restructuring the banking sector role of danamodalrepo.uum.edu.my/652/1/rahimah_majid.pdf · 2010....

ISSN: 151 1-2477 JAN - MARCH 1999 Restructuring The 1 Banking Sector : RoleQf Danahartaand Danamodal Market Structure and Concentration 6 + Does it Really Matter 8 if Forecasts are Right or Wrong? ~~,~~ Key Economic Indicators for 10 Northern Region Economies RESTRUCTURING THE BANKING SECTOR : ROLE OF DANAHARTA AND DANAMODAL - Rahimah Majid Introduction Although strong economic per- formance in recent years had placed Malaysia in a stronger position to withstand the re- gional financial turmoil, the in- tensity of the contagion effect nevertheless had deteriorated its economic situation. The currency crisis had caused strains in the financial system as well as undermined inves- tors' confidence. Inefficiency and vulnerability had emerged in the financial sector due to several reasons. There has been a rapid expansion of credit' to the private sector, particularly in the broad prop- erty and stock markets, indicat- ing inappropriate direction of lending. The economy is highly leveraged with heavy reliance on short-term domestic debts that increased the overall sol- vency risk of both the corpo- rate and financial sectors. Also, banks are burdened with increasing level of non-per- forming loans (NPEs) that lead to erosion of their capital ad- equacy. These factors partly contributed to the instability of the financial sector, which in turn, affect the real sector. Conse- quently the economic growth has been slowed down. Efforts are directed towards minimising the adverse impact of the crisis on the economy. Se- ries of policy packages had been implemented to restore confidence in our macroeconomic sta- bility, with priorities given to maintaining financial market sta- bility so that it becomes resilient to external shocks. An overly fragmented and high level of fra- gility in the banking sector reflects the need for restructuring. Re- structuring the banking sector is crucial and need to be tackled quickly if the economy is to re- gain its footing. Accordingly, measures bxd been taken to tackle the most challenging tasks in the restructuring proc- ess, that is, resolving the NPk:: 1 The ratio ot bank lending to nominal GDP rose from 98 6% in 1990 to around 145 1 % in 19" 7 The Northern Malaysian Economic Bulletin (NMEB) is published quarterly by School of Economics, Universiti Utara Malaysia. ; in this publication may be used without restriction. However, an appropriate acknowledgement would be appreciated. The ilitp for facts and opinions presented in the articles rests exclusively with the individual authors. Their interpretations do not ly retlect the views or the policy of the Editorial Committee and the School of Economics, Universiti Utara Malaysia. NMEB s original contributions from local or overseas institutions and organisations. Please direct your comments, suggestions, news, .les to Dr, Fatimah Wati Ibrahim, School of Economics, Universiti Utara Malaysia, 06010 UUM Sintok, Kedah Dam1 Aman. 700575 I; or e-mail: [email protected] ~~ Ma j HC 445.5 A1 N874

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Page 1: RESTRUCTURING THE BANKING SECTOR ROLE OF DANAMODALrepo.uum.edu.my/652/1/Rahimah_Majid.pdf · 2010. 8. 17. · SECTOR : ROLE OF DANAHARTA AND DANAMODAL - Rahimah Majid Introduction

ISSN: 151 1-2477 JAN - MARCH 1999

Restructuring The 1 Banking Sector : RoleQf Danahartaand Danamodal

Market Structure and Concentration

+ Does it Really Matter 8 if Forecasts are Right or Wrong?

~~,~~

Key Economic Indicators for 10 Northern Region Economies

RESTRUCTURING THE BANKING SECTOR : ROLE OF DANAHARTA AND DANAMODAL - Rahimah Majid

Introduction

Although strong economic per- formance in recent years had placed Malaysia in a stronger position to withstand the re- gional financial turmoil, the in- tensity of the contagion effect nevertheless had deteriorated its economic situation. The currency crisis had caused strains in the financial system as well as undermined inves- tors' confidence. Inefficiency and vulnerability had emerged in the financial sector due to several reasons. There has been a rapid expansion of credit' to the private sector, particularly in the broad prop- erty and stock markets, indicat- ing inappropriate direction of lending. The economy is highly leveraged with heavy reliance on short-term domestic debts that increased the overall sol- vency risk of both the corpo- rate and financial sectors. Also, banks are burdened with increasing level of non-per- forming loans (NPEs) that lead

to erosion of their capital ad- equacy. These factors partly contributed to the instability of the financial sector, which in turn, affect the real sector. Conse- quently the economic growth has been slowed down.

Efforts are directed towards minimising the adverse impact of the crisis on the economy. Se- ries of policy packages had been implemented to restore confidence in our macroeconomic sta- bility, with priorities given to maintaining financial market sta- bility so that it becomes resilient to external shocks. An overly fragmented and high level of fra- gility in the banking sector reflects the need for restructuring. Re- structuring the banking sector is crucial and need to be tackled quickly if the economy is to re- gain its footing. Accordingly, measures bxd been taken to tackle the most challenging tasks in the restructuring proc- ess, that is, resolving the NPk::

1 The ratio ot bank lending to nominal GDP rose from 98 6% i n 1990 to around 145 1 % in 19" 7

The Northern Malaysian Economic Bulletin (NMEB) is published quarterly by School of Economics, Universiti Utara Malaysia. ; in this publication may be used without restriction. However, an appropriate acknowledgement would be appreciated. The i l i t p for facts and opinions presented in the articles rests exclusively with the individual authors. Their interpretations do not ly retlect the views or the policy of the Editorial Committee and the School of Economics, Universiti Utara Malaysia. NMEB s original contributions from local or overseas institutions and organisations. Please direct your comments, suggestions, news, .les to Dr, Fatimah Wati Ibrahim, School of Economics, Universiti Utara Malaysia, 06010 UUM Sintok, Kedah Dam1 Aman. 700575 I ; or e-mail: [email protected]

Ma j HC 445.5 A 1 N874