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Bond Market Development in Malaysia
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Overview
- With the shift in public policy in the 1980s to consolidate public sector activities and promote the private sector as the engine of growth, a new financing pattern emerged. With this transformation of the economy, the decline of public sector borrowing was compensated by an increase in financing by the private sector. The private sector has relied on the banking system for its financing needs, of which a large portion was intermediated through the banking system – the ratio of bank credit to gross domestic product (GDP) in Malaysia was high at 149% in 1997. Nevertheless, the ratio of bank deposits to GDP was also high at 154% and therefore banks were able to finance their lending operations from their deposits.
- As the banking sector was heavily exposed to the economic crisis that struck the nation in 1997, it was very cautious in extending new credits. In the post-crisis period, loan growth was low; for example in 1998 and 1999, growth was less than the target of 8% proposed by the government.
- The malignancy of the Asian financial turmoil was derived from the externally-driven currency crisis with the internally induced banking crisis. In other words, it was a capital account shortfall coupled with domestic credit contraction, which is distinct from the traditional current account crisis caused by deterioration of domestic macroeconomic performance such as inflation, fiscal deficits and low saving rates. The crisis was preceded by massive short-term and unhedged capital inflows and was subsequently triggered by a sudden reversal of capital outflows. At the same time, the situation was exacerbated by a double-mismatch of currency and maturity.
- As a result, there was a greater need for a more efficient fund-raising framework, divesting away from the historical source of indirect financing by financial institutions which typically comprise intermediate credit, term and currency risk on leveraged balance sheets. The need for private enterprises to tap the capital market for funding became even more urgent.
- From the perspective of the corporate bond market as an alternative avenue for fund-raising, there were clear structural deficiencies in the issuance process at that time. The time taken for any bond issue ranged from nine to 12 months. In addition, issuers did not have the certainty as to when any corporate bond issue proposal would be approved or rejected. To ensure that financing of private sector enterprises is not impeded, the government accelerated the reform of the issuance process by centralising the regulation of the corporate bond market with the SC. All efforts were taken to create transparent criteria to ensure an efficient and cost-effective issuance process.
- To ensure that efforts to develop the bond market are well co-ordinated, a high-level National Bond Market Committee (NBMC) was established by the government in 1999. The role of the NBMC is to provide overall policy direction for the orderly development of the bond market and to identify and recommend appropriate implementation strategies.
- The NBMC is chaired by the Secretary General of Treasury and comprises senior officials from Bank Negara Malaysia (BNM – the Central Bank), Registrar of Companies (presently known as the Companies Commission of Malaysia), Foreign Investment Committee, Ministry of Finance, Kuala Lumpur Stock Exchange (presently known as Bursa Malaysia) and the SC. Under the NBMC’s oversight, a number of bond market-related initiatives and measures have been implemented since 1999.
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