VZCZCXRO6452
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #1317/01 2332341
ZNR UUUUU ZZH
R 212341Z AUG 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 9850
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RHEBAAA/USDOE WASHDC
RUEHGV/USMISSION GENEVA 1496
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 001317 
 
SIPDIS 
 
STATE PASS USTR - WEISEL AND BELL 
STATE PASS FEDERAL RESERVE AND EXIMBANK 
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN 
USDOC FOR 4430/MAC/EAP/J.BAKER 
TREASURY FOR OASIA AND IRS 
GENEVA FOR USTR 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN KTFN EINV MY
SUBJECT: Ambassador's Farewell on Malaysian Central Bank Governor 
Dr. Zeti Aziz 
 
 
¶1. Summary: The Ambassador paid a farewell call on Malaysian Central 
Bank (Bank Negara) Governor Dr. Zeti Aziz on August 15.  He relayed 
U.S. appreciation for Malaysia's efforts to combat money laundering 
and terrorist finance; congratulated the central bank on its 
successful initiatives in developing Islamic finance; and expressed 
hope for continued dialog on financial services and other areas of 
ongoing discussion.  Governor Zeti expressed confidence in the 
Malaysian economy, particularly in becoming a global hub for Islamic 
finance, and her satisfaction with the level of financial inclusion, 
particularly among the rural poor.  She cited education and training 
as Malaysia's biggest economic challenge, and said the GOM would be 
asking for assistance from foreign banks to help train Malaysians in 
the financial sector.  She hoped U.S. companies would take advantage 
of Malaysian Islamic instruments to raise funds, pointing out that 
due to high demand for Sharia- compliant investment products, they 
could be offered at ten basis points lower than conventional 
products and still be fully subscribed.  End summary. 
 
CENTRAL BANK INTERVENES IN CURRENCY MARKET 
 
¶2.  The Ambassador met with Central Bank Governor Dr. Zeti Aziz on 
August 15, on a day when the Malaysian stock market was in rapid 
decline along with markets around the world.  Dr. Zeti mentioned 
that the central bank was busy intervening to stabilize Malaysia's 
currency, but she seemed unperturbed about the stock market's slide. 
 Dr. Zeti noted with some satisfaction that New Zealand had 
suspended its inflation targeting framework - a mechanism that the 
IMF had "reprimanded" Malaysia for not adopting, she said.  She 
stated that the only reason the central bank intervened in the 
currency markets was to keep the ringgit stable. 
 
ECONOMIC PERFORMANCE 
 
¶3.  Zeti predicted that the Malaysian economy would remain strong, 
in spite of the ongoing volatility in the financial markets. 
Malaysia enjoys a diversified economy which has benefited in 
particular from strong performance in the tourism, education, 
health, and financial services sectors.  She claimed that foreign 
direct investment remained at high levels, and that high commodity 
prices were helping boost rural incomes, generating a robust 
domestic demand which was boosting small and medium-sized 
enterprises.  She said many tourists were coming, especially from 
China, India, and the Middle East, with some from Europe as well. 
She pointed to Indonesia's projected six percent growth and stated 
confidently that, therefore, Malaysia would enjoy six percent growth 
as well. 
 
 
 
GETTING ENOUGH GOOD HELP 
 
¶4.  Zeti noted that the Malaysian leadership recognized the need for 
a shift in the economy toward higher-value-added products, pointing 
out that the country used to be a global leader in producing air 
conditioners, but that such labor-intensive manufacturing ventures 
had moved to Vietnam and China.  She said the biggest challenge to 
"moving on" to high-tech industries was the human resources deficit, 
but said the Prime Minister was pressuring the Ministry of Education 
to "provide the right skills." She was confident that Malaysia had 
the flexibility to meet this challenge.  She also described efforts 
the GOM was making to address the human resources problem, including 
an initiative to sponsor internships in the financial sector for 
1000 college graduates.  She said the foreign banks operating in 
Malaysia would be asked to bring "resource persons" for a few days 
or weeks to help train and mentor interns.  In the 1980s Citibank 
used to "aggressively educate" Malaysians but they don't do it on 
the same scale now, even though they are making a nice profit in 
Malaysia. 
 
COMPARATIVE ADVANTAGE IN ISLAMIC FINANCE 
 
¶5.  Zeti described Malaysia's financial services sector as having 
transformed from an "enabler of growth" to an "engine of growth," 
pointing to the employment, income, and wealth the sector generated. 
 She was excited about the potential for Islamic finance, where 
Malaysia had a comparative advantage.  "We are now liberalized," she 
said, referring to a recent lifting of restrictions on the trade by 
Islamic financial institutions in foreign currencies, and said 
anyone - from Latin America, from China, or from anywhere in Asia - 
could raise financing here.  Given the strong demand for 
Sharia-compliant financial products, Islamic instruments were about 
 
KUALA LUMP 00001317  002 OF 002 
 
 
ten basis points cheaper than conventional products.  She wondered 
if American companies would be likely to take advantage of this. 
 
¶6.  The Governor was optimistic about the future of Islamic banking 
as a global industry.  She explained that the prudential standards 
had already been harmonized, and were comparable to Basel II. 
Regarding the differences in Sharia standards, she expected 
convergence within the next two years.  (septel) 
 
HOW MALAYSIA MOBILIZED PILGRIMAGE SAVINGS 
 
¶7.  Zeti credited her father for having "invented Islamic finance." 
She explained that her father, an economist, developed the idea for 
"Tabung Haji," a government-owned entity that operates as both a 
Sharia-compliant mutual fund and as Mecca tour operator.  Her father 
noticed that in rural Malaysia, people saved for the Hajj 
(pilgrimage to Mecca) by hiding money under mattresses and in tin 
cans, but often lost their savings to theft, flood, or fire.  Now, 
they can invest their savings productively through Tabung Haji which 
invests in various Sharia-compliant corporations and uses the money 
to organize Hajj tours for a long waiting list of investor pilgrims. 
 In this way, the funds were now servicing not only their individual 
owners but the entire economy as well. 
 
LIBERALIZATION VS. VULNERABILITY 
 
¶8.  In spite of her broad comment that Malaysia's financial sector 
was "now liberalized," later she qualified this, saying the 
government had made "many strides" in liberalization and would 
continue to do so, but "must manage it carefully so as not to 
disrupt the system."  She said policymakers did not want to increase 
risks in light of Malaysia's vulnerabilities, and that they needed 
"expertise to manage (liberalization) or it would deteriorate 
rapidly in this environment." 
 
MALAYSIA OUTSHINES U.S. ON ANTI-MONEY LAUNDERING 
 
¶9.  The Ambassador praised Malaysia's anti-money laundering and 
counter terrorist finance framework, citing the country's recent 
Mutual Evaluation within the Financial Action Task Force Asia 
Pacific Group, where it ranked higher than the United States with 
only one recommended area for improvement (the U.S. has two).  Zeti 
pointed out that Malaysia ranked higher than Australia as well, and 
credited Malaysia's mandatory identification cards and its high 
level of financial inclusion, especially through the voluntary 
Tabung Haji and the mandatory Employee Provident Fund. She recalled 
explaining to the G-7 that Islamic finance was not an easy 
instrument to finance terrorism; rather, since it was based on 
underlying tangible assets and required high levels of transparency 
for Sharia compliance, it was less vulnerable to misuse by 
terrorists than conventional channels. 
 
ONLY TWO PERCENT OF MALAYSIANS "UNBANKED" 
 
¶10.  Zeti described the World Bank's studies of the "unbanked," 
where in many countries in Africa and Asia only 20 to 30 percent of 
the population has some sort of bank account.  In Malaysia, 98 
percent of adults had some sort of account.  "We can monitor 
everybody!" she exclaimed happily, but then quickly added that only 
about three people have the codes to access individuals' account 
information but at least it was all in the formal sector. 
 
¶11.  COMMENT: According to Malaysia's Financial Sector Master Plan, 
adopted in 2001, financial services liberalization was supposed to 
have been achieved by 2007.  Malaysia has taken incremental steps in 
that direction, but only within a framework that is managed 
meticulously from above.  Bank Negara has little confidence in 
market forces which, along with foreigners, they generally blame for 
the financial crisis of the late 1990s. Underlying the excuses and 
the finger-pointing is a fear that local Malaysian banks cannot 
compete with their international counterparts.  However, Malaysia is 
proving highly competitive in some areas of Islamic finance, and 
this sector could lead the way for true financial sector 
liberalization.  If conventional finance is not blocked from 
following it its wake, Malaysia might be able to implement the 
reforms it needs to become a global player. 
 
LAFLEUR