Enhancing domestic capital market with liberalised measures

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KUCHING: The liberalised measures announced by Bank Negara Malaysia (BNM) to relax the foreign exchange administration rules and to enhance the domestic capital market will help spur the banking sector this year.

These measures are expected to come in force the same time as the implementation of the Financial Services Act (FSA) and the Islamic Financial Services Act (IFSA) on May 2, 2013.

“Local takaful operators will soon be able to invest 100 per cent of the net asset value (NAV) of  ringgit investment linked funds offered to residents in foreign currency assets when the liberalised measures becomes effective,” outlined Kelvin Ong, an analyst with the research team at MIDF Amanah Investment Bank Bhd (MIDF Research).

Currently, local takaful operators are allowed to invest up to 50 per cent of the funds NAV in foreign currency assets.

For local takaful operators and insurers, these companies need to comply only with the risk based capital framework when investing in foreign currency assets for their own account.

“Prior to this change, we understand that only up to 5 per cent of the total assets for takaful operators and up to 10 per cent of the total assets of insurers are allowed to be invested in foreign currency assets,” Ong added.

“Under the liberalised measures, residents are now allowed to issue debt securities to non residents subject to compliance to rules on borrowing from non residents.

Also, non residents will be allowed to issue foreign currency securities in Malaysia.” This, Ong added, would add vibrance to the domestic capital market and complement the expansion of residents business operations abroad and for non residents to expand their businesses to Malaysia.

“Interestingly enough, to enhance the domestic foreign exchange market, residents will be allowed to invest in foreign currency assets which are offered by residents,” he noted.

“Meanwhile for hedging purposes, residents and non residents will soon be allowed to carry out anticipatory hedges involving ringgit for their transactions with onshore banks.” In addition, the MIDF Research analyst said non residents would be allowed to hedge ringgit exposure for ringgit investment acquired before April 1, 2005 in addition to ringgit investments acquired after April 1, 2005.

Previously, the regulation had only allowed hedges on ringgit investments acquired after 1 April 2005.

“As such, we expect the more flexible regime to spur foreign currency exchange (forex) transactions and increase in forex deal flows to the local financial institutions,” he predicted.

“This will be beneficial to the fee income growth of foreign investments, particularly in banks which are stronger in capital markets deals and have a stronger regional presence.” Ong also touched on the FSA which would be implemented on May 2, 2013.

“From now until the implementation date, more guidelines on the FSA are expected to be rolled out regulating key areas of the financial industry.

The FSA will regulate Financial Holding Companies (FHC) and the subsidiaries of financial institutions on areas such as capital adequacy, liquidity, risk management and corporate governance,” he explained.

“Moving forward, regulations will be more stringent governing banks. We expect banks to remain focused on shoring up capital positions as a countercyclical capital buffer ranging between 0 to 2.5 per cent could be imposed above the minimum required capital ratios later on.

“Also, higher capitals are needed to support the rise in weighted assets with the expansion of banks’ assets.”