The politics and business of bank mergers

Terence Gomez
22 July 2014

Malaysians were informed on July 10, 2014 that a major bank consolidation was in the pipeline, involving CIMB Group Holdings, RHB Capital and Malaysian Building Society. With this union, CIMB will emerge as Malaysia’s largest banking enterprise, in terms of assets, as RHB Capital owns RHB Bank, currently the country’s fourth largest bank.

According to media reports, the merger will enhance CIMB’s goal of becoming Southeast Asia’s leading Islamic finance institution with the capacity to expand its interests in this sector to other parts of the world. However, one core issue remains unmentioned in the press: this consolidation will tightly entwine the interests of political and business elites in the banking sector.

Common political-business history

The histories of CIMB and RHB are intriguingly common. Both banks have long been controlled by Umno politicians (the case of CIMB) or by well-connected businessmen (the case of RHB). Their histories are also fraught with contestations involving political and business elites, indicating a conspicuous struggle for control over Malaysia’s financial sector.

CIMB’s roots can be traced to a small Sarawak-based financial enterprise, Bian Chiang Bank, which was taken over by Umno in 1975 and renamed Bank of Commerce. Interestingly, in 1985, an attempt was made to merge Bank of Commerce with Malaysia’s then third largest bank, United Malayan Banking Corporation (UMBC), which would eventually evolve into RHB Bank. UMBC was then controlled by a key Umno figure, Daim Zainuddin. This deal fell through because an agreement could not reached over the price of the shares involved, but Daim’s stake in UMBC was eventually sold at a huge profit to a government agency, Pernas. This incident was referred to as the “UMBC scandal” as Daim was then serving as Finance Minister.

In 1992, UMBC came under the control of publicly-listed Datuk Keramat Holdings, whose primary shareholder was Mohd Noor Yusof, once the political secretary of then Prime Minister Mahathir Mohamad. Another shareholder of the bank was Umno’s cooperative, KUB. While under Datuk Keramat Holdings control, UMBC was involved in numerous financial improprieties involving the disbursement of questionable loans. Four years later, UMBC, ridden with bad debts, was sold to a major government-controlled publicly-listed firm, Sime Darby, again at a hefty profit. Since Sime Darby, primarily a plantations enterprise, had no experience in banking, this acquisition was not well-received in the corporate sector, with clear evidence of conflict-of-interest involving Umno. UMBC was renamed Sime Bank.

When the Asian currency crisis broke in 1997, Sime Bank and another government-controlled enterprise, Bank Bumiputra, were revealed to be heavily burdened with non-performing loans. In 1999, of the RM28 billion in bad debts taken over by the government as a consequence of the crisis, RM21 billion had come from these two banks. Bank Bumiputra was merged with Bank of Commerce and become part of the CIMB Holdings group while Sime Bank was merged with RHB Bank, controlled by the well-connected Rashid Hussain through his financial group, Rashid Hussain Bhd. RHB Bank itself was a merger between Kwong Yik Bank, acquired from government-owned Malayan Banking, and D&C Bank, established by former Finance Minister H.S. Lee and then controlled by his son, Alex Lee, a leading member of the Barisan Nasional’s Gerakan, and a close associate of Mahathir and Daim.

Later, in 2003, after Rashid was believed to have had a fall-out with Umno elites, his interest in the bank was taken over by an enterprise owned by the family of the former Chief Minister of Sarawak, Taib Mahmud. This takeover involved a merger with Bank Utama, controlled by Taib’s family. In 2007, the government’s Employees Provident Fund (EPF) took a controlling stake in RHB.

Consolidating banks

During this long practice of shifting the shares of major banks between government agencies and political and business elites, one core public policy discourse that emerged was the need to consolidate the banking sector, presumably because Malaysia had far too many financial institutions. The contention then – and an argument still made by politicians and well-connected business people – was that the presence of large-scale banking enterprises was good for the economy, allowing them to take on major Western financial institutions as they expanded their operations abroad.

This argument gained currency after the 1997 crisis, emerging as the principal justification for the government’s intent to consolidate Malaysia’s 58 banks and financial institutions. In 1999, the government voiced its plan to merge these financial institutions under six “anchor” banks. This plan was widely protested, particularly by families and individuals who had long cultivated these financial institutions. As objections from the business community mounted, and with a general election then impending, the number of anchor banks was increased to ten. This decision to increase the number of anchor banks sparked a rift between Mahathir and Daim, then the serving Finance Minister who had replaced Anwar Ibrahim after he had been controversially expelled from this post in 1998.

This fall-out between Mahathir and Daim was due to the latter’s desire to obtain direct and indirect control over a large segment of the consolidated banking sector. The row was also due to Daim’s attempt to muscle out Mahathir’s son, Mokhzani, who was trying to secure control of one anchor bank. (A full account of this controversial bank consolidation exercise and political feud was published by the Far Eastern Economic Review in July 2001. Republished by Aliran, it can be read here:

One key outcome of this feud between political elites over this forced bank consolidation exercise is that it led to the unprecedented move by Prime Minister Mahathir to appoint himself as Finance Minister, a dubious practice but one that was continued by his successors, Abdullah Ahmad Badawi and Najib Razak. Control over the Finance Ministry gave these Umno presidents jurisdiction over the financial sector, a large segment of which was now owned by the government. With Umno factionalised due to access to government contracts, control over the banking sector was imperative as it served as a key means to dispense patronage.

Crucially too, there appears to be a link between the consolidation of the financial sector and the subsequent fall in domestic investments in the economy, a situation the government has long been trying to remedy. Through this consolidation exercise, the government instantaneously removed ownership and control of banks by owners who had long held a major presence in this sector. This consolidation exercise was an indication of the might of the strong state, a distinct message to private investors of their limited capacity to protect their corporate assets. Given Malaysia’s history of scandals involving banks controlled by the government, this raised the issue of confidence in a state that could act arbitrarily in the corporate sector to reshape ownership patterns of key sectors of the economy.

CIMB-RHB-MBSB merger: in the national interest?

This review of bank consolidation exercises inevitably raises several concerns about the wisdom of merging CIMB, RHB Capital and MBSB. The first concern is that these three institutions have a common shareholder, the EPF, controlled ultimately by the Finance Minister – and Prime Minister Najib – who happens to be the elder brother of the Nazir Razak who leads the CIMB group. While Nazir, who has a sound reputation as a banker of high calibre, has voiced his intention to step down as chief executive of CIMB, he will retain much influence over the enlarged enterprise as chairman of this institution, along with government agencies, such as the EPF and Khazanah Nasional, CIMB’s controlling shareholder.

In fact, Nazir will be appointed to the board of directors of Khazanah, an appointment that has raised some queries even in Malaysia’s much muzzled media. This merger is also troubling as the Finance Minister has control, through government agencies, of other leading banks: Malayan Banking, currently Malaysia’s largest bank, and Affin Bank.

Najib’s government has articulated consistently the need to check “rent-seeking” and “cronyism”. Government plans such as the Economic Transformation Plan, New Economic Model and 10th Malaysia Plan have strongly stipulated that rent-seeking must be curbed in order to inspire investor confidence, particularly among domestic investors. However, serious allegations of rent-seeking have emerged during Najib’s administration, specifically through the award of government projects to businessmen such as Syed Mokhtar Al-Bukhary and Tan Kay Hock.

This then raises the second major concern: will this consolidation exercise inspire investor confidence? This history of the banking sector indicates that it will not, even if justified on the grounds that it will appreciably enhance Malaysia’s presence in the Islamic finance sector in Southeast Asia. Ownership and control of the banking sector evidently matters to investors. What is clear is that while the political actors may have changed over the past decade, the practice of Umno elites striving to gain control over the banking sector has not. This is worrying as it suggests that political change, or feuds, will have implications on the banking sector. Equally worrisome is the overwhelming influence that politicians will have over the banking sector, specifically through a government where power is concentrated in the office of the Prime Minister, one tainted with allegations of rent-seeking.

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