power overappointments of bank directors to effect a change in executive authority at RHB Bank Bhd., Malaysia's fourth-largest lender in terms of assets.

RHB Bank has been the center of a struggle for control that pits Malaysia's national pension fund, the Employees Provident Fund, or EPF, against the bank's single largest shareholder, Utama Banking Group Bhd. In a series of decisions in the past two months, the central bank spurned the applications of Utama's nominees for positions on the boards of RHB Bank and its immediate holding company, RHB Capital Bhd., while approving the installation of a senior EPF candidate as a director of the two concerns.

Bank Negara's decisions effectively gave EPF -- RHB Bank's second-largest shareholder and historically a passive investor with little experience running businesses -- executive command at the banking group. Bank Negara has declined to discuss its rulings on management appointments at RHB Bank.

Leslie Lopez at leslie.lopez@wsj.com