RESTRICTEDWORLD TRADE
ORGANIZATIONTN/S/W/17
S/FIN/W/28
30 July 2003
(03-4050)
Council for Trade in Services
Special Session
Committee on Trade in Financial ServicesOriginal:  English
COMMUNICATION FROM MALAYSIA
Challenges in the Financial Services Sector
The attached communication has been received from the delegation of Malaysia with the
request that it be circulated to the Council for Tr ade in Services in Special Session and the Committee
on Trade in Financial Services.
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I. INTRODUCTION
1. Malaysia’s financial system has evolved over several decades against the backdrop of rapid
changes in the economy and the international financ ial environment.  Policies have been modified
according to changing circumstances, to focus on developing an efficient and sophisticated financial
system that can meet the financing needs of the economy as well as support national policy objectives.
In this context, while Malaysia recognises that the opening up of the domestic financial sector to
foreign competition would contribute towards creating a more efficient, competitive and market-
driven financial sector, thus enabling the sector to play a more efficient and effective role in the
economy, such opening will have to be carried out in a careful and phased manner.
II. FINANCIAL LIBERALIZATION - AN IMPORTANT OBJECTIVE FOR MALAYSIA
2. Malaysia remains committed to further liberalizing its financial services sector.  Foreign
participation has always been significant in the domestic financial sector.  A careful study of
Malaysia’s commitments at the conclusion of the financial services negotiations in 1997 reflect the
commitment of the Government to bind its existin g liberal policies on foreign ownership.  In the
banking sector, the Government allowed the 13 foreign banks to maintain their 100 per cent equity
ownership, but they were required to be locally incorporated.  We had also bound foreign presence at
an aggregate maximum of 30 per cent of the total equity of a domestic banking institution.  In the
insurance sector, existing foreign shareholders were allowed to increase ownership subject to amaximum 51 per cent of the equity of the insurance company.  New entry of foreign insurance
companies was also allowed through participation of up to 30 per cent of the total equity of a locally-
incorporated insurance company.
3. The capital market has also progressively opened to global players, with gradual increases in
foreign equity participation in stock broking, fund management and the entry of managers, specialists,experts and professionals.  We have committed to 49 per cent foreign equity in stock broking
companies.  Under appropriate circumstances, Malaysia has allowed 100 per cent foreign ownership,
such as in the fund management and investment advisory.TN/S/W/17
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III. CURRENT SITUATION
4. It must be pointed out, at the outset, that under the General Agreement on Trade in Services
(GATS) of the World Trade Organisation (WTO) Malaysia has already made substantial
commitments to progressively liberalise its financial system.
5. Malaysia’s liberal policies in the financial services sector had resulted in significant presence
of foreign services providers in the Malaysian financial sector.  There are 13 fully foreign-owned
banks, which maintained presence in Malaysia and, at the end of 2002, foreigners owned an average
23 per cent of the total equity in four domestically-o wned banks.  On an aggregate basis, foreigners
accounted for about 33 per cent of total commercial bank assets.  In the insurance sector, out of a total
of 54 insurance companies, 23 companies were majo rity foreign-owned.  The foreign market share in
the insurance industry remained high and accounted for 77 per cent of life insurance premiums and
40 per cent of general insurance premiums.
6. In the capital market, 5 out of 79 licensed fund managers are majority or fully foreign-owned
whilst in the investment advisory sector, close to half of the licensed advisers are majority or fully
foreign-owned.
7. Besides equity participation, foreign participation has taken other forms, such as participation
through strategic alliances with local entities.  In the insurance sector, there are 10 bancassurance
arrangements involving locally incorporated foreign-owned banks, of which nine were established
with domestically-owned insurance companies.
IV. CHALLENGES
8. In the aftermath of the economic and social turmoil created by the Asian financial crisis,
Malaysia had found it necessary to vigorously pursue its long-term objective of building a resilient,
competitive and dynamic financial sector, which would play a catalytic role in the transformation of
the economy and serve as an engine of growth.  To  prepare the domestic institutions for liberalisation,
a timeline of 10 years has been set aimed at building a core of strong and forward-looking domesticplayers.  The timelines are encapsulated in the Financial Sector Masterplan, FSMP and the Capital
Market Masterplan, or CMP.   Both the FSMP and the CMP launched in 2002, provide a guide on
Malaysia’s approach towards financial liberalization and the strategies that would be adopted.
9. The focus of both master plans in phase 1 has been on building capacity.  For this purpose,
the emphasis is to enhance the effectiveness and competitiveness of domestic financial institutionsand to establish an efficient consumer protection infrastructure.  While progress has been on track,
several developments in the past year had posed serious difficulties for the domestic institutions, and
the authorities have had to review some aspects of the implementation, so that we are basically on
track.
10. One of the greatest challenges faced by domestic institutions is their ability to compete
effectively in a more liberalized environment due to skill gaps which are still lacking in critical areas,
particularly in the area of credit and treasury risk management.  In the banking sector, it wasacknowledged by the Basel Committee on Banking Supervision on the New Capital Accord that the
emerging economies in Asian do face difficulties in implementing the BASLE requirements due to
the lack of skills.
11. In the next decade, the banking and broking sectors are expected to experience greater and
more dramatic structural changes.  Advanced communication technology is rapidly and irreversiblychanging the way business is being conducted.  The ability to tap information technology becomesTN/S/W/17
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increasingly important to meet the more sophisticated demands.  As such financial services entities
will require large amounts of capital investments to remain competitive and be able to assume higher
risks.  To provide for stronger capitalization of the domestic institutions, the banking and broking
institutions have embarked on a merger programme.
12. As at end December 2002, from 54 institutions, the domestic banking institutions have
consolidated into 10 banking groups.  In contrast there are 13 foreign owned commercial banks.  In
the broking sector, as at December 2002, the number of stock broking companies stood at 40, as
compared to 66 when the consolidation programme commenced in 2000.
13. The merger process was a first for Malaysia in terms of the scale and complexity as it
involved more than 50 banking institutions and 66 stock broking companies.   It is not surprising
therefore that the financial sector is still undergoing a process of restructuring and consolidation,particularly in the broking industry, where some players are still at work finding merger partners.
14. For those in the banking and broking industries that have completed their merger exercises,
much still needs to be done to consolidate the corporate cultures of the merged institutions.  There are
also difficulties in merging databases and IT systems without disruption to operational efficiency.
Other difficulties have also surfaced.  In particular, human resource management and manpower
deployment issues are still being addressed, primarily to ensure there will be minimal social
disruption.  In the light of the geo-political uncertainties developing in the region and nascent
economic recovery, it is important to manage these developments carefully to ensure the stability of
the financial system.  There are concerns that there would be another round of mergers involving the
domestic financial institutions and in the wake of such developments, a longer period of adjustmentand consolidation may be necessary.
15. In the meantime, although the Malaysian financial services sector has long been
acknowledged as well supervised and well regulated, our financial services regulators continue to
work with domestic institutions to ensure ongoi ng compliance with applicable BASEL, IOSCO and
IAIS standards and best governance practices.
16. Malaysia, as a Member of the WTO, is certainly committed to long-term gradual and
progressive liberalization of the financial services sector.  But at the same time, we must ensure that
the implementation of liberalisation must be in the context of our own needs, and that is for the
financial sector to assume the role of supporting the nation’s economic development agenda.
V. CONCLUSION
17. Malaysia’s position is that for the benefits of liberalisation to be fully realized, the pace of
liberalisation has to be in tandem with the capacity and ability of the system to absorb these changeswithout undermining financial stability.  Liberalisation must be carried out at a pace that is consistent
with the prevailing conditions, infrastructure and regulatory framework and the needs of the economy.
It is also important that liberalisation does not marginalise the domestic financial institutions.  An
important lesson of the last financial crisis is that liberalisation strategies must go hand in hand with
increased regulation, effective supervision and enhanced capacity building.
18. We have a responsibility to our people to ensure that wealth is distributed equitably.  To
achieve this, it is imperative that domestic institutions are given a fair chance to equip themselves to
face global competition.  This is why we have chosen to approach liberalisation in a sustainable and
progressive manner.  It is a question of time, not intention.
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