VZCZCXRO0850
PP RUEHAG RUEHBZ RUEHCHI RUEHDT RUEHFK RUEHGI RUEHHM RUEHKSO RUEHMR
RUEHNAG RUEHPA RUEHPB RUEHPOD
DE RUEHKL #0318/01 1181217
ZNR UUUUU ZZH
P 281217Z APR 09
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC PRIORITY 2652
INFO RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUCNWTO/WORLD TRADE ORGANIZATION COLLECTIVE
RUEHKA/AMEMBASSY DHAKA 0433
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGV/USMISSION GENEVA 1703

UNCLAS SECTION 01 OF 03 KUALA LUMPUR 000318 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR -- WEISEL AND BELL 
STATE PASS FEDERAL RESERVE AND EXIMBANK 
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN 
SINGAPORE PASS TO SBAKER 
USDOC FOR 4430/MAC/EAP/M.HOGGE 
TREASURY FOR OASIA AND IRS 
GENEVA FOR USTR 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON ETRD PREL MY BG
SUBJECT: MALAYSIAN PM ANNOUNCES FINANCIAL SECTOR 
LIBERALIZATIONS 
 
REF: KUALA LUMPUR 303 
 
 ¶1. (U) Summary:  Prime Minister Najib Tun Razak announced a 
number of liberalizations to Malaysia's financial sector on 
April 27, as promised last week when he removed some 
restrictions in various service sectors (reftel).  Foreign 
equity limits will be raised from 49 percent to 70 percent 
for investment banks, Islamic banks, and insurance companies, 
but will remain capped at 30 percent for domestic commercial 
banks.  Up to seven new licenses will be given to foreign 
banks over the next three years, including two Islamic banks, 
two commercial banks with "specialized expertise," and three 
"world-class" commercial banks that can offer "significant 
value propositions to Malaysia."  Up to two new licenses will 
be issued for Islamic insurance providers.  Some "operational 
flexibilities" will be offered to foreign and domestic 
financial service providers and offshore companies.  Central 
Bank Governor Dr. Zeti Akhtar Aziz told the press that these 
measures bring Malaysia in line with 90 percent of reaching 
the goals laid out in the ten-year Financial Sector Master 
Plan, established in 2001.  The full liberalization package 
can be found at www.bnm.gov.my. 
 
¶2. (SBU) Comment:  Reactions among financial sector 
professionals and economic analysts ranged from tepid praise 
to expressions of real hope for the Malaysian economy going 
forward.  Najib seems to be carefully selecting reforms that 
will be less painful for his closest supporters and for the 
average voter.  Nevertheless, as with the liberalizations to 
the services sector he announced last week, Najib is sending 
a message to the business community and the public that he is 
determined to move on necessary reforms and that may be even 
more important than the near-term economic impact of the 
announced measures.  End comment. 
 
ISSUANCE OF NEW LICENSES 
 
¶3. (SBU) In line with the GOM's goal of making Malaysia a 
global hub for Islamic finance, the government will offer up 
to two new licenses for foreign Islamic banks with a minimum 
paid-up capital of USD 1 billion.  In addition, two new 
licenses will be granted for "family takaful" (Islamic life 
and investment insurance).  AIG Chief Executive Officer for 
Southeast Asia Rob Ryan told Econoff that his company was 
definitely interested in obtaining a license to offer Islamic 
insurance products in Malaysia and had been in discussions 
with the central bank for some time. 
 
¶4. (SBU) Two new commercial bank licenses will be offered by 
the end of 2009 to foreign banks with "specialized 
expertise."  Sanjeev Nanavati, CEO of Citibank Malaysia, told 
EconCouns that he believed the GOM was looking for banks with 
expertise in financing infrastructure projects, shipping, and 
agriculture.  He named Robobank and Fortis as two 
possibilities. 
 
¶5. (SBU) Another three commercial banking licenses would be 
offered in 2011 to "world-class banks that can offer 
significant value propositions to Malaysia."  The GOM 
provided no details, but Dr. Yeah Kim Long, Managing Director 
and Chief Economist for Rating Agency Malaysia speculated 
that, while the Islamic banking licenses were intended to 
draw money from the Middle East, Malaysia also was looking to 
India and China as it saw those markets as areas of growth. 
 
FOREIGN EQUITY LIMITS 
 
¶6. (SBU) Foreign equity limits were raised from 49 percent to 
70 percent for investment banks, Islamic banks, and insurance 
companies.  Yeah pointed out that since few American 
financial service companies were in any position to make 
acquisitions, this was a relatively safe time to raise equity 
limits.  Even Middle Eastern banks were having liquidity 
problems.  Still, if Malaysia wanted to become a global hub 
for Islamic finance, liberalization was a necessity.  He said 
domestic Islamic banks already were facing stiff competition 
 
KUALA LUMP 00000318  002 OF 003 
 
 
from the new foreign Islamic banks licensed in the last 
several years, and taking foreign partners not only would 
force them to improve their own competitiveness, but also 
would give them inroads into other countries. 
 
PERMISSION TO OPEN NEW BRANCHES 
 
¶7. (SBU) Citi's Nanavati was most optimistic about a new 
provision to allow locally-incorporated foreign banks (like 
Citi) to establish four additional branches:  one in an urban 
area, two in semi-urban areas, and one in an underserved 
rural area.  Negotiating the locations of these branches was 
"manageable," he told EconCouns.  He did not expect Citi to 
take advantage of a new provision to allow the establishment 
of up to ten "microfinance branches" in the near term. 
Suhaimi Ilias, Vice President and Chief Economist for Equity 
Markets at Maybank Investment Bank highlighted microfinance 
as one of the areas of "specialized expertise" the GOM wanted 
to attract to Malaysia.  The day before Najib's announcement, 
Suhaimi speculated that perhaps Bangladesh's Grameen Bank 
would be opening up shop in Malaysia.  Ryan said a provision 
to lift branching restrictions on insurance companies 
altogether was a welcome relief; AIG has been in negotiations 
with the central bank for some time just to get permission to 
move several of its branches.  Ryan also welcomes the lifting 
of restrictions in employing expatriates; currently AIG is 
limited to three expatriate work visas in addition to the 
CEO.  Nanavati explained that the central bank already had 
lifted the numerical restrictions on the banking sector 
regarding how many expatriates it could hire. 
 
OFFSHORE COMPANIES TO OPEN OFFICES IN KUALA LUMPUR 
 
¶8. (U) Holding companies in Labuan, Malaysia's offshore 
financial services center, will be allowed to establish 
offices in Kuala Lumpur, subject to approval from the Labuan 
Offshore Financial Services Authority (LOFSA).  The Kuala 
Lumpur office will be allowed to trade outside Malaysia as 
well as hold investments, provide management services, manage 
surplus funds, and provide credit facilities to related 
companies within Malaysia or non-related companies outside 
Malaysia, subject to some restrictions.  Details are 
available at www.lofsa.gov.my. 
 
OVERALL REACTION:  POSITIVE, BUT NOT WITHOUT DISAPPOINTMENTS 
 
¶9. (SBU) Overall, reactions to the announced liberalizations 
were positive.  Yeah was optimistic that the PM would 
continue liberalizations at a "sustained pace" up until the 
next election in 2013, explaining that even many young Malays 
were seeing that affirmative action programs, while effective 
in the short run perhaps, were counterproductive in the long 
run.  Yeah told Econoff that the 2004 landslide victory for 
the current ruling coalition was based on promises of 
then-Prime Minister Abdullah to clean up corruption and 
reform the economy.  He attributed the drop in support and 
the loss of five states in the March 2008 elections to the 
fact that those promises never materialized.  "Now the ruling 
party and the opposition are competing on the basis of who 
can be the biggest reformer, and if Najib doesn't reform, 
he'll lose the next election," he said. 
 
¶10. (SBU) Yeah told Econoff that PM Najib seemed to have 
hand-picked the liberalization measures that would be the 
least painful ) both in terms of exposing domestic players 
to competition and with regard to the man on the street. 
Yeah described the measures as "carefully paced to meet the 
public,s expectations."  While the impact of the reforms on 
the overall economy was likely to be small, they made a 
significant impact on "sentiments" because they represented a 
breach of the race-based policies and the system of 
protecting domestic players. 
 
¶11. (SBU) There were some disappointments as well.  Ryan told 
Econoff that AIG and other insurance providers in Malaysia 
had been in discussions with the central bank for some time 
 
KUALA LUMP 00000318  003 OF 003 
 
 
to remove the ceiling on premiums for auto and fire 
insurance, neither of which had been raised since 1974.  Auto 
and fire policies comprised 60 percent of general insurance 
premiums, he explained, and while fire insurance still 
generated a modest profit, auto insurance was a loss maker 
for most insurance companies in Malaysia.  Discussions about 
lifting premium caps had been ongoing, he said, but no 
proposals were on the table.  Ryan speculated that licenses 
for new banks and liberalizations for various technical 
matters in the banking sector had little political impact for 
the man on the street, but automobile insurance premiums were 
a different matter, and more likely to be remembered by 
voters. 
 
KEITH