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Sunday, 6 July 2014

Very important alternative


There is still a need to have small banks that understand the local conditions and able to serve the particular needs of small businesses and depositors.

I HAD high hopes that Prime Minister Datuk Seri Najib Tun Razak would use the Cabinet reshuffle to inject new blood to drive higher performance by the ministers.

I was hoping Najib would take over the Home Ministry given that we had so any issues ranging from the Lahad Datu intrusion, the numerous kidnappings of foreign tourists in Sabah, the high crime rate, down to the huge number of illegals in the country.

Very disappointingly it turned out to be just an expansion to accommodate MCA and Gerakan’s return to the Cabinet.

We now have at 35 ministers. This must be one of the highest in the world. We have more ministers than the US with less than just 10 % of the population and the size of America.

China, with 1.5 billion people, has less than 20 ministers.

I have also urged that Najib give up his Finance Minister portfolio to enhance governance. To me the Chief Financial Officer (meaning the Finance Minister) should not be the same person as the Chief Executive Officer (Prime Minister). We seem to be the only democratic country doing it.

This brings me to the first Financial Master Plan to merge the country’s banks into 10 large banking groups launched in 1999, 15 years ago.

This resulted in the mergers of numerous smaller banks into bigger banking groups. As a result several household banks disappeared. Several are Sarawak-based — Kong Ming Bank, Wah Tat Bank, MUI Bank, Bank Utama, Delta Finance and Hock Hua Bank. They had serve Sarawak business and consumers well.

When the plan was announced, the bank union had warned that such mergers would make access to banking much harder and more expensive for small business and consumers.

Malaysia has a sizeable rural population and different levels of development in different regions, especially those in the east coast of Peninsular Malaysia and in Sabah and Sarawak. There is still a need to have small banks that understand the local conditions and able to serve the particular needs of small businesses and depositors.

In most countries, small banks are flourishing and are offering a very important alternative to the bigger international banks. Small banks have a higher proportion of their assets in loans to small businesses than larger banks.

In Malaysia, the small and well-managed banks and finance companies are performing a very useful role and service to the small business and rural communities. Removing them will encourage money lending to be driven underground and the increase in loan sharks.

By having just six big banks, the small businesses and borrowers would be squeezed out of credit facilities. Already, some big foreign banks in Malaysia have policies of going up-market in their customer base such as credit cards holders, depositors and borrowers.

Some banks are offering minimal interest rates to small deposits as well as not extending credit facilities or credit cards merchant arrangements if their business volume is below a substantial level.

Fifteen years on, our fears are realised. Already we have seen big foreign banks closing down branches in small rural towns and move than to high-density urban areas.

If this goes on, very soon the rural areas will not have any bank branches.

This was somewhat glaringly exposed when I was in Bintulu last week leading a protest against HSBC closing down its commercial business in Sarawak.

Next to the bank was a newly opened moneylending outlet.

One cannot help but notice the explosion of moneylending outlets and credit companies over the past 15 years. Quite a few of these occupy the premises of bank branches that had been closed.

While headline figures of the Financial Master Plan may be impressive, it cannot be ignored that it has also driven banking into informal and the shadow banking system.

This has little regulation or supervision.

I have come across cases where the licensed moneylenders charge more than 100% interest per annum. The borrower has to pay a month repayment of $464 for 24 months for a $5,000 loan. That is $464 X 24 = $11,160. Interest cost is $6,160. The borrower would have paid of the principal aunt in 11 months. The effective interest rate is actually $6,168 / $5,000 for eight months = 134% per annum. And I am not even talking about loan sharks yet.

We have also warned that banking will get more expensive. These days bank charge you for anything and everything — from audit reports to sending statements to you. They “force” you to subscript to e-statements. E -statement may be free but you need to pay a printer, printer ink and paper to print your own statements.

Recently all banks started charging 50 sen for each cheque issued as announced by the association of banks.

Is this no against the Competition Act?

This will force consumers to go for online banking, which is not free. Most bank charge a fee for each transaction. It may be cheaper than 50 sen, but with minimal cost, banks are reaping higher income from these fees.

Since all banks are charging 50 sen, what choice do consumers have?

It is easy to assume that mergers should be a good thing, that a few mega institutions will lead to economies of scale that should result in cheaper fees for consumers. This has turn out to be fallacy. Large banks with major market share can become too big to fail, and the Government may be forced to bail them out to avoid consequent economic disruptions and the cost to taxpayers will be significant.

Such big banks might be even encouraged to take greater risk, knowing that the Government would be likely bail it out.

This is exactly what happened and led to the global financial crisis where governments have to pump in billions in US and Europe to save the behemoths and so-called secure banks.

In their relentless drive for profits, banks forgo integrity and ethics. Global banks like HSBC, BNP Paribas, Barclays and UNS have been fined billions of dollars for money-laundering activities or manipulating interest rates.

Tags / Keywords: Opinion , Sarawak , Cabinet expansion and financial prudence


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