Bank Negara Malaysia deputy governor Datuk Muhammad Ibrahim : "We have now reached a critical juncture in our migration to e-payments.
KUALA LUMPUR: Bank Negara Malaysia has urged banks to provide more financing to new productive investments that are essential to support the transformation of the economy while seeking ways to moderate the lending bias towards property.
Its Governor Datuk Muhammad Ibrahim said on Thursday the banking industry has to be more innovative in product offerings to meet the demands of the new economy.
“At a more fundamental level, we should explore ways to moderate the lending bias towards real estate,” he said in his keynote speech or “State of the industry” at ASLI’s 21st Malaysian banking summit.
He noted there was significant scope for the banking industry to organise itself more effectively to weigh, expand, and ultimately galvanise action in response to emerging issues that concern the economy and society.
He cited education in long-term financial planning among Malaysians, the impact of financial technology, expanded inclusion to financial services, income and productivity gaps, and labour market developments, as some of the issues where banks ought to be much more active participants in the policy dialogue and debate.
Affordable housing
Muhammad said a current issue that has disproportionately drawn attention to banks is the affordable housing issue.
He pointed out BNM recently featured a box article on this subject in 2016 Annual Report.
“The public debate largely continues to misdiagnose or ignore the root cause of the problem, that is, affordability and accessibility, rooted by low incomes and compounded by the huge mismatch between demand and supply of affordable houses.
“The popular myth, is that it is all about access to financing. I am perplexed. Actual data is self-evident. It shows the continued strength in bank financing to households for the purchase of affordable homes, with four in five new housing loans extended for houses priced below RM500,000.
“Yet banks have done little to educate and inform the public on this financing trend. The industry ought to be at the forefront in explaining the real situation and where possible, offering suggestions to help address this issue,” he pointed out.
Muhammad said affordable housing is not a problem that is unique to Malaysia.
He said policymakers around the world, including in developed countries, continue to look for creative solutions to this delicate socio-economic challenge. A common thread across these solutions is their multi-faceted dimensions.
“The solution for Malaysia has to involve rebalancing the supply of housing towards the affordable segments. We require a bold and pragmatic solution.
“We estimate a shortage of 960,000 units of affordable housing. This is projected to reach one million units by 2020.
“A central authority and a national repository can significantly improve the ability to better distribute, monitor and manage the supply-demand imbalances. Developing a thriving rental market should also be on the agenda to temper the nation’s fixation on home ownership,” he said.
Abundant shopping malls
Muhammad also highlighted banks should be concerned with is the sizable surplus in commercial property.
“In contrast to affordable housing, the office and retail markets are in oversupply,” he noted.
In 2016, the vacancy rate for prime office space in the Klang Valley stood at 21.8%, outstripping the regional average of 6.2%.
Monthly rentals of prime office space in Kuala Lumpur are the lowest among regional cities.
“Over the next few years, the significant incoming supply of large projects is likely to aggravate supply conditions in this segment,” he cautioned.
Signs of oversupply are also emerging in the retail segment in major urban centres in Malaysia.
This can be traced to the abundance of shopping malls, he said.
“You may be surprised to learn that there are as many as 20 shopping malls just along the 40km stretch of the LDP (Lebuhraya Damansara-Puchong) highway. It is equally astonishing that the prime retail space per capita in cities like Johor, Penang and Kuala Lumpur is actually higher than regional megacities such as Shanghai and Beijing, and also higher income cities such as Singapore and Hong Kong,” he said.
Rising vacancy rates, price corrections
Muhammad said a significant increase in vacancy rates, and the ensuing price corrections, are risks that BNM has highlighted as far back as 2013.
He pointed out the concerns are not limited to effects within the commercial property sector, but have broader spillovers to other economic sectors.
During the Global Financial Crisis, commercial property was a major driver of loan losses in Australia, France, Ireland and New Zealand, despite generally accounting for a much smaller share of banks’ loan books, compared to residential property. This was attributable to a sharper pace of contraction in commercial property prices, compared to house prices.
“Banks are key stakeholders in this conversation. Data available within banks can be a harbinger of turns in the property cycle, and used more effectively in combination with other sources of market data, to smooth out adjustments between demand and supply.
“Furthermore, in the same way that reporting standards are starting to move away from provisioning practices that were “too little too late”, there is merit in in taking a closer look at current valuation practices that contribute to property boom-bust cycles.
“It may well be time to consider how we might correct practices that are encouraging banks to lend “too much too early” in specific property segments, before demand drivers are firmly entrenched," he added.
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