BUSINESS, TRADE, FOREIGN INVESTMENT AND ISLAMIC BONDS IN MALAYSIA

BUSINESS IN MALAYSIA

Market value of publicly traded shares: $414 billion (31 December 2011), country comparison to the world: 23; $410.5 billion (31 December 2010); $256 billion (31 December 2009). Stock of narrow money: $96.68 billion (31 December 2012 est.), country comparison to the world: 36; $81.28 billion (31 December 2011 est.). Stock of broad money: $458.5 billion (31 December 2012 est.), country comparison to the world: 23; $382.2 billion (31 December 2011 est.). Stock of domestic credit: $403.7 billion (31 December 2012 est.), country comparison to the world: 29; $354.6 billion (31 December 2011 est.). [Source: CIA World Factbook]

The 1997 financial crisis hurt banking, but since that time the National Asset Management Agency and the Corporate Debt Restructuring Committee have resolved numerous bad loans and debts. Indeed, nonperforming loans were reduced from 8 percent of total loans in 1998 to 4.4 percent by April 2006. The government has tried to improve corporate transparency by requiring publicly listed companies to submit quarterly reports. The Bank Negara Malaysia (BNM, Central Bank of Malaysia) has authority over the banking system and monetary policy, and the BNM’s total assets grew from US$6.6 billion in 1985 to US$82.9 billion by April 2006. As of April 2006, there were 10 merchant banks with US$5.5 billion in fixed deposits and 31 commercial banks with total deposits of US$120.8 billion. In addition, banks following Islamic banking procedures had a total of US$17.6 billion in deposits in April 2006. As of 2004, 53 banks had offshore licenses in Labuan, off the cost of Sabah. The country has two stock exchanges, the Malaysia Derivatives Exchange (MDEX) and the Kuala Lumpur Stock Exchange (KLSE). In April 2006, the KLSE had 1,027 listed companies and a market capitalization of US$202.8 billion. [Source: Library of Congress]

The bond and stock market are relatively undeveloped in Malaysia. The stock market is heavily supported by state-controlled companies. Malaysia’s banks suffered during the Asian economic crisis. The government helped bail them out and reduce the number of bad loans and then forced the 21 major banks to consolidate into six banks and forced 25 financial institutions and merchant banks to merge into six financial institutions.

HSBC, Citibank and Standard Chartered have service centers in Shanghai and Guangzhou and Cyberjaya and Penang in Malaysia. Malaysia has discussed setting up an offshore financial center on Labuan Island, off of Borneo.

Malaysia was ranked 24th in the World Bank's 2008 index on ease of doing business, down three places from 2007. It was behind Hong Kong and Thailand but ahead of South Korea, China, Vietnam and India. Singapore topped the list of 178 economies.

Associated Press reported: “Malaysia's government regularly encourages companies to conduct "corporate social responsibility" programs; in recent years, these ranged from oil-and-gas company BP helping to manage a sanctuary for endangered turtles to toothpaste manufacturer Colgate providing oral care travel kits to Muslim pilgrims bound for Saudi Arabia. [Source: Sean Yoong, AP, November 9, 2012]

Malaysian Business is a news and business magazine.

Malaysia May Liberalize Banking Sector

In June 2012, the Jakarta Post reported: Malaysia is considering opening up its banking system to foreign investors, a move seen by analysts as part of the country’s efforts to expedite integration into the so-called ASEAN Community in 2015. Zeti Akhtar Aziz, governor of Bank Negara Malaysia, that nation’s central bank, said the country was preparing new banking rules to provide greater flexibility in the nation’s financial system. “We are now pushing a new law in parliament for the full financial system,” Zeti said after delivering a keynote speech at the Wharton Global Alumni Forum in Jakarta on Friday. “We’re not sure when it will go, either this time or next time. Next time [may mean] in September. But that law will give us more flexibility in the licensing,” she said. [Source: Francezka Nangoy, Jakarta Globe, June 24, 2012]

Bank Negara Malaysia has been discussing the move since last year. The central bank said in December, as reported by Bloomberg, that the country would allow foreign banks to own larger stakes in local lenders, grant more licenses and ease rules on short sales as it sought to triple the size of its finance sector by the end of the decade.

Under it’s first 10-year Financial Sector Master Plan published in 2001, Malaysia’s banks and brokerages were encouraged to merge as rules were gradually eased and more licenses were granted, Bloomberg reported. Several international lenders currently own stakes in Malaysian lenders. Australia & New Zealand Banking Group holds 23.8 percent of AMMB Holdings, while Hong Kong’s Bank of East Asia has 23.5 percent ownership in Affin Holdings, according to Bloomberg data.

Malaysia maintains a 30 percent cap on foreign ownership of banks in Malaysia now. The upcoming banking flexibility may affect this ceiling. Malaysia’s central bank eased foreign ownership limits on non-commercial banks in 2009 when its economy slipped into recession. It raised the maximum amount that foreign investors may own in insurers, Islamic banks, investment banks and sellers of Shariah-compliant insurance to 70 percent from 49 percent at that time, according to Bloomberg. At the same time, Indonesia’s central bank is working to curb foreign ownership in Indonesian lenders. Currently, a single investor may own up to 99 percent of an Indonesian lender.

Indonesia, Southeast Asia’s largest economy, has cut the number of commercials lenders to 120 from more than 250 during the 1997-98 Asian financial crisis in a move to consolidate its banking system. Malaysia and Thailand have fewer banks than Indonesia, which makes them easier to regulate. In Malaysia, 54 banks combined into 10 after the crisis, while the number of Thai commercial banks fell to 12 from 16.

Islamic Banking in Malaysia

Malaysia is a leader in Islamic banking. Bank Islam Malaysia Berhad was the first Islamic bank and is now the country’s largest financial institution. Many innovative Islamic banking and financing techniques have been developed in Malaysia. Malaysia also has an Islamic bond market. Malaysia has set up a dual banking system with Islamic banking and conventional banking

In December 2010, Soraya Permatasari & Suryani Omar of Bloomberg wrote: “Malaysia, the Asian hub for Shariah-compliant finance, accounts for more than 50 percent of the $144 billion of outstanding Islamic bonds, or sukuk, globally, according to data compiled by Bloomberg. Total sales of the securities, which pay asset returns to comply with the religion’s ban on interest, have dropped 24 percent to $15.3 billion this year. [Source: Soraya Permatasari & Suryani Omar, Bloomberg, December 22, 2010]

“Shariah-compliant bonds returned 12.4 percent in 2010, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in developing markets gained 11.7 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows. The difference between the average yield for sukuk and the London interbank offered rate shrank two basis points, or 0.02 percentage point, to 305 on Dec. 21, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. [Ibid]

“CIMB Islamic, the world’s top sukuk arranger this year, is “exploring” Shariah-compliant credit-default swaps to complement the bank’s Islamic profit-rate swaps, cross-currency swaps and cross currency profit-rate swaps, Badlisyah said. “It’s still very early days for the market but we’ve been receiving interest for our derivatives products from institutional investors as well as companies who need to hedge their positions,” Badlisyah said. “Without effective risk management, Islamic financial institutions cannot grow in a stable and aggressive manner.” [Ibid]

Islamic Derivatives in Malaysia

In December 2010, Soraya Permatasari & Suryani Omar of Bloomberg wrote: Standard Chartered Plc and Bank Islam Malaysia Bhd. plan to offer Shariah-compliant derivatives in Malaysia that will allow investors to hedge against interest rates and commodity prices. Standard Chartered, the U.K. bank that earns most of its profit from emerging markets, will begin selling contracts in the first quarter that provide protection from fluctuations in the cost of items such as rice and oil, according to an e-mailed reply to questions yesterday. Bank Islam Malaysia, the country’s oldest Islamic lender, will offer swaps that allow two parties to exchange different forms of payments from an underlying asset. [Source: Soraya Permatasari & Suryani Omar, Bloomberg, December 22, 2010]

The lack of such Shariah products is hindering industry growth, Badlisyah Abdul Ghani, chief executive officer of Kuala Lumpur-based CIMB Bank Islamic Bhd., said in an interview on Dec. 20. The market will be limited to hedging after derivatives contributed to the global financial crisis, which resulted in $1.8 trillion of credit losses and write downs. “The industry has gone through a set of innovations over the past 10 years to offer Shariah-compliant solutions and today the industry can say we have Islamic derivatives,” Syed Alwi Mohd Sultan, director of origination at Standard Chartered Saadiq Bhd., the bank’s Kuala Lumpur-based Islamic banking unit, said in a telephone interview on Dec. 15. “A wide acceptance of the standards will bring greater convergence of the industry.”

Derivatives are contracts whose values are tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather. Standard Chartered started offering its commodities-based contracts in the Persian Gulf in March as the International Islamic Financial Market, a Manama, Bahrain-based agency that sets guidelines, provided standardized legal documentation for Shariah derivatives the same month. The U.K. bank will be the first to provide the products in Malaysia and is awaiting regulatory approval, according to the e-mail.

Islamic contracts can’t be traded or used as a speculative investment under Shariah law, said Aznan Hasan, assistant professor at the Kuala Lumpur-based International Islamic University of Malaysia, in an interview on Dec. 20. Standard Chartered’s products are vetted by a Shariah panel of experts to ensure compliance and that they are backed by a real underlying asset, Syed Alwi said. “Customers need hedging instruments; if you have a customer who needs to make payment in the future for properties the company bought overseas, they have to hedge their currency,” said Aznan, who sits on several advisory boards including the one at Malaysia’s central bank.

Islamic Rate Hedges in Malaysia

In May 2005, Shanthy Nambiar wrote in Bloomberg News, “CIMB, Malaysia's biggest investment bank, will offer Islamic bond issuers and investors a way to hedge against interest-rate fluctuations while adhering to Islam's ban on paying or receiving interest. "The problem in Islamic finance is the inability to hedge the movement of interest rates, so a lot of investors have a phobia about increasing their Islamic portfolios," said Badlisyah Adbul Ghani, who heads CIMB Islamic, the unit that specializes in Islamic financing. "The product will protect any entity that wants to manage exposure to the movement of interest rates." [Source: Shanthy Nambiar Bloomberg News, May 3, 2005]

Investors and borrowers in the Islamic finance market, valued at $200 billion, until now have not been able to take advantage of a standard practice at the world's biggest companies: using swaps to match the type of payments on their debts with those on their income. Citigroup, HSBC Holdings and other banks vying to lead the Islamic finance market have created bonds, loans and bank accounts that comply with religious restrictions.

CIMB's so-called profit-rate swap will use income from assets to make payments that are in line with the income from interest rate swaps, Ghani said. He would not specify the assets that would be used to back the profit-rate swap. Islamic bonds sold by borrowers like Qatar use lease payments on real estate instead of interest. The global market for the debt exceeds $30 billion, according to Singapore's central bank.

Malaysia, home to 15 million Muslims, is competing with Bahrain and other Gulf states to become a global center for the Islamic financial services industry. "Demand for Islamic products and services has traditionally come from the Middle East," said Baljeet Grewal, who heads fixed-income research at Aseambankers Malaysia, the investment-banking unit of the country's largest lender, Malaysian Banking.

Commerce Asset-Holding, Malaysia's second-biggest lender and the parent of CIMB Islamic, also plans to expand its Islamic investment banking services, including underwriting bonds and providing infrastructure loans in the Middle East. "We will soon be going into the Middle East market to provide Islamic investment banking," Ghani said. "It is a natural progression. We definitely need to be better able to cater to our clientele in the Middle East by establishing physical operation there." Commerce Asset holds a 61.1 percent stake in Bank Niaga, Indonesia's eighth-largest lender.

CIMB took four years to develop the Islamic profit-rate swap and plans to offer the product to investors by the end of June, Ghani said. Bank Negara Malaysia, the county's central bank, will help oversee the contracts. CIMB Islamic plans to market the swaps along with other investment banking products to clients in the Middle East, Ghani said. Banks that offer the swap will earn a fee from the transaction, Ghani said without being more specific.

The yield on Malaysia’s 3.928 percent Islamic notes due June 2015 rose two basis points to 3.10 percent today, according to prices from Royal Bank of Scotland Group Plc. The debt has returned 5.8 percent since it was issued in June. The difference in yield between the Dubai Department of Finance’s 6.396 percent sukuk due November 2014 and Malaysia’s Islamic note was little changed at 339 basis points today, according to data compiled by Bloomberg. The gap shrank 59 basis points this month.

Bank Islam Malaysia plans to introduce new contracts that will allow an exchange of profit or return rates between two counterparties, Hizamuddin Jamalluddin, the bank’s assistant general manager, said at a seminar for Islamic derivatives on Dec. 14 in Kuala Lumpur. These will be in addition to its existing Shariah-compliant hedging contracts, he said have hit rock bottom.”

Government Bonds in Malaysia

The types of government debt securities include: 1) Malaysian Government Securities (MGS)—coupon-bearing, long-term bonds issued by the Government to raise funds from the domestic capital market. They are the most actively traded bonds. In addition, there are callable MGS which gives the government an option to redeem the bond ahead of its maturity date. 2) Malaysian Treasury Bills (MTB)—short-term securities issued by Bank Negara Malaysia (BNM) on behalf of the government. Treasury bills are used for working capital. 3) Government Investment Issues (GII)—non-interest-bearing government securities based on Islamic principles issued by the government and placed on a competitive tender with maturities of three to ten years. Funds are used for development expenditures. 4) Bank Negara Monetary Notes (BNMN)—discounted or coupon-bearing government securities with maturities of 91-, 182-, 364-days and one to three years. BNMNs are issued by BNM to manage liquidity in both conventional and Islamic markets, and have replaced BNM Bills and BNM Negotiable Notes beginning December 2006. BNMNs are offered through competitive auction through principal dealers.

Islamic Vonds available in Malaysia: 1) Sukuk BNM Issues (SBNMI)—zero coupon bonds with maturities of one-to-two years. SBNMI are based on al-Ijarah (sale and lease back concept).2) Merdeka savings bonds—targeted at retirees by offering a slightly higher return than the market rate, and a tax exemption. A unique feature of Merdeka savings bonds is that they are all based on the Islamic banking concept of bai' al-inah (sell-and-buy-back arrangement). 3) Khazanah bonds—issued by Khazanah National Berhad and guaranteed by the Government, these zero-coupon bonds are based on Islamic principles. [Source: Asian Bonds Online]

The National Mortgage Corporation (Cagamas) is the major issuer of asset-backed securities in Malaysia. Securities issued by Cagamas are called Cagamas bonds in the domestic market. There are three types of Cagamas non-Islamic issues: 1) Cagamas fixed-rate bonds —have tenures of between 1.5 and 10 years with fixed coupon rates determined through tenders submitted by principal dealers. Interest is paid semi-annually. 2) Cagamas floating-rate bonds—have tenures of up to 10 years and an adjustable interest rate pegged to the 3-month or 6-month Kuala Lumpur interbank offer rate (KLIBOR). The interest rate is reset every 3 or 6 months, with interest paid at those intervals. 3) Cagamas notes—short-term instruments with maturities of between 1 and 12 months, and issued at a discount from face value to reflect the implied interest rate.

Cagamas non-Islamic issues: 1) Sanadat Mudharabah Cagamas—Islamic bonds issued under the Islamic principle of Mudharabah (profit-sharing) to finance the purchase of Islamic home-financing debts, granted on the basis of bai bithaman ajil and the purchase of Islamic hire-purchase debts, which are granted under the principle of ijarah thumma al-bai. They are redeemable at par at maturity unless there is principal diminution. Tenures extend up to 10 years. 2) Sanadat Cagamas—Islamic bonds issued under the Islamic principle of bai bithaman ajil to finance the purchase of Islamic home-financing debts and Islamic hire purchase debts. The bonds are redeemable at par together with the dividend due on maturity date. They also have tenures of up to 10 years. 3) Khazanah bonds—unsecured zero coupon bonds under the Islamic principle of murabahah, with maturities of 3, 5, 7 or 10 years.

Corporate Bonds The types of corporate bonds issued on the Malaysian capital market are classified as straight, convertible, bonds with warrants, floating rate, zero coupon, mortgage bonds, Islamic bonds, secured and unsecured bonds, and guaranteed bonds. 1) Commercial papers (CP) —short-term revolving promissory notes with maturities from 1 month to 1 year. 2) Medium-term notes (MTN) —have tenors from 1 to 5 years and may be issued both on conventional or Islamic principles, and by direct placement or tender. 3) Quarterly statistics of corporate debt securities approved by the Securities Commission are available through the web link below. Related Resources:

Malaysian Construction Firm Wins and Loses a $30 Billion Saudi Project with the Saudi Binladin Group

November 2006, it that announced that the Malaysian conglomerate MMC Corporation won the rights to build a new economic city in Saudi Arabia over the next 30 years, worth $30 billion with the Saudi Binladin Group. AFP reported: “MMC Corporation said the new Jizan Economic City, located 725 kilometers (453 miles) south of Jeddah on the Red Sea, will be a comprehensive industrial, commercial and residential development spanning 117 square kilometers. Facilities within the new city will include a port, aluminum smelter, steel processing plant, a commercial business district and housing, it said in a statement. Out of the $30 billion amount, approximately $17 billion will be investment costs for the various projects within the industrial zones, MMC said. The Malaysian conglomerate, with interests in ports, utilities and construction, was awarded the project on a 50-50 basis with the Saudi Binladin Group by the Saudi Arabian General Investment Authority. The Saudi Binladin Group is a Saudi conglomerate with a diverse range of interests in the fast moving consumer goods, banking, telecommunications and electronics sectors. [Source: AFP, November 7, 2006]

April 2013, Malaysia MMC said that the Saudis government rescinded its rights to develop the $30 billion city. “The termination was as a result of circumstances which gave rise to several difficulties that interrupted the progress of the project,” MMC said in a local stock exchange filing today, without detailing the “difficulties”. MMC will be engaging consultants to advise on matters relating to the project termination and compensation, it added. [Source: Reuters, April 8, 2013]

Reuters reported: The project was “30 percent complete as of September 2010, according to news reports at the time. MMC said in 2006 that Jazan Economic City would be Saudi Arabia's fourth economic city after King Abdullah, Prince Abdul Aziz bin Mousaed and Madinah. Economic cities are built to attract domestic and foreign investment into industry and business and help diversify Saudi Arabia's oil-based economy.

Lare Foreign Retailers in Malaysia: Carrefour and Aeon

As of 2012, the French retail giant Carrefour was Malaysia's fourth-largest retailer with 26 hypermarkets. Carrefour, which set up its Malaysian operations in 1994, recorded net sales of $400 million over a 12-month period to June 30, 2012.

In November 2012, Reuters reported: Carrefour announced it was selling its Malaysian operations to Japan's Aeon Co. Ltd for an enterprise value of $250 million. According to a statement posted on its website, it said the "transaction is part of Carrefour's strategy of refocusing on its core activities and allocating its resources to mature countries where it occupies strong and established positions and emerging markets where it has strong growth potential". [Source: Reuters, November 1, 2012]

Aeon was established in 1984 in Malaysia. With 29 stores, Carrefour said Aeon was acquiring a leading position in this market. Carrefour said Aeon should be able to continue the successful development of its business in Malaysia, as it has done previously in Japan.

The Carrefour Group is the largest retailer in Europe, and the second largest worldwide, with more than 9,900 stores under banner in 30 countries and 412,000 employees. It has more than three billion cash transactions per year. AEON Co., Ltd. is the largest retailer in Japan, operating 540 general merchandise stores and 1,502 supermarkets in Japan, and 113 stores outside its domestic market as of end of August 2012.

"The transaction is part of Carrefour's strategy of refocusing on its core activities and allocating its resources to mature countries where it occupies strong and established positions and emerging markets where it has strong growth potential," the company said in a statement.

Trade in Malaysia

Malaysia is a major trading nation. Malaysia has been a member of the World Trade Organization since January 1, 1995. Malaysia also has participated in regional free-trade and investment relations with many of the same countries through the Association of South East Asian Nations (ASEAN). The government’s only major trade dispute has been an objection to the U.S decision to ban imports of shrimp and shrimp products from Malaysia and other countries. This dispute commenced in 1996 and continued into 2006. [Source: Library of Congress, 2006 *]

Current account balance:$22.8 billion (2012 est.): country comparison to the world: 16, $32.03 billion (2011 est.). [Source: CIA World Factbook]

Trade Balance: According to World Bank and government data, Malaysia experienced both trade deficits and surpluses from 1960 to 1995 but only surpluses from 1996 to 2005, largely as a result of growth in exports of electrical and electronic goods. The external balance on goods and services was US$1.4 billion (in current U.S. dollars) in fiscal year (FY) 1996 and US$26.3 billion in FY 2005. *

Balance of Payments: According to World Bank and government figures, prior to 1998 current account balances registered both surpluses and deficits, demonstrating no clear trend toward one or the other. However, Malaysia had a current account surplus from 1998 to 2005 that amounted to US$19.3 billion in fiscal year (FY) 2005. The improvement has been attributed to several factors, including higher trade balances and inflows of foreign direct investment into manufacturing and services. *

External Debt: According to government data, from 1980 to 2005 the government’s external debt increased from US$2.2 billion to US$8.3 billion but declined from 10.9 percent of gross domestic product (GDP) to 6.5 percent of GDP. Total debt to multilateral lenders increased from US$593 million in 1980 to US$1.1 billion in 1991, declining thereafter to US$968.9 million in 2005. However, the government’s portion of total external debt is quite small: 16.1 percent in 2005, compared with 30.5 percent for nonfinancial public enterprises (such as Petronas) and 53.4 percent for the private sector. *

In 1996, Malaysia was the worlds 19th largest exporter and the worlds 17th largest importer.

Ports and Shipping, See Singapore.

Exports from Malaysia

Exports: $247 billion (2012 est.), country comparison to the world: 24; $227.5 billion (2011 est.) Exports - commodities:semiconductors and electronic equipment, palm oil, petroleum and liquefied natural gas, wood and wood products, palm oil, rubber, textiles, chemicals, solar panels Exports - partners: China 13.1 percent, Singapore 12.7 percent, Japan 11.5 percent, US 8.3 percent, Thailand 5.1 percent, Hong Kong 4.5 percent, India 4.1 percent (2011) [Source: CIA World Factbook]

Exports of goods and services (in current U.S. dollars) grew from US$1.2 billion in 1960 to US$140.8 billion in 2005. Major exports include chemicals, liquefied natural gas, petroleum products, electrical machinery and parts, and particularly electronic equipment and semiconductors. The principal export markets have been the United States, Singapore, and Japan. International investors believe Malaysia’ currency is undervalued, and this has improved the competitiveness of Malaysian exports. [Source: Library of Congress]

Semiconductors, hard-disk drives and other electrical and electronic products account for as much as half of Malaysia’s exports. At one time round 30 percent of Malaysia’s exports went to the United States.

The manufacturing goods increased from 12 percent of exports in 1970 to 77.5 percent in 1994. In 1994, Malaysia was the world's 17th largest exporter in the world, a considerable jump from 40th on the list in 1980. In 2003, it exported more than India even though India has 40 times more people.

Imports to Malaysia

Imports: $202.4 billion (2012 est.). country comparison to the world: 27; $178.6 billion (2011 est.). Imports - commodities: electronics, machinery, petroleum products, plastics, vehicles, iron and steel products, chemicals Imports - partners: China 13.2 percent, Singapore 12.8 percent, Japan 11.4 percent, US 9.7 percent, Indonesia 6.1 percent, Thailand 6 percent, South Korea 4 percent (2011), [Source: CIA World Factbook]

Malaysia’s imports of goods and services (in current U.S. dollars) grew steadily from US$938.4 million in 1960 to US$114.5 billion in 2005. Major imports include machinery and transport equipment, basic manufactures, and mineral products. The principal import sources have been Japan (15.9 percent of total imports in 2004), the United States (14.5 percent), and Singapore (11.1 percent). Other important sources have included China, Taiwan, and Thailand. [Source: Library of Congress]

Malaysia’s Trade Partners

Major trading partners include China, Japan, and the United States, although Malaysia has pursued bilateral free-trade agreements with Australia, India, New Zealand, Pakistan, and South Korea. Its top five trading partners in 2007 were the U.S., Singapore, Japan, China and Thailand.

China is now Malaysia’s largest trading partner. Malaysia exports electronic products and large amounts of basic commodities such as palm oil and rubber to China. Imports from China rose 125.6 percent between 2001 and 2003. Exports to China rose 90.7 percent in that time.

Bilateral trade between Malaysia and Japan was $49.27 billion in 2011, a 22 percent increase from the previous year, with exports to Japan valued at $30.38 billion and imports from Japan valued at $18.79 billion, making Japan Malaysia’s third largest trading partner.

In June 2011, The Hindu reported: The free trade agreement (FTA) between India and Malaysia will come into effect from July 1, 2011, giving Indian professionals like accountants, engineers and doctors access to the key Southeast Asian nation. The India-Malaysia Comprehensive Economic Cooperation Agreement (CECA) envisages liberalisation of trade in goods, trade in services, investments and other areas of economic cooperation. [Source: The Hindu, June 30, 2011]

“Similarly, exports of items such as basmati rice, mangoes, eggs, trucks, motorcycles and cotton garments will attract lower or no duty in Malaysia, thus giving Indian exports a boost. Sensitive sectors like agriculture, fisheries, textiles, chemicals and automobiles have been given protection from imports without duty or with significant cuts. The CCEA will facilitate temporary movement of business people, including contractual service suppliers and independent professionals in accounting, architecture, engineering services, medical and dental, nursing and pharmacy, computer services and management consulting. [Ibid]

“Trade between India and Malaysia has reached $10 billion in 2010-11, an increase of 26 percent over the previous year. It is expected that the implementation of this agreement will boost bilateral trade to $15 billion by 2015. The CECA also facilitates cross-border investments between the two countries. It creates an attractive operating environment for the business communities of both countries to increase bilateral trade and investment. [Ibid]

Foreign Investment in Malaysia

Investment (gross fixed):25.2 percent of GDP (2012 est.), country comparison to the world: 50. Stock of direct foreign investment - at home: $123 billion (31 December 2012 est.), country comparison to the world: 33; $112.1 billion (31 December 2011 est.). Stock of direct foreign investment - abroad: $123.3 billion (31 December 2012 est.), country comparison to the world: 27; $110.3 billion (31 December 2011 est.) [Source: CIA World Factbook]

Liau Y-Sing of Reuters wrote: Overseas investors helped build Kuala Lumpur's iconic twin towers and the main highway, which spans the length of the peninsula, while global oil majors are developing multimillion dollar energy fields in Malaysia. Malaysia wants to attract foreign dollars into its Islamic finance industry to build on its success as the world's largest Islamic bond market. The authorities are also setting up a $105 billion, electronics, food, health and education hub in Johor state in the south. It also wants to transform its Malay heartland in the northern states of Kedah, Penang and Terengganu into a farming, tourism, energy and manufacturing powerhouse. [Source: Liau Y-Sing, Reuters, December 25, 2007 >>>]

Foreign direct investment (FDI) increased from US$350.5 million in 1975 to US$5.2 billion in 1992, declined to US$287.1 million by 2001, and increased to US$4.6 billion in 2004, the last year for which figures are publicly available. Generally, most FDI has come from Japan, Singapore, the United Kingdom, and the United States. The government has expressed concern that Malaysia’s competitiveness in attracting FDI may be hindered by various factors, including wages that are higher than those in other Asian countries, and has liberalized 16 foreign investment policies to attract FDI, particularly in biotechnology, high-technology manufacturing, and tourism.

Between 1990 and 2000 Malaysia accounted for half of all foreign direct investment into Southeast Asia . It has since lost its leading position to Thailand and Indonesia. The Malaysia government is trying to woo them back with economic liberalization measures. Foreign direct investment into Malaysia leapt to a 10-year high in 2006 but many in the business community say that is despite red tape, rather than because of government efforts to reduce it.

Japan was the largest source of foreign investment in Malaysia in 2011, with approved investment of $3.36 billion in 77 projects Between 1990 and 1994, the largest foreign investors in Malaysia were Taiwan ($6.1 billion), Japan ($5.6 billion), Hong Kong, Singapore, the U.S. ($3.5 billion), Singapore ($1.6 billion) and Korea ($1.2 billion).

Foreign investment fell 42 percent to $2.95 billion in 2002. There was also a sharp decline in foreign direct investment (FDI) in 2009, tumbling 81 percent to $1.4 billion from $7.3 billion in 2008. Foreign investors have been scared off somewhat by the favorable terms given to local investors that give them a competitive advantage. Malaysia had tried to convince investors it has nothing to with terrorism or Muslim extremism. FDI jumped 141 percent to 17.1 billion ringgit ($5.5 billion) in the first nine months of 2010, in a rebound partly attributed to the reforms.

See Taxes.

Malaysia is investing heavily in Cambodia and Vietnam.

See Petronas

Malaysia Relaxes Foreign Investment Rules

In December 2007, Liau Y-Sing of Reuters wrote: “In response to complaints, the government set up a cabinet committee in September 2006 to fast-track approval for projects involving high-technology, huge capital investment or job growth. In February 2007, authorities created a task force of officials and business leaders to simplify procedures. It expedited approval for expatriate work passes and speeded up the registration of businesses and renewal of business licenses. Since the drive was launched, businesses have reported improved service from customs and immigration staff. On the whole, however, complaints about sluggish bureaucrats and tardy service are still common. [Source: Liau Y-Sing, Reuters, December 25, 2007]

Ooi Sue Hwei wrote in Malaysian Business, “Measures to improve the business environment to attract foreign investments include allowing 100 percent equity for new as well as expansion/diversification projects in the manufacturing sector, approval of up to 10 expatriate posts (including five key posts) for manufacturing companies with a foreign paid-up capital of US$2 million and above, and the placing of Immigration offices in MIDA and MDeC to facilitate approvals and expedite issuance of visas. [Source: Ooi Sue Hwei, Malaysian Business, January 1, 2007 <<>>]

“Foreign investors are also offered customised incentives for projects that are capital and technology-intensive and have a significant impact on the economy. One-stop centres have been established at all local authorities to expedite approvals and, more recently, the corporate tax was reduced to 27 percent for 2007 and 26 percent for 2008. To promote investments in new growth areas, the Government has set up a RM600 million Strategic Investment Fund under the Ninth Malaysia Plan (9MP). The fund will be used to attract quality investments in projects that are knowledge-intensive and have high-technology content involving R&D. This is to help Malaysia move up the value chain. In addition, efforts have been stepped up to promote investments by organising regular trade and investment missions to the US, Europe, Japan, South Korea, Taiwan, China and Australia.” <<>>

In June 2009, Associated Press reported: “Malaysia took a big step Tuesday to liberalize its economy, relaxing a host of restrictions on foreign investment, including a controversial rule requiring businesses to be partly owned by ethnic Malays. Prime Minister Najib Razak announced that listed companies will no longer be required to allocate 30 percent of their stae to Malays as part of an affirmative action program for the country's ethnic majority. [Source: Associated Press, June 30 2009 <*>]

"The world is changing quickly and we must be ready to change with it or risk being left behind," Najib told an investment conference organized by Malaysia's stock exchange. "It is not a time for sentiment or half measures but to renew our courage and pragmatism to take the necessry bold measures to advance the national interests for the long term benefit of all Malaysians," he said. <*>

“Among other steps in the liberalization, stock brokers and unit trust management companies will be allowed 70 percent foreign ownership, up from the current level of 49 percent. Foreigners can also own 100 percent of fund management companies, Najib said. The liberalization moves take away most powers of the Foreign Investment Committee, an omnipotent government body that has been the bone of foreign investors. The FIC has been derided as an impediment in Malaysia's efforts to become competitive against regional rivals such as Singapore, Indonesia and India in attracting investment by imposing various restrictions. Foreigners will also not be required to get the FIC's approval beforebuying property in Malaysia, either residential or commercial. <*>

“The removal of the 30 percent Malay ownership requirement for listed companies does not apply to "strategic industries" such as telecommunications, water, ports and energy. Critics have complained that the Malay ownership rule was being abused to enrich a handful of Malay individuals or companies. Listed companies will still be required to sell at least 25 percent of their shares to the public, and half of those public shares must be given to Malays so that ordinary people from the community get to participate in businesses. The government also plans to set up a private equity fund with an initial capital of 500 million ringgit ($143 million) to buy private companies and hand them over to Malay managers. The fund will be enlarged to 10 billion ringgit ($2.8 billion) with no fixed time frame. <*>

Obstacles to Foreign Investment in Malaysia

In December 2007, Liau Y-Sing of Reuters wrote: “Malaysia's drive to woo investment is losing traction, as efforts to get rid of red tape and inept bureaucrats falter. A year after the authorities vowed to speed up the business approval process, businessmen are still battling unwieldy procedures and inert government staff. "Civil servants have become more courteous, they smile more than usual but the bureaucracy, the red tape, is still there," said Mohd Ghouse Mohd Noor, who is setting up a hospital resort in Penang state in northern Malaysia where he hopes to entice visitors for medical treatment. "They are still passing us from one person to another. Nobody seems to know who is responsible and who should look into matters," he said of the bureaucracy. "Some of our investors say to us 'You go and solve your problem first'." [Source: Liau Y-Sing, Reuters, December 25, 2007 >>>]

“It takes nine steps and more than a week to register a business in Malaysia compared with five steps in five days for Singapore, according to the World Bank's Doing Business Index 2008. Many blame Malaysia's civil service for being slow, unresponsive and opaque, and it continues to disappoint despite a state-led revamp aimed at winning more investment. >>>

“Foreign companies have complained that the regulatory authorities sit on applications to set up offices here, and local businessmen allege that government officials have asked for payment in return for state contracts. The government awards state contracts through open tender but in some instances it has expedited the process by shortlisting only proven contractors and then awarding the job to one of them. >>>

“Plans are at risk of foundering as it struggles to galvanize its roughly one million public servants, despite wielding the stick. "The government might want one thing but the culture of the civil service might not react to it," said political analyst Ooi Kee Beng of Singapore's Institute of South East Asian Studies. "That's the tough part to change: you can change the rules and all that but how do you, down the hierarchy, actually get people to work?" Ooi said.

In the World Bank's Doing Business Index 2008, Malaysia got good marks for investor protection but scored less well for enforcing contracts, registering property and starting a business. Pemudah, a panel to facilitate business comprising private and public sector officials, says efforts are being made to rectify Malaysia's weaknesses. "It is a matter of procedures and how we can shorten them," said Yong Poh Kon, who co-chairs the panel.

Khazanah Nasional Berhad: Malaysia’s Sovereign Wealth Fund

Khazanah Nasional Berhad is the Government of Malaysia's strategic investment fund. As trustees to the nation's commercial assets, its role is to promote economic growth and make strategic investments on behalf of the Government which would contribute towards nation-building. Khazanah is also tasked to nurture the development of selected strategic industries in Malaysia with the aim of pursuing the nation's long-term economic interests.

Khazanah has investments in over 50 major companies, both in Malaysia and abroad, and is involved in a broad spectrum of industries.. Its net asset value for 2012 stood at US$ 29 billion. Khazanah is also the key agency mandated to drive shareholder value creation, efficiency gains and enhance corporate governance in companies controlled by the government, commonly known as Government-Linked Companies, or GLCs.

Khazanah incorporated under the Companies Act 1965 in September 1993 as a public limited company. The share capital of Khazanah is owned by the Minister of Finance, a body corporate incorporated pursuant to the Minister of Finance (Incorporation) Act, 1957. Khazanah has a nine member board comprising representatives from the public and private sectors. Najib Tun Razak, the current Prime Minister of Malaysia is the Chairman of the Board of Directors. [Source: Wikipedia]

For 2012 the net realizable value was RM 121.6 billion. It stood at RM 113 billion in 2010 Khazanah is also the state agency responsible for strategic cross-border investments. These companies are involved in various sectors such as power, telecommunications, banking, automotive, airport management, infrastructure, property development, broadcasting, semiconductor, investment holding, research technology and venture capital. Some of the key listed companies in Khazanah's investment portfolio include Axiata, Telekom Malaysia, Tenaga Nasional, CIMB Group, PLUS Expressways, Malaysia Airlines, Malaysia Airports and UEM Land.

Khazanah Nasional has substantial stakes in companies that are involved in various sectors such as: 1) Agriculture: MAFC 100 percent; Blue Archipelago 100 percent; Biotropics 100 percent. 2) Automotive: Miyazu Seisakusho 9.12 percent: 3) Basic Materials: CIMA 100 percent. 4) Financial Institution Group: Santubong Ventures 100 percent; ACRM 70 percent; Valuecap 33.33 percent; ACR Holdings 31.56 percent; ACR ReTakaful 40 percent; Bank Muamalat 30.0 percent; CIMB Group 28.39 percent; EON Capital 10.0 percent; Jadwa Investment 10.0 percent; IDFC 8.97 percent. 5) Healthcare: Integrated Healthcare Holdings (IHH) 45.58 percent; Acibadem Healthcare Group 15 percent. 6) Infrastructure & Construction: Plus Expressways 16.74 percent; UEM Group 100 percent; UEM Builders 100 percent; Opus International 96.39 percent. 7) Leisure & Tourism: Themed Attractions 100 percent. 8) Media & Communications: Axiata Group Berhad 44.51 percent; Telekom Malaysia 36.78 percent; TimedotCom 18.38 percent; Time Engineering 45 percent; Astro 29.34 percent. 9) Property: STLR 100 percent; Iskandar Investment Berhad 60 percent; Putrajaya Holdings 15.59 percent; UEM Land 77.14 percent. 10) Technology & Bio Tech: Atlantic Quantum 100 percent; MTDC 100 percent; SilTerra Malaysia 98.05 percent; Springhill Bioventures 33.33 percent. 11) Transportation & Logistics: Penerbangan Malaysia 100 percent; Malaysia Airlines 17.08 percent; Malaysia Airports 60 percent; Pos Malaysia 32.21 percent; Westport 8.55 percent. 12) Utilities: Tenaga Malaysia 35.69 percent; Northern Utility 20 percent; Shuaibah Water and Electricity Company 12 percent. 13) Others: KCS Green Energy 80 percent; Parkson Retail 7.84 percent; DRB-HICOM 5.13 percent.

Foreign Companies in Malaysia

Levis, Motorola and Intel all have or had factories in Malaysia. Barbies are made by Mattel-owned factories in China, Malaysia and Indonesia. The conditions at their factories are generally better than the conditions at factories run subcontractors that makes toys and dolls for other companies.

In 1989 Japanese firms invested $393 million dollars in Malaysia which was ten times what they invested in 1985. Some Malaysian company's engage in all the kind of activities that we associate with Japanese companies. They do calisthenics in the morning, bow to one another and sing company songs. If you go four months without being late or absent you get a Tupperware dish. A director for Matsushita told National Geographic that it chose Kuala Selangor, Malaysia as the site for a large television manufacturing plant because of the "suitable" work ethic in Malaysia.

A typical worker at a garment factory in Malaysia that contracted with Levis in the 1990s worked 55 hours over a six-day workweek and earned $6 to $12 a day depending in overtime. There were no medical benefits but employees were entitled to free visits to the company doctor, two-month maternity leave, 16 paid holidays a year, and 80-cent meal allowances. There were no breaks during the day except for a 45-minute lunch period.

Efforts to unionize have been stifled by house unions formed by management. After visiting the White House, former Prime Minister Mahathir said he can accept criticism of his country's lax labor regulations but moves by the West "to force us to bow to your demands" for a minimum wage and greater recognition of unions amounts to "twisting our arms, and that we will not accept." [Source: Pascal Zachary, Wall Street Journal]

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, Malaysia Tourism Promotion Board, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

Page Top

© 2008 Jeffrey Hays

Last updated June 2015

This site contains copyrighted material the use of which has not always been authorized by the copyright owner. Such material is made available in an effort to advance understanding of country or topic discussed in the article. This constitutes 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner. If you are the copyright owner and would like this content removed from factsanddetails.com, please contact me.