Regions and Countries

	Table of Contents
p. 8 of 18 BACK | NEXT I. Country Performance Assessment II. Country Operational Strategy III. Sector Strategies A. Infrastructure B. Social Impact of the Crisis and Government Response C. Governance Dimensions of ADB Operations D. Gender Dimensions of ADB Operations E. Private Sector Operations IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Malaysia : III. Sector Strategies

---

A. Infrastructure

1. Industry and Finance

30. The economic crisis revealed a number of fundamental weaknesses in the Malaysian financial sector. The key weaknesses of the financial sector are anchored in four issues, namely (i) rapid credit growth and high exposure of banks to the property sector and the stock market; (ii) high leverage of the corporate sector with a large proportion of the corporate debt being short-term domestic debt; (iii) rapid increase in the non-performing loan ratio of the banks since the onset of the crisis in mid-1997; and (iv) inadequate investor protection. The thrust of the Government’s strategy for financial sector restructuring is to stabilize the financial sector in the short term and long term, build a stronger and more resilient banking sector; accelerate the development of a strong bond market, and enhance transparency, disclosure, accounting standards and corporate governance in the capital market.

31. In the short-term, the major issues in the banking sector are centered on recapitalization and strengthening of the banking sector to promote systemic stability. In the wake of the crisis, many domestic banks were confronted with problems of high NPL ratios and consequent impairment of their capital. The stress tests done by the authorities in 1998 to ascertain the criticality of capital deficiency and to quantify the amount of recapitalization requirements showed that 23 banking institutions would require recapitalization.

32. In the long-term banking sector development will focus on (i) market orientation and competitive environment; (ii) sector consolidation; (iii) corporate governance improvement, including policies related to lending to influential shareholders, regular review of the performance of chief executive officers and directors, and the concentration of loans to single customers; (iv) strong capital adequacy requirements; (v) strengthening supervision and regulation; (vi) sound risk management and credit analysis practices; and (vii) coherently formulated deposit insurance policies.

33. In the area of capital market development, protecting the local stock market from adverse effects of trading of ringgit-denominated securities in the Central Limit Order Book system of the Singapore Stock Exchange emerged as a short-term issue. Improving the market perception about the Malaysian financial sector required tangible measures to strengthen the regulatory framework for ensuring an orderly market, improving transparency in the stock market and upgrading corporate governance practices. Several important measures were implemented in this regard since the onset of the crisis (see para. 10). Long-term development of the capital market requires intensifying the reform measures already initiated by the authorities.

34. Accelerating the development of the bond market is critical for reducing the concentration of financial risks in the banking sector and minimizing the maturity mismatches that currently characterize the long-term debt provided by the banking sector. The lack of benchmark yield curves, lengthy approval processes and the multiplicity of regulators constrained the development of the bond market. On the securities demand side, the contractual savings sector, which has large assets, could potentially play an important role in fostering the development of a healthy capital market. A policy environment should be created such that the accumulated balances of the contractual savings institutions can be invested to maximize the returns. Functional autonomy and professional investment management are crucial requirements for maximizing yields and minimizing risks for these institutions.

Back III. Sector Strategies	Next B. Social Impact of the Crisis and Government Response