The problem with DFIs in Malaysia

This article first appeared in The Edge Malaysia Weekly, on October 8, 2018 - October 14, 2018.
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LAST week, Bank Pembangunan Malaysia Bhd (BPMB) appointed Afidah Mohd Ghazali as its chief financial officer, acting president and CEO. If she makes it past the “acting” stage, she will be the bank’s third CEO in a span of three years, and all eyes will be on her to see how long she lasts.

BPMB turns 45 next month. It is the oldest development financial institution (DFI) in the country, providing medium to long-term financing for the infrastructure, maritime, technology and oil and gas industries.

It was originally fashioned after the Development Bank of Singapore Ltd (DBS), which was set up five years earlier, in 1968, to take over industrial financing activities from the city state’s Economic Development Board.

While DBS has since morphed into DBS Bank Ltd with its parent DBS Group Holdings Ltd becoming a regional powerhouse with a market capitalisation in excess of US$47 billion or almost RM195 billion, BPMB is still plodding along, weighed down by various problems.

So, what ails BPMB, and the country’s other five DFIs, namely Small Medium Enterprise Development Bank Malaysia Bhd (SME Bank), Export-Import Bank of Malaysia Bhd (EXIM Bank), Bank Kerjasama Rakyat Malaysia Bhd, Bank Simpanan Nasional and Bank Pertanian Malaysia Bhd (Agrobank).

BPMB’s profit after tax jumped almost 282% to RM199.4 million in its financial year ended Dec 31, 2017, from RM52.2 million in FY2016. But the profit could have been much higher, given that the bank’s gross impaired loans, advances and financing ratio was a high 12.15%, albeit better than the 15.02% in FY2016.

“To put things in perspective, BPMB can write off 12.15 sen of every RM1 it gives out as borrowings,” says a banker.

Things become clearer when you look at the bank’s board — its five members are from the civil service (Ministry of Finance, to be exact), Bank Negara Malaysia (a unit of the MoF), commercial banks and the transport industry. None has extensive experience in DFIs.

Furthermore, some of these directors are on the board of several conglomerates, which raises the question of whether they really know what is going on at BPMB. Are they even keeping track of and reading the board documents? Will they admit to not having sufficient time to perform their fiduciary duties well?

Then, there is the issue that goes to the heart of DFIs. Today, these institutions are treated like commercial banks with key performance indicators and targets such as loan growth and earnings per share, which are the yardsticks of commercial banks.

In actuality, DFIs are meant to nurture small businesses that have difficulty in getting funding from commercial banks, businesses that the government deems a priority, such as oil and gas or shipping, which are specialised businesses that are shunned by the commercial banks.

Once these sectors start making money and the commercial banks are more comfortable to lend to them, it is time for the DFIs to pull away. That is the basic model.

DFIs should be the bad weather friend who is willing to lend during an economic downturn, supporting the economy when commercial banks shy away from giving out loans.

Hence, the skill set of running a DFI and a commercial bank varies, with very different risk management requirements.

In a nutshell, commercial banks are more concerned about the ability of clients to repay their loans, not in what area of business they are in or what sort of socioeconomic benefit or impact a particular industry can create for the nation.

Unfortunately, the mission to nurture infant industries or businesses with high credit risks due to different reasons might have been abused over the years, according to some industry observers.

Since DFIs require no security, they become the kitty for certain groups of companies or individuals.

This could be a reason why the local DFIs have not fared well and their non-performing loan ratio is way above the average for commercial banks.

There are also many government agencies that perform the same functions as BPMB, for instance, DanaInfra Nasional Bhd, which handles fundraising for infrastructure projects, such as the MRT, Prokhas Sdn Bhd, which is a restructuring outfit, Danajamin Nasional Bhd, which provides financial guarantees to companies issuing bonds.

A consolidation of BPMB, DanaInfra, Danajamin and Prokhas would create an entity with more capital and a larger balance sheet. This would reduce the cost of funding, which would translate into higher earnings as costs would go down as well.

In its financial year ended Oct 31, 2017, Prokhas registered an after-tax profit of RM24.71 million on revenue of RM82.03 million while Danajamin made an after-tax profit of RM114.19 million on revenue of RM81.82 million  in FY2017 ended Dec 31. DanaInfra’s earnings and turnover were negligible. Thus, a merger of the four entities would see a 70% increase in profit to RM338.3 million.

While such a proposal has its merits, the government has yet to consider it.

So the question is, will there be any incentive or drive to push through reform at the DFIs, considering that some of their directors are from the MoF and Bank Negara? Will anyone want to derail the gravy train?

 

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