Banking and Capital Market Reforms in Malaysia

Over a short span of thirty years, Malaysia has made a remarkable transition from a predominantly agrarian to a successful middle-income economy on the threshold of a final push towards “developed economy” status. The financial sector played an important role in facilitating growth — initially as a passive concomitant of the development strategy, subsequently taking on a proactive role as the economy deregulated and grew. Until the onset of the Asian financial crisis of 2007, macroeconomic stability and a gradualist approach to financial liberalization helped insulate the economy from the vicissitudes of global financial markets. Since then the challenges of transforming into a developed economy have manifested themselves. The Malaysian experience appears to epitomize the “middle income” economy trap. Despite several policy initiatives to develop venture capital industry, knowledge based firms are yet to gain traction. The banking sector is still fragmented, with foreign banks demonstrating superior performance. Bank holding companies are yet to realize the benefits of consolidation of commercial banking, investment banking, finance companies and insurance firms. The falling rate of capital formation has stalled growth of capital markets. While there have been improvements in corporate governance, reforms of government linked enterprises is a work in process. Reforms in the political economy of finance, especially portfolio restrictions and directed credit resulting from the Bumiputera policy could yield considerable dividends.