PETALING JAYA: The International Monetary Fund (IMF) praised local policy makers for successfully mitigating the harsh external economic climate, bringing about sustained growth in the first three quarters of 2012 and bringing headline inflation down to a welcome low of 1.3% last September.
Growth was primarily driven by domestic demand supported by improved sentiment and fiscal transfers to low-income households, as well as investment growth in the private and public sectors.
The IMF, in its Malaysia: Financial Sector Stability Assessment report, forecast that improving exports would help the economy expand 5% this year, in spite of the uncertainties of the coming general election.
The report highlighted the capitalisation and profitability of banking institutions, evidenced by significant improvements of asset quality in the last five years.
The IMF relied on stress tests indicators to determine the banking system's resilience to economic and market shocks, and concluded that smaller banks and liquidity would be a potential vulnerability, given banks' reliance on demand deposits.
The report also stated that pre-emptive measures taken by Bank Negara included reductions in the Policy Rate, extension of access to the central bank's standing facility to insurance companies, a temporary reduction of the Reserve Requirement and the extension of a Government Deposit Guarantee (GDG) on all local and foreign currency deposits.
Although total government debt as at December 2011 stood at RM456bil (52% of gross domestic product), IMF credited the Government for the development of its bond market, which had a market turnover of 2.5 times a year comparable to regional peers.
Concerns over the household debt were raised, as it was now the highest in the region. House prices in urban areas had also spiked.
Bank Negara took recovery measures, revising eligibility requirements for credit cards in 2010, and tightening its lending conditions based on the loan-to-value or LTV ratios on mortgages.
The Federal Government also reintroduced the Real Property Gains Tax for housing disposals within five years of purchase, which was further raised in January 2011.
Additional increases are contained in the 2013 Budget.
New blueprints such as the Financial Services Act and the Islamic Financial Services Act enacted last December would serve to address shortfalls in oversight of financial holding companies.
IMF recognised that Bank Negara and the Securities Commission practised effective risk-based supervision for the range of banks, insurance companies and securities firms operating in Malaysia.
It proposed that the effectiveness of supervision, however, could be enhanced by addressing existing gaps in enabling legislation and regulatory policy.
Moving forward, further development of the domestic Islamic financial system would present opportunities and challenges.
Malaysia is a global centre for Islamic finance, and as products with new features such as a greater degree of risk-sharing are developed, it would be important that users both domestic and foreign are clear about the changes involved, the IMF said.
The authorities published a Financial Sector Blueprint and a Capital Market Masterplan Two covering this decade, while a Corporate Governance Blueprint covers the first half of it.
These aim to support Malaysia's transition into a developed nation by 2020, integrate Islamic finance in the region and progressively reduce the direct role of the state in the financial markets.
The report pointed out that the Labuan International Business and Financial Centre (IBFC), which does bank lending, reinsurance, leasing and trust company business, needed a substantial review for its legislative framework for regulation.
This bodes well with the IBFC's plan to change its business model to focus on traditional offshore business, Islamic finance and service for high net-worth individuals.
“New legislation enacted in 2010 gives stronger enforcement powers and enhances the ability of the Labuan Financial Services Authority (LFSA) to cooperate with foreign authorities. However, the new laws should be revised to further meet international standards, including strengthening the governance of the LFSA. Some key aspects of the regulatory reforms in 2010 should also be revised in order to meet international standards.
“For instance, Labuan could focus on serving as a back office centre for financial services business carried out in Kuala Lumpur (such as wealth and fund management for those wishing to use Islamic products) and trust company business using the network of double taxation treaties and location as strategic advantages.”
(The Star Online / 02 March 2013)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com