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November 30, 2000

From Our Correspondent: Hirohito and the War
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Rethinking the Merger Plan
Mathathir seems to be changing his mind about consolidating the banking sector.

October 8, 1999
Web posted at 7:00 p.m. Hong Kong time, 7:00 a.m. EDT

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- Tuesday, Oct. 5, 1999

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- Monday, Oct. 4, 1999

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Malaysia's on-again, off-again bank merger plan is... well, on-again. Sort of. Three months after it was first announced, Malaysia's grand plan to merge 21 commercial banks, 12 investment banks and 25 finance companies into six "core" financial groups has been derailed -- officially. But that doesn't mean the idea won't be back, with the number of core groups increased.

On Wednesday Oct. 6, Prime Minister Mahathir Mohamad conceded that the forced mergers might not have been such a great idea after all. At a news conference he said: "There seems to be some difficulties in bringing the banks together... also difficulties in determining the lead banks (among the six groups). The government is not going to force this down their throats." Still he said the plan might be revised soon, hinting that he was willing to accept a higher number of "anchor" banks: "There is no logical reason why six is a good number."

The word in Kuala Lumpur is that under intense pressure from his own party leaders, Mahathir will soon announce that number of core banking groups will be increased to nine or ten.

That will mark a huge climb down. Since the July day the merger plan was first announced, Bank Negara, the Malaysian central bank, has issued frequent denials that it would backtrack from its plan to merge 58 institutions into six groups. The plan has been unpopular because it forces some of better, more profitable banks to merge with smaller loss-making but politically well connected ones. Moreover, the merger reduces the number of Chinese-controlled institutions from 10 to two -- and those will be the smallest of the six "core" groups. Ethnic Chinese make over 30% of Malaysia's population and have so far supported Mahathir in his battle against his rival, the sacked former deputy prime minister Anwar Ibrahim. Political pundits say Mahathir is due to call a general elections within the next few weeks -- though the government could technically delay the polls until next June. (The poll date currently being bandied about is third week of November.)

The about-turn comes just four days after Bank Negara had triumphantly reported that the proposed bank mergers had crossed their first hurdle: all the financial groups had signed memoranda of understanding in which they agreed to merge into six groups. All mergers were to be completed by March 2000, even though they were likely to lead to layoffs of tens of thousands of bank employees and the closure of several hundred bank branches across the country.

According to the original plan these were to be the six anchor banks: Maybank (government-linked); Multi-Purpose Bank (controlled by associates of Finance Minister Daim Zainuddin); Bumiputra Commerce Bank (whose new shareholders would include the government as well as businessmen linked to Finance Minister Daim); Perwira Affin Bank (controlled by Armed Forces Cooperative and some politically well-connected businessmen); Public Bank (controlled by entrepreneur Teh Hong Piow); and Southern Bank (controlled by the family of casino owner Lim Goh Tong). A seventh bank, Bank Islam, which operates under strict Islamic principles would remain an independent niche entity.

The mergers left four of the best-managed banks in Malaysia out in the cold: Quek Leng Chan's Hong Leong Bank, Rashid Hussain's RHB Bank, Azman Hashim's Arab-Malaysian Bank and Tong Kooi Ong's PhileoAllied Bank. All four had received their banking license while Anwar Ibrahim was Finance Minister.

From what I hear, it was these four men who objected strongly to the merger plan. Urbane, sauve, London-trained investment banker Rashid is son-in-law of Malaysian billioniare Robert Kuok, who owns the Shangri-La hotel chain and Hong Kong's South China Morning Post newspaper among other things. Cigar-chomping Quek merely agreed to explore the merger possibility with BumiputraCommerce Bank, while Rashid and Tong demanded biggish terms from the smallish Multi-Purpose Bank. Azman Hashim was reluctant to merge his bank until the very end, but finally gave in. (Azman was part of Mahathir's entourage to the U.S. and Europe last fortnight.)

Because the four men were being forced to merge their own larger banks with smaller, cash-strapped institutions, they were reportedly offered long-term, low-yielding bonds in return. The acquiring banks seem to be in no position to pay cash to the four owners who, under Malaysian law, could go to court to get better terms for their banks. With elections around the corner, Mahathir and Daim didn't want such court battles. Nor did they want government institutions to pay huge sums to bank owners at a time when the economy has just started to recover and the budget is in huge deficit. True, the government could amend the law, forcibly nationalize the banks, and then force some mergers. But, analysts say, that would only send the wrong signal to investors inside and outside the country, especially so soon after the capital-controls era.

So in the end, wise counsel prevailed. Rumor-mongers in Kuala Lumpur say that Daim Zainuddin lobbied hard to continue with the merger plan. But Mahathir, being the pragmatic politician he is, realized the political cost of forcing the mergers would be heavy. Kuala Lumpur is now abuzz with talk of a brewing rift between Mahathir and Daim over an array of policies and business deals -- including the bank mergers. But they are probably just rumors.

Of the four, RHB and Arab-Malaysian will almost certainly get anchor bank roles. To calm the fears of the Chinese community, I understand Mahathir is leaning towards granting Hong Leong anchor bank status as well. But PhileoAllied isn't likely to be as lucky. Its owner, the once high-flying tycoon Tong Kooi Ong was a close associate of Anwar, and it is said that he has already given up hope of being a major corporate player while Anwar languishes in prison.

The new concessions will bring the number of banks to nine. That's still far too many for a country of just 21 million -- especially if you watch what's happening across the Causeway in Singapore, where the five banks are talking about mergers that would leave just two or three players. But Singapore mergers are driven by the fear of giants like Citibank and GE Capital. Mahathir and Daim have so far refused to say if Malaysia will open up its banking the market in 2003 in compliance with the WTO accord on financial services. Mahathir has said in the past that WTO accord was a bit unfair to developing nations like Malaysia, which need to protect their local banks from foreign invasion. Foreign banks in Malaysia currently have a mere 20% share of local deposits and loans. Further consolidation of local banks and any delay in opening the market will increase the local banks' lead over foreign banks. That would make Malaysia the only market in Asia where that's happening. Everywhere else -- from Seoul to Surabaya -- foreign banks are increasing their market share in the aftermath of the Crisis.

The big question in Malaysia now is whether Mahathir will stop at 8 or 9. Or will he make further concessions and allow more anchor banks as interest groups and ethnic minorities advance their causes in the lead up to the elections.

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