KUALA LUMPUR: Significant and institutional shareholders have been urged to play a more active role to ensure that only capable individuals are appointed to the boards and senior management of banking institutions.
“Institutional investors should also play a more active role and make swift and bold decisions in ensuring that only capable individuals are appointed and remain in the boards and senior management of banking institutions,” Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said.
She said the capital strength of a financial institution was not the only factor that determined its capacity and potential to perform, but equally important was the quality of its talent, systems, risk management and ICT systems, governance structure, leadership and corporate culture.
“Sound corporate governance and effective management of banking institutions are vital to ensure their effective and sound functioning. It needs to be recognised that the responsibility for the safety and soundness at the institutional level rests primarily with the board and the management of each banking institution and the key stakeholders such as the significant shareholders,” she said.
Zeti was speaking at the signing ceremony for the completion of the share subscription agreement between BIMB Holdings Bhd, Bank Islam Malaysia Bhd and Dubai Financial LLC and Lembaga Tabung Haji (LTH).
In the case of Bank Islam, she said currently all the directors and key executives were new and had diverse banking experience.
“In accelerating the provisions and instituting the measures to address the bank’s system, processes and business culture, it has now paved the way for drawing in new shareholders. The participation of a new strategic investor will in fact further strengthen the bank (Bank Islam),” Zeti said.
Bank Islam’s huge non-performing loans (NPLs) have been a drag on the group’s financial performance. To re-capitalise the bank, its shares were sold to Dubai Financial, a unit of Dubai Investment Group (DIG) and LTH for RM1.014bil.
With the share sale, Dubai Financial holds 40% stake in Bank Islam and LTH 9%. Both Permodalan Nasional Bhd and the Employees Provident Fund have stakes in Bank Islam but via the bank’s parent, BIMB.
The entry of Dubai Financial and LTH marks a new era for the country’s oldest Islamic bank, which is currently undergoing a remodelling, after which it is seen as the natural choice for DIG’s expansion into the Asia Pacific region. DIG is the platform for Bank Islam’s entry into the Middle Eastern market.
Bank Islam managing director Datuk Zukri Samat said the challenge for Bank Islam ahead was “to remain relevant and competitive and build new capabilities that are innovative and technology-driven.”
DIG chief executive officer Soud Ba’alawy said several factors attracted DIG to Bank Islam but “I think the support that Bank Islam has been getting from the central bank is significant to us.”
After the signing, Salaam Al Shaksy, CEO of DIG unit, Dubai Islamic Investment Group, said the group’s investment in Bank Islam was strategic and important to DIG.
“It is interesting for us and we want to help strengthen it (Bank Islam further) to tap future opportunities,” Salaam said.
Asked if DIG would inject more funds into Bank Islam, he said: “it is too early to say for now.”
Dubai Financial would end up with three board seats and Salaam is one of the candidates to represent the Middle Eastern investor’s interest in Bank Islam. He did not name the other two.
Asked if DIG would appoint some of its own people at the management level at Bank Islam, Salaam said: “We have not decided on that. It is also up to Bank Islam to come up with its own products but we are willing to support them.”
Meanwhile, Zeti said the Malaysian Islamic banking industry remained well capitalised with a risk-weighted capital ratio of 14.8% as at end-August, while the net non-performing financing ratio (for the whole Islamic banking system) had declined to 4.2%.
On whether Bank Negara was aware of Bank Islam’s RM1.5bil in loan loss provision, she said: We were aware of the risks associated with some of the exposure made. Yes, it is well documented in our supervisory report.”
In her speech, she said Bank Negara had, in 2001, required the board and management of Bank Islam to undertake remedial actions on several operational and control weaknesses.
When the weaknesses were not adequately addressed, the process of reconstituting the board and management of Bank Islam was initiated in 2003.
"In such an exercise, key shareholders are expected to be proactive in making prudent and responsible action to remove any member or employee that is found to be unsuitable or not having the required calibre so as to avoid a prolonged process in the reconstruction of the board and management of the bank,'' she said.
To a question on interest rates, Zeti said there was no need to drive domestic consumption by means of an interest rate revision.
“Domestic consumption from all the indicators is expanding, and increasing at a steady pace. The environment is already very positive and so it does not prompt us to take any action. We do not need to lower rates, not at this point in time because the outlook still looks positive,” she said.
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