Page 323 - Contributed Paper Session (CPS) - Volume 4

CPS2245 Azrie Tamjis

The first phase of the FSMP (2000–2003) is regarded as the period of initial
reform in the banking industry. The banking sector in particular witnessed the
emergence of large domestic banks from a guided consolidation exercise.
During this period, cost efficiency scores were trending downward. This can
be potentially explained by various recovery measures taken by the
government of Malaysia and BNM. After the financial crisis in 1997–98, the
Malaysian government took various drastic measures to improve the banking
sector. Against the backdrop of that crisis, there were significant structural
changes in the Malaysian banking sector (Sufian, 2004). With the severe losses
faced by the Malaysian banks, and to maintain the integrity of public savings
and the stability of financial system, the Malaysian government introduced a
rescue scheme to acquire shares in some of the ailing commercial banks and
absorb problem assets in distressed banks. Malaysia did not rely on assistance
from the International Monetary Fund (IMF) after the financial crisis, unlike
some other Association of South East Asia Nations (ASEAN) member countries.
Under the IMF programme, insolvent banks were forced to close down, but
Malaysia did not take this path as the social cost involved, in terms of
dislocation of resources, would have been high. Malaysia took a different
approach by introducing a guided consolidation of fragmented banking
institutions, in which BNM played an intermediary role, solving issues of
2
fairness to all parties involved in the merger. The effect of consolidation of
domestic banks resulted in declining cost efficiency because they were forced
to implement various rationalisation programmes including: restructuring of

2 This consolidation programme was also in line with the requirement in having stronger
domestic banks to compete regionally when opening its financial industry to the international
players in 2003 under the World Trade Organisation (WTO). As a result, in 2001, the
consolidation had successfully merged 54 Malaysian banks and financial institutions into 10
anchor banking groups.
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