New Internationalist

Banks against the wall

Issue 392

Dipping deep into public funds, Anil Netto finds the Malaysian Government bailing out banks… and their well-connected debtors.

When I was a child, my father used to pick me up after school and drive me home. Sometimes he would stop by at the local branch of the United Malayan Banking Corporation (UMBC), where he had an account. I would wait in the car while he applied for a bank draft or arranged to make some other payment. Those were the days before computers when a simple transaction could take what seemed like an eternity for a child waiting outside in the car.

Today, as I pass by that same street, the bank – once Malaysia’s third largest – has vanished, as if some alien spacecraft had zapped it. It is now a supermarket. Its disappearance is a classic example of how government bails out banks while the well-heeled and well-connected escape responsibility.

Established by an ethnic Chinese, UMBC fell under government control in 1976 following allegations of mismanagement. Its ownership then changed hands a number of times. When UMBC was sold to a firm controlled by a government crony in 1992, under questionable circumstances, allegations of irregular and imprudent lending soon surfaced. So in 1995 the troubled bank was sold to a rich government-controlled plantation firm, Sime Darby, and renamed Sime Bank. The losses with which the Bank had been burdened soon took a toll on the plantation giant’s financial results. In 1998 Sime Bank was sold and merged into another banking group, RHB, whose major shareholder was its founder, a well-connected banker, Rashid Hussain (whose initials make up the title of RHB). Four years later Rashid, along with another major shareholder, sold their stakes in RHB to a banking group whose controlling shareholder is the son of a long-serving provincial Chief Minister.

Rashid was reportedly well compensated. The Malaysian public was not. After all this wheeling and dealing, the RHB group is today saddled with debt totalling 3.4 billion ringgit ($938 million). The bank itself – supposedly the jewel in the RHB group – has effectively passed to RHB’s other major shareholder, the Employees Provident Fund (EPF), the State-run pension fund. Following disagreement about how to deal with RHB’s crippling debt, EPF appears to be engaging in some desperate deals to salvage the situation.

UMBC and its successors are typical of the banking crises and questionable loans that took place during the 22-year rule of the autocratic former premier Mahathir Mohamad (who held power from 1981 to 2003). As part of Malaysia’s ethnic-based affirmative action policies, Mahathir embarked on an ambitious plan to promote bumiputra – ‘indigenous ownership’ – in both business and banking. Several of the country’s top banks – once dominated by foreign or ethnic Chinese-Malaysian interests – were taken over by either entrepreneurial bumiputra or government firms.

In UMBC’s case, ownership was batted backwards and forwards from public to private hands as the bank collected more and more debt, until finally the present shareholders of the RHB group – in particular the ordinary people of Malaysia, through their pension fund – have been weighed down with the group’s extensive non-performing loan portfolio.

Public money misdirected

Another Malaysian bank, which takes its name from bumiputra – the politically connected Bank Bumiputra, Malaysia’s second largest – has had to be rescued by government-controlled entities not once, but three times. National oil corporation Petronas – which is one of the most profitable oil companies in the world and the country’s cash cow – was milked in order to pump more than two billion ringgit ($553 million) into Bank Bumiputra in 1984 and a further one billion ringgit ($276 million) in 1990. A third rescue followed in 1998 during the big bank bail-out after the Asian financial crisis. (The Bank was then merged with the Bank of Commerce to form Bumiputra Commerce, under which it now trades.)

Loans for both property speculation and the purchase of shares, often given without adequate collateral, fuelled the 1998 financial crisis. In the aftermath the Government set up two organizations – Danaharta and Danamodal. Their job was to remove the burden of the non-performing loans from the banks and to inject funds into their empty coffers.

Out of more than $14 billion in non-performing loans, Danaharta recovered just over $8.3 billion over seven and a half years – a recovery rate of 58 per cent. As a consequence, the total bill for cleaning up the banking system was equivalent to a massive five per cent of Gross Domestic Product. The banks absorbed $2.76 billion, while the Government (read the public) had to fork out $3.5 billion. The overwhelming majority of this public payout ($3 billion) addressed the bad loans in the books of just two institutions – the star performers in this article, Sime Bank and Bank Bumiputra.

High-flyers protected

Until now, amazingly few of the non-performing borrowers have been publicly identified and held accountable for their outstanding debts. This tide is turning. After two legal cases which began in May this year, it appears increasingly likely that huge loans have been granted to well-connected individuals or firms whose credit worthiness and collateral may have been less than solid.

In the first case, Danaharta is suing once high-flying tycoon Tajudin Ramli for over $138 million. The debt is reportedly in connection with a syndicated bank loan he took in order to gain control of Malaysia Airlines. Tajudin was a protégé of Mahathir’s economic and finance tsar, Daim Zainuddin. The banks that are suing Tajudin include two with a history of questionable loans – UMBC and (you guessed it) Bank Bumiputra.

The second case claims a massive $395 million against Rashid Hussain (the founder of RHB) and five of his banking associates. Three RHB group firms are suing the six for breach of duty and negligence in granting loans totalling $138 million. These loans – each for $27 million – were made to five individuals who used the money to speculate on shares that became valueless. And according to RHB’s legal counsel during the court case, the loans were approved based on what amounted to ‘blank application forms’. Questions are now being asked about why legal action against the five debtors was previously discontinued against the advice of RHB’s lawyers. Another important revelation has been brought to light through last year’s Bank Islam scandal. The Bank – whose owners then included a government-managed investment fund and the armed forces retirement benefits board – has been found to have a massive $607 million in bad loans on its books. Why have regulating bodies allowed this?

The total bill for cleaning up the banking system was equivalent to five per cent of Malaysia’s GDP

Regulators lack clout

Given the extent of power of the executive over other arms of government in Malaysia, it is being suggested that banking regulatory bodies may not have enough autonomy to do their job properly when government agencies own and control certain banks.

‘The issue here, it seems to me, is how can we ensure a banking system that is well regulated and safe from abuse by Umno (United Malays National Organization) leaders,’ says political economist Edmund Terence Gomez, co-author of the book Malaysia’s Political Economy. Umno is the dominant party in Malaysia’s ruling coalition. Gomez observes that while Petronas, under public ownership and control, appears to be relatively well managed and consistently flush with funds, its strength is undermined when its funds are used to bail out banks and failing pet industries such as the car sector. He advocates that regulatory institutions must act independently against errant bank directors and that bank takeovers and mergers must be conducted openly and transparently.

The bail-outs of banks have cost Malaysia dearly. Billions of ringgit (and dollars) have been squandered: money which could have been better spent on low-cost housing and seed loans for the poor: on improved public transport and on healthcare (which now accounts for only two per cent of GDP – well short of the World Health Organization recommendations of five to six per cent).

Critics say the Government should take heed of Venezuela, where the Chávez administration has used its petrodollars to increase literacy, reduce poverty and improve healthcare. ‘The money that was used to save the banks could have been used to enhance the managerial and operational efficiency of essential services, thereby benefiting the whole country,’ says economist Charles Santiago, co-ordinator of the Coalition Against Water Privatization. ‘(But) the Government’s logic was that essential services are going to be privatized and therefore we do not need to invest in those sectors now.’ It is a telling reminder of the priorities of modern-day governments.

Anil Netto is a chartered accountant who now works with Aliran – a Malaysian reform movement dedicated to justice, freedom and solidarity. Visit Aliran’s on-line journal at http://www.aliran.com

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