Enhancing standards at development financial institutions

THE move by Bank Negara Malaysia (BNM) to set new standards for the country’s development financial institutions (DFIs) is a right move, albeit a bit delayed.

DFIs are specialised, government-backed entities established to achieve national socio-economic objectives.

Over the past few decades, several major controversies have involved DFIs, including governance failures, questionable lending, corruption allegations, and political interference.

BNM’s three policy documents, namely, the Performance Measurement Framework (PMF), Corporate Strategic Plan (CSP) and Corporate Governance, took effect last week.

BNM appears to be moving DFIs away from a traditional “loan disbursement” mindset toward a system focused on developmental outcomes, accountability and mandate delivery.

Will this result in better run DFIs? Perhaps, the most troubling episode among DFIs in recent memory must be the RM400mil loan that Bank Pembangunan Malaysia Bhd gave in 2012 to Aries Telecoms (M) Bhd for a RM1.3bil coastal fibre-optic network.

The project was never completed, and the loan fell into default. It triggered sweeping lawsuits and criminal corruption charges regarding alleged bribery, fraud, and fund embezzlement

Applying the new set of standards, it is likely that approval and disbursement of that RM400mil loan would be significantly more difficult and would have triggered more scrutiny.

For example, the CSP framework’s emphasis on linking strategy, risk, funding capacity and developmental outcomes would likely have forced Bank Pembangunan to challenge several assumptions more rigorously.

BNM’s strengthened governance framework also requires greater board oversight, independent challenge and accountability.

These controls would make decisions such as that RM400mil loan harder to approve without scrutiny. Recall that it is alleged that certain conditions precedent were waived before disbursement of that loan.

In addition, the PMF’s emphasis on ongoing monitoring of developmental outcomes could have led Bank Pembangunan to identify problems earlier.

What is needed now is for the DFIs to strictly follow the new standards set by BNM.

Anything less will lead us back into the dark days of weak DFIs in Malaysia.