Domestic Banking Sector Consolidation Programme

Bank Negara Malaysia (BNM) had announced a consolidation programme for the domestic banking sector on 29 July 1999. Since then, there has been some strong objections on certain aspects of the programme, especially pertaining to the number and composition of the banking groups and the time frame.

Following the recent announcement by Y.A.B Perdana Menteri and the statement in Parliament by Y.B. Menteri Kewangan II, BNM wishes to inform all banking institutions that they will now be given the flexibility to form their own merger groups and to choose their own leader in each group to lead the merger process. Banking institutions are required to revert to BNM by the end of January 2000 on their respective merger groupings, as well as the agreement in principle from the major shareholders of the banking institutions in the group. Upon BNM's approval in principle of the new merger groupings, the domestic banking institutions will be allowed to terminate the Memorandum of Understanding signed with the earlier partners, and they should then proceed to complete all aspects of the merger exercise by the end of December 2000. In line with this announcement, a separate circular will be issued to all banking institutions on 21 October 1999 outlining the operational details of the merger exercise.

The flexibility that is now provided to the banking institutions does not in anyway reduce the importance of bank consolidation. In view of the impending liberalisation and globalisation of the banking sector, the consolidation of domestic banking institutions is inevitable. A fragmented banking system will only increase the vulnerability of the financial system and indeed the vulnerability of the economy as a whole. We need a strong and efficient banking system that is resilient in order to support the financing needs of the economy so that the nation can continue to achieve a strong and sustainable growth. We now have 55 banking institutions, made up of 20 commercial banks, 23 finance companies and 12 merchant banks and this number will have to be substantially reduced. The policy to consolidate the domestic banking institutions to strengthen the banking system would, therefore, continue to remain a priority objective of BNM. The only difference is that under the new approach, greater responsibility is now with the shareholders of the domestic banking institutions to initiate and drive the merger process. In the event that the shareholders of the banking institutions do not make full use of the flexibility accorded to merge among themselves, BNM will intervene directly to select the merger partners to ensure that the consolidation objective is achieved.

One important aspect of the consolidation exercise is its effect on employment. BNM would like to explain that the proposed bank consolidation exercise should not result in an increase in the level of unemployment in the country. Indeed, the recent merger of Bank Bumiputra Malaysia Berhad and Bank of Commerce (M) Berhad did not result in any staff lay-off and this clearly shows that bank mergers need not lead to any retrenchment of bank employees. Even where there is a need to redeploy some staff, particularly at the senior level, the fast recovering Malaysian economy would provide ample opportunities for alternative employment. Such staff will also be compensated fully through voluntary separation scheme. There should be no forced retrenchment in this bank consolidation exercise.

All banking institutions are reminded that the merger exercise should not in any way disrupt the normal operations of the banking institutions and they should continue to place particular emphasis on loan growth, which is a vital ingredient in the recovery process of the economy.

Tan Sri Dato' Seri Ali Abul Hassan Bin Sulaiman
Gabenor Bank Negara Malaysia
20 October 1999


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