The Bank Merger Pushback!

The government’s proposal to merge development financial institutions (DFIs) has unsettled some industry players.  They claim there are solid grounds for the ongoing restructuring to be halted. A single merged entity will have a reduced focus on the micro, small and medium enterprises (MSME), leading to dire consequences.

The proposal to consolidate and strengthen the DFI eco-system was first mooted by then finance minister Lim Guan Eng in 2019. This was reiterated by Prime Minister Anwar Ibrahim during his Budget 2024 speech last October. Phase 1 of the merger process, involving Bank Pembangunan Malaysia Bhd (BPMB), and Danajamin Nasional Bhd, was concluded in March last year. Phase 2 involving BPMB, SME Bank and Export-Import Bank of Malaysia Bhd (Exim Bank) is expected to be completed up by year-end.

Source: FMT, 6 June 2024

Is there a need for merger? The business model and focus for each of the three banks are different. BPMB focuses on large-scale projects. EXIM Bank targets medium-sized SMEs while SME Bank’s mandate is to develop and nurture MSMEs. The merger will likely result in reduced focus on all. The merger may also result in layoffs, with more than 95% of staff in the three banks being Bumiputera.

What are the advantages in terms of funding costs? All three banks rely on sukuk/bonds and corporate deposits as sources of funds. The three banks are fully owned by the Minister of Finance Incorporated. There are currently six DFIs in the country that are regulated by Bank Negara Malaysia under the Development Financial Institution Act 2002. The other three are Bank Kerjasama Rakyat Malaysia Bhd (Bank Rakyat), Bank Simpanan Nasional (BSN) and Bank Pertanian Malaysia Bhd (Agrobank).

However, Geoffrey Williams, an economist has said the negative scenarios raised by critics do not appear to be evidence-based and may be part of the normal pushback that happens in

any change process. According to him, all objections to the merger must be viewed in the reality of the current situation, adding that the DFIs’ assets under management (AUM) are too small. Based on 2023 data, BPMB (with RM26 billion), SME Bank (RM11 billion) and Exim Bank (RM8 billion) have only RM45 billion compared to the EPF at more than RM1 trillion. Their impact is limited.

Meanwhile, Malaysian Institute of Economic Research (MIER) head of research views the merger as helping with scale and access to pooled capital. The resulting entity will have the benefit of mobilising a larger combined stock of capital which can then be efficiently and optimally allocated. There is no reason why the MSME sector should be neglected post-merger – that’s one view.

A RM45 billion monster will not solve SMEs problems. Let me be clear, I am not for the merger. Why?

(i) All the silly synergies one talks about is actually “crap” – I have seen it;

(ii) Each institution best plays its role as independent entities. What about inefficiencies? That is a problem whether one is large or small. You don’t merge to get efficiencies. You need a dynamic team; a mixture of all races in a ratio reflecting the population working at all levels and a sense of passion for their mission;

(iii) A merged entity will “blur” the lines of service and standards will drop; and

(iv) As it stands, they need a revamp and a merger will not help, it meets somebody’s pre-conceived idea!

I could go on but just look at U.S., U.K., Europe and Japan. Did they merge all their entities? No! So, what’s our big idea, other than creating a bigger sludge!

Reference:

Pushback against Bank Pembangunan-Exim Bank-SME Bank merger, Lee Min Keong, FMT, 6 June 2024