Shadow Banking

A "shadow banking" crisis is looming if left unchecked and could potentially derail the Malaysian financial markets and economy. The reason for such concern is plain to see from the staggering numbers those institutions are now showing. Last year alone, non-banking financial institutions (NBFIs) gave out 43 billion ringgit (US$13.4 billion) in new personal financing facilities, up from 63.7 per cent previously according to Bank Negara's Financial Stability and Systems Report 2012.

This is more than two times the loans disbursed by banks for personal loans at 19.4 billion ringgit for 2012. The central bank notes that such loans extended by the three largest NBFIs grew at a faster rate of 23.1 per cent in 2012 versus 17.1 per cent a year ago. That growth is faster than the 10.4 per cent recorded by the entire banking sector.

The culprit for such high credit growth is personal financing. According to the central bank, NBFIs supplied 60 per cent of personal loans to the country last year and growth in that segment by the shadow banks grew by 29 per cent. Personal loans by the commercial banks clocked in at 9.1 per cent.

Such lending has pushed household debt to GDP at a frightening 83 per cent of GDP. That ratio is the highest in emerging Asia and was at 70 per cent in 2009. Developed western countries have a higher ratio but are now mired in economic problems.

A shadow bank is essentially a term used to describe institutions that take on bank-type functions. They are lenders that are not governed by Bank Negara before this but compete with the banks in lending money to the public. But not anymore as the new FSA has allowed the central bank to get the shadow banking industry to comply with its rules on lending.

In Malaysia, it isn't clear just how large the shadow banking system is as they are not captured in any formal banking statistics. But some estimates put it at easily several hundred billions the amount of money loaned out. Among the more prominent shadow banks are lenders such as the Government-owned Bank Rakyat Malaysia Bhd (Bank Rakyat) and public-listed Malaysia Building Society Bhd (MBSB). Cooperatives are also another player in the shadow banking sector.

Now, the shadow banks, including the cooperatives, will have to comply with new lending rules, which limit the amount of the debt of vulnerable borrowers to a maximum of 60 per cent of their net income.

The Angkasa syndrome
The phenomenal rise of shadow banks over the last few years can be attributed to mainly one party or rather, a system of credit - Angkasa or Angkatan Koperasi Kebangsaan Malaysia Bhd. This is the national umbrella body for cooperatives whose members make up of civil servants by virture of them being the bulk of cooperative members. It was formed in 1971 by Royal Professor Ungku Abdul Aziz, who is co-incidentally the father of Zeti.

While the original motives of creating Angkasa were noble, what has since transpired though is that Angkasa has become a major conduit for 'wild' lending to civil servants, and this is where the problem is. The Angkasa scheme allows for deductions of as much as 60 per cent of a borrower's total income, net of statutory and other direct deductions from salary.

Bank Negara notes that 80 per cent of the personal financing by NBFIs are given out to government servants with a monthly household income of less than 3,000 ringgit. This means that about 34.4 billion ringgit in personal finance loans were dished out to that group of lowly paid civil servants last year if Bank Negara's 43 billion ringgit NBFIs figure is used as a guide.

Angkasa's 2012 annual report showed that 10.3 billion ringgit was made via the automatic salary deduction scheme with the bulk of it going to the civil service. As a comparison the government was projected to have paid out 52 billion ringgit as salaries to civil servants last year.

But what are the sources of these funds? Do note that Angkasa is merely a conduit to these loans.
Industry sources say there are a multitude of sources from which these funds come from.
Judging from the low risk element in these loans, as Angkasa enables salary deductions to repay the loans, there had been a race by funders to lend to government employees. Even the mainstream banks have tried to get a slice of this pie.

Analysts note that the earnings of MBSB and Bank Rakyat have risen sharply in recent years primarily due to an increase in personal financing activity. As a result of vast sums of personal loans being dished out to mainly civil servants, a number of NBFIs have become really profitable, even more than some of the banks in the country.

Bank Rakyat's profit before tax and zakat of 2.11 billion ringgit in 2012 for example is comparable to RHB Bank Bhd which made 2.2 billion ringgit. MBSB and Bank Rakyat declined to comment.
It is estimated that over 90 per cent of civil servants are in an "indebt situation" in various ways like credit cards, personal finance and high-purchase debt.

"The easy loan access in recent years has thrown civil servants deeper into debt. Wouldn't this encourage corruption?" quips an industry observer.

Credit card debt accounted for 5.2 per cent of household debt before the central bank decided to act a couple of years ago. Today, such debt accounts for 4.5 per cent of household debt and credit card debt grew by 1.7 per cent last year from 15.2 per cent in 2010.

A crack in any one of them (non-bank lenders and credit cooperatives) will likely trigger a contagion effect resulting from panic withdrawal by customers who have placed funds in savings or fixed deposits. Should there be a contagion effect, we fear that it may knock on the doors of the banks given the high household debt to GDP of 83 per cent."