R u n n i n g H e a d : B a n k i n g i n M a l a y s i a P a g e | 1

Banking in Malaysia

MGM355-1203A-02 International Business Practices

Phase 5 Individual Project

Sabrina Mergenthaler

Colorado Technical University Online

Professor Asmeret Beyene

August 13, 2012

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Abstract

Business expansion undergoes many considerations prior to action. As businesses travel

across oceans and country lines to engage, greater needs arise in order to ensure the

success of the business. One such need includes banking. Regional banks are businesses

that also take part in overseas expansion to facilitate certain business functions. Not

unlike any other company, challenges can be anticipated based on the region in which the

bank pursues setup. The challenges may be related to the culture, economics, and

government of the nation in which there is intention to enter. Throughout this document,

we will explore some of the challenges to be expected when expanding a regional bank

into the country of Malaysia. Particularly addressing the culture, political, legal and

economic conditions of Malaysia will lend to an assessment of the risks and benefits

associated with such an expansion. The final assessment will contribute to a conclusive

decision of pursuit or termination of the plan to engage.

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Introduction

Once a dependant nation, Malaysia has risen as a diversified country by developing an

economy upon manufacturing, services, and tourism (Malaysia, 2012). The diversification of

Malaysia contributed greatly to the country’s rise as a large financial center. The growth of

technology has further strengthened the country’s role in the banking industry; and as such, is the

focus of regional banking expansion from the United States (History of Banking, n.d.).

The New Environment: A Challenge or a Welcome Mat?

Malaysia is greatly diversified, not only in its product, but in its people as well. While

Malaysians make up 50% of the population, the next largest group—the Chinese—have

ingrained a lot of culture on the country; for example, in religion, cuisine, and policy (Malaysia,

2012). However, it is these same aspects that create Malaysia’s “close-to-home” appeal for

American businesses.

Though the main language of Malaysia is Malay commerce and banking is typically

conducted in English. Similar to America, the educational system of Malaysia is conducted

under the guidance of the government; and starting at age six, children are required to attend

public school (or another acceptable educational facility). A slight difference provides students

the opportunity of attending post-secondary educational facilities funded entirely by the

government (Hsu, 2009).

Education has immensely affected the nation, as well. As more and more Malaysian

graduates enter the working-class, a growth of individualism has sparked. In fact, the rise in

Malaysia’s individualistic approach in society has increased the concern of many nationalists of

Malaysia who address the “new attitude” as being linked to greed and arrogance (Hsu, 2009).

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Political and Legal Systems

While much of the social and educational standards of Malaysia do not deviate from the

familiar types of the US, the government and legal systems have a slightly varied approach. For

example, the ruler, or King is elected to serve for a five year term by the hereditary rulers of the

nine states. Nomination of the King is based on a rotation of those state rulers (Malaysia, 2012).

Though the role of the king is primarily ceremonial, the ruler appoints the representatives

of the specific branches of government. Under the Constitution of Malaysia, the king is granted

the power to elect these officials in order to safeguard the country’s position and interest (Means,

1991). The branches of government define policies and carry out rulings based on the mixed

legal system of English common law, Islamic law, and customary law (Malaysia, 2012).

Intervention in the Private Sector

The granting of such a broad role has been a reward to the private sector which works

hand-in-hand with the public sector to achieve maintaining the position and interest of Malaysia.

In fact, Malaysia has remained an attractive location for businesses through policies that favor

business growth and profit. To facilitate such an environment, the Malaysian government goes to

great lengths to keep an open line of communication and consultation between government and

businesses (Why Malaysia, 2010). With influence from companies fueling policies, political

decisions, and tax breaks, a financial institution in the country can only improve its bottom line

and position.

Economics and International Trade

Restructuring efforts continue in the four pillars of economic freedom, and more than

ever before, the regulatory framework has become more efficient as business procedures have

become streamlined. This reform is largely accredited to the implementation of policies which

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support open markets and encourage an effervescent private sector and have been communicated

by the companies of the nation. The result is enhanced investment flows and the improved

strength and amount of entrepreneurship (Malaysia, n.d.).

Having gained its independence in 1957, Malaysia has gradually relaxed its economy.

Government now stakes ownership in sections such as banking, media, automobiles, and airlines.

Though it has come a long way from its dependence on the export of natural resources, Malaysia

still engages in exports of electronics, agriculture, and information technology products

(Malaysia, n.d.). In fact, the country has maintained a positive trade balance: exporting more

than it imports (Malaysia—International, 2012).

This growth in international trade is representative of the government’s role in building

the country’s attractiveness. Through Malaysia’s Ministry of International Trade and Industry

(MITI), strives to put policies and incentives in place to coerce trade and agreements between

nations. In pursuit of creating a more liberalized and fair global trading market, Malaysia has

entered into trade agreements with many countries, including: the US, Japan, Pakistan, New

Zealand, India, Chile, and Australia to name a few (Malaysia’s FTA, 2012). Coupled with the

stability in Malaysia’s banking industry, the work of the government to establish and maintain

such a strong global trading market only increases the potential for expansion of a bank within

the Malaysian nation.

Presence in Malaysia: A Potential Benefit for Future Investments

Because Malaysia pushes so eagerly to build trade between nations, it is without a doubt

the bank can pursue greater interests using Malaysia as a starting point. The country is currently

invested in a regional integration with many provinces of the island of Sumatra in Indonesia, and

southern Thailand. Established in 1993, the Indonesia-Malaysia-Thailand Growth Triangle

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(IMT-GT) only hopes to expand into additional neighboring lands. In fact, Malaysia has taken

fervent action towards engagement with the Association of Southeast Asian Nations

(ASEAN) for several years, and encourages a speedier process by the Asian nations to complete

the expanse of free trade into those member nations by 2015 (Malaysia Says, 2006).

Personal Address

Previous to the research conducted for this document, little was known regarding

Malaysia to the writer. I saw a movie called Entrapment many years ago in which Catherine

Zeta-Jones and Sean Connery were thieves. Working together the two concocted a plan to “rob”

the International Clearance Bank located in Kuala Lumpur. After a minor search, I found the

referenced bank was real and located in a state of Malaysia. While this was the initial intention

behind selecting Malaysia, I was quite pleased throughout my research to find the region was so

supportive of investing businesses and the banking industry more specifically. This laughable

approach led me to select and stick with Malaysia as a choice-nation for advancing a regional

bank.

Assessment

As a manager, and the researching agent for the pursuit of this particular endeavor (opening

an overseas office in Malaysia for a regional bank of the United States), all findings point to

concluding that such a movement would be in the best interest of this bank. Because the

government of Malaysia takes an active role in expanding and supporting growing businesses, it

goes without saying that any advancement into the nation will be welcomed and assisted. In

addition to being a nation open to and attractive to businesses, the Malaysian government

actively participates in communication with companies to ensure that its policies are made to

maintain the appealing corporate environment. Such an appeal inspires this writer to believe that

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any financial investment to the nation is well worth the risks. The stakeholders, including the

vendors, investors, customers, and employees of our bank, can rely on the continuous stability of

the banking industry in Malaysia to provide a satisfactory return on investment (ROI).

Malaysia has also proven that diversity has lent an immense texture to the cultural, social,

political and educational aspects. As well, these diversities have greatly contributed to the

individualistic attitude and behaviors similar to the United States. Adaptation for our

representatives will likely be less difficult due to the similarities discussed. In fact, with such

similarities and the active role of government, one can expect that the greatest challenge will lie

in managing the change itself, combating the resistance to the change by staff, and providing the

support tools necessary to make such a great transition (Robbins & Judge, 2010).

Presence in Malaysia

Not entirely unlike the U.S., Malaysia recognizes businesses as sole proprietorships,

partnerships, and registered companies. Because the bank has shareholders, it is advisable that

engagement of a presence in Malaysia be conducted under a registered company to meet our

objectives. A registered company is legally independent of its owners. Essentially, the company

become an artificial person which can own property, pay taxes, and be sued regardless of who

holds the highest shares. Governed under the Companies Act of 1965, such a presence would

protect our investors and shareholders in the event of tragedy (Registered Company, n.d.).

Conclusion of Part I

Businesses expand with crucial input on the host nation of choice. As they move their

operations abroad, their needs for conducting simple business functions also expand with them.

As a financial institution, it is in the best interest to pursue engagements abroad to ensure that

other businesses can function accordingly. It is additionally important to protect the interests of

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the bank, and in so doing, much research should be invested into selecting an adequate host

nation. Malaysia is a country not unlike the United States—with similar interests, cultures, and

pursuits in business. The stability of the nation during its rise to whole economic freedom speaks

volumes about the promising future and the potential benefit which could be gained by pursuing

an expansion. With a government focused on increasing fair global trade, entrance into the nation

of Malaysia can only be viewed as a portal which will inspire the future growth of this bank.

Additionally, the entrance of the bank into the global market greatly contributes to a sense of

trust and brand identity for our clients who conduct business overseas. To overlook such an

opportunity would be as caustic as shutting the doors to the bank on payday and cutting all

investments. Advancement into any nation will come with challenges. Those challenges are part

of the growth a company must endure and overcome into to be successful in any endeavor. This

bank should be no different in its efforts to expand.

Part II

Introduction

To further demonstrate the benefit of such a move, we can look to our role as provider for

GlobiTech. GlobiTech is one of our multinational corporation clients. The company advances

aerospace technology across the globe to governments and widely funded space programs. The

intellectual level of the company contributes to an atmosphere of competence, reliability, and

superiority in product, which puts them among the most notable companies in their industry.

GlobiTech’s next endeavor includes designing a plant in Chile. Making up one of our

largest clients, the founder and current president of the company has requested the advice of the

bank’s top advisors. As such, a team has been developed to investigate the factors lending to a

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decision, including: foreign currency exchange, government regulation, inflation, and interest

rates.

Affecting Financing

Options

GlobiTech is, like any company, with limited resources to carry out its operations. The

organization has three options for obtaining the necessary funds to expand into the Latin

American region of Chile: borrowing (which will create a debt with financial institutions),

issuing equity (or stocks), and internal funding (from parent companies or international

subsidiaries) (Wild & Wild, 2012).

Foreign Exchange and Currency Risks

While each option has its pros and cons, a bigger issue of concern is the transference of

finances across nations. There are many risks to be aware of when financing international

operations. First and foremost will be the rate of exchange, whereby in some nations the cost to

fund processes will greatly outweigh the benefits to be gained due to the exchange rate.

However, even the exchange rate is secondary to the convertibility of funds in certain nations.

With supply and demand acting as the force which determines the convertibility of currency,

nations without strong financial positions or adequate reserves of foreign currencies may not

readily exchange funds (Wild & Wild, 2012).

Hedging

Governments will often implement policies that restrict currency exchange as well. Such

policies include multiple exchange rates, import deposit requisites, and quantity restrictions.

Nations may pass such policies in order to conserve hard currencies, safeguard currencies from

speculators, and to keep native residents and businesses from investing in other countries. For

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these very reasons, the company will require to insure its finances against possible losses due to

unexpected changes in the exchange rate. Also known as currency hedging, this practice will

decrease the risk connected to the transfer of international funds, as well as protect the company

in credit-based transactions (Wild & Wild, 2012).

Instruments of Exchange

In addition to hedging currency, GobiTech can employ the use of foreign exchange

instruments. The instruments are broadly defined as standard contracts in which foreign

exchange is the primary asset. There are many types of instruments available and it would be

wise to investigate each one to precisely determine the best solution for GlobiTech. However, in

light of Chile’s emerging marketing, with an exchange that is not entirely free, it would be a

great interest to Globitech to employ a foreign exchange option (FEO). An FEO is a contract

which allows the buyer to buy or sell currency at a defined rate within a certain period of time.

Use of this particular instrument eliminates much of the risk while allowing potential profits to

grow unrestrained (Sekirin, n.d.).

Government Regulations of Chile

In light of these risks, Chile has strengthened itself as a business-friendly country. As

such, Chile is also involved in many trade agreements. Growth of the nation is widely influenced

by its market-based economy, and the government of Chile is fixated on continuing the growth

through active engagement in creating business-friendly policies. However, the Chilean

government strictly controls the stock market of Chile, and works closely with businesses to

disperse economic wealth throughout the country through public employment programs

(Financial Times, 2010).

The Time to Decide: Inflation and Interest Rates

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Despite the many risks to consider when engaging GlobiTech into the new market, timing

will greatly be influenced by inflation and interest rates. Inflation reflects supply and demand,

and ultimately is dependent on interest rates. When interest rates are low, more debt is eagerly

consumed. This impacts supply and demand as having access to low-interest credit increases

consumer demand, which increases the need for suppliers to supply. The movement of the cycle

requires GlobiTech to be aware of the movement of interest rates in order to capture funding at

the lowest rate, and profit at the greatest rate. Though this does not necessarily indicate the need

for Chilean rates to be low, it does indicate the need to have a balance on the side of Malaysian

interest rates and Chilean exchange rates (Wild & Wild, 2012).

Conclusion

As the advising and financial representative for GlobiTech, it crucial to adhere to and

understanding how the foreign exchange market operates. It is possible for GlobiTech to obtain

low interest rates from a Malaysian financial institution and exchange the funds in their Latin

American location. However, timing is pertinent. Low interest rates must be compatible with

Chile’s inflation rates and current economic conditions in order for GlobiTech to achieve a

maximum profit.

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References

Financial Times. (2010). Retrieved from Chile Surges Forward on Good Policies, Good Timing: http://blogs.ft.com/beyond-brics/2010/10/06/chile-surges-forward-on-good-policies-good-timing/

History of the Banking Industry in Malaysia. (n.d.). The Association of Banks in Malaysia. Retrieved from http://www.abm.org.my/history_of_the_banking_industry_in_malaysia.aspx

Hsu, D. (2009). Malaysia and a Declining Standard of Social Behavior. Dr. Hsu on Malaysia. Retrieved from http://hsudarrenpress.com/2009/09/16/5489/

Malaysia. (2012). The World Fact Book. Central Intelligence Agency. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/my.html

Malaysia—International Trade. (2012). Encyclopedia of the Nations. Retrieved from http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia-INTERNATIONAL-TRADE.html

Malaysia’s FTA Involvement. (2012). Ministry of International Trade and Industry. Retrieved from http://www.miti.gov.my/cms/content.jsp?

id=com.tms.cms.section.Section_8ab55693- 7f000010-72f772f7-46d4f042

Malaysia Says Southeast Asia Must Speed Up Economic Integration. (2006). Association of Southeast Asian Nations. Retrieved from http://www.aseansec.org/afp/167.htm

Means, Gordon P. (1991). Malaysian Politics: The Second Generation. Oxford University Press: England. Retrieved from: http://journals.cambridge.org/action/displayAbstract?

fromPage=online&aid=3697900

Registered Company. (n.d.). My Government—Malaysia’s Official Government Portal. Retrieved from http://www.malaysia.gov.my/EN/Relevant%20Topics/MakeaBusiness/Business/PlanBusiness/FormsOfBusiness/Company/Pages/company.aspx

Robbins, S. & Judge, T. (2010). Essentials of Organizational Behavior: Tenth Edition. New Jersey:Prentice Hall.

Sekirin, E. (n.d.). Foreign Exchange Instruments. EHow Money. Retrieved from http://www.ehow.com/list_6793287_foreign-exchange-instruments.html

Why Malaysia. (2010). Malaysian Investment Development Authority. Retrieved from http://www.mida.gov.my/env3/index.php?page=government-policies

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Wild, J. J., & Wild, K. L. (2012). International Business: The Challenges of Globalization. SixthEdition. Upper Saddle River, NJ: Pearson Prentice Hall.