Development financial institutions (DFI) play an important role in supporting strategic sectors that are important to the country. However, it can be challenging for DFIs to monitor and manage their financing, as they are not licensed for deposit taking hence unable to open current accounts for the borrowers.

DFIs have to rely on the borrower to open a designated account in the borrower’s name with a commercial bank. Its only means of control over the bank account is by making a DFI personnel one of the borrower’s authorised signatories. The account however still legally belongs to the borrower. If the DFI wishes to update or change the authorised signatories of such designated accounts, it has to request each borrower to individually issue a Board of Directors’ Resolution to the banks.

This exposes DFIs to certain operational and legal risks, if they remain dependent on borrowers in fulfilling the loan terms and conditions. It also lengthens the time for loan disbursements and for any changes to be made, where required.

This cumbersome process can now be seamless with Standard Chartered Malaysia’s Bare Custody Trust Structure (BCTS), which is the first of its kind for DFIs.

In the past year, Sabah Development Bank entered into an agreement with Standard Chartered to adopt the BCTS, effectively putting in place a win-win condition conducive to both lender and borrower.

“We recognise that the BCTS addresses some long-standing challenges in the industry. Consequently, the loan disbursement into a trust structure provides confidence to the main contractor that the borrower is focused and financially ready to kick-start the project,” says Datuk Vincent Pung, CEO of Sabah Development Bank.

In the meantime, the DFI having assignment over the project proceeds may receive repayment, which may be delayed in the traditional mode. The reason is that the borrower needs time to reconcile its single operating account that is commingled with all types of collection - meaning, with the borrower having better visibility of collection from the intended projects, the borrower may also apply surplus after loan waterfalls that is more timely than before."

Not to mention poor conduct on any part for that matter, issues can be better managed up front given funds are held by an independent trustee on behalf of the borrower while activities are to the order of the DFI,” he adds.

Sabah Development Bank Berhad is not the Bank’s first client for BCTS. One of the earlier articles on the same offering was the trust structure co-created with Malaysia Debt Ventures Bhd (MDV), a wholly-owned subsidiary of the Minister of Finance (Incorporated). For MDV, the Bank applied alternative banking where the trust accounts are maintained with Standard Chartered Saadiq Berhad and governed by Syariah principles instead.”

“Similar trust structures have been widely applied in the other areas of the financial sector such as asset management companies for the longest time – which we have now optimised for institutions like the DFIs,” observes Mak Joon Nien, Managing Director and Head of Corporate Commercial & Institutional Banking (CCIB) for Standard Chartered Malaysia.

With BCTS, DFIs only need to engage SCBMB Trustee Berhad and instruct the opening of designated trust accounts, registered in the trustee’s name for the borrower as beneficiary. The trustee, in turn, allows the DFIs to operate the designated trust accounts similar to traditionally where the borrower includes the DFI as an authorised signatory to its operating cash account. In BCTS, banking activities are all through Straight2Bank, that is, the Bank’s proprietary channel.

Such trust cash accounts are segregated by purpose and the borrower remains the beneficiary of the proceed surplus after loan repayment waterfall, terms and conditions. Such balances, if any, is returned to the borrower’s operating cash account that has been determined up front.

Where there are reserves and/or sinking fund imposed by the DFIs, there is no need to wait for the borrowers to open such reserve/sinking fund accounts with banks. The trustee may receive such advanced loan instalments from the borrower into designated trust cash account for reserves with visibility to DFIs.

The long documentation process like charging, assignments, lien and set-off, stamping, and so on that are related to traditional reserve accounts maintained in borrower’s name singly, which is time consuming, is no longer relevant.

“The trust accounts, segregated by purpose, are registered in the trustee’s name. They are independent from both the lender and borrower, and transparent, so it supports pre-disbursement conditions almost immediately upon account opening. This is usually within five business days, subject to customer due diligence,” says Mak.

Pung adds that “As a result, our loan disbursement period is now timely, and we have improved visibility of our loan utilisation and repayment trends. Since the trust cash accounts are registered in the name of an independent trust company, it improves transparency.

“We are pleased that this public-private partnership has improved efficiency and loan monitoring for Sabah Development Bank.” Mak believes that this solution will strengthen DFIs in Malaysia and accelerate the intended socio-economic and governance agenda in the country.

“We are proud to be part of this journey. We strongly believe that by replicating the solution we will be able to help other similar organisations, within and outside of Malaysia in time to come,” he adds.

“Being a tested solution, we are confident that this programme may be customised to our clients’ needs when offered across the region to benefit more countries.