Speechs in the year
Tarikh/Date 	: 	21/08/89 

 Yang Berbahagia Tan Sri Basir Ismail,
Pengerusi Persatuan Bank-bank Dalam Malaysia;
Yang Berhormat Dato' Paduka Daim Zainudddin,
Menteri Kewangan;
Dif-dif Kehormat;
Tuan-tuan dan puan-puan.
    Saya  mengucapkan terima kasih kepada Ahli Jawatankuasa
Penganjur Majlis  Makan  Malam  Tahunan  Institusi-institusi
Kewangan  Malaysia  kerana  sekali  lagi  menjemput saya dan
isteri saya ke Majlis Makan Malam ini.
2.   Ini  adalah  kali  ke  lapan  saya  menghadiri   Majlis
Institusi  Kewangan ini.   Pada majlis-majlis yang lalu saya
telah mengambil kesempatan untuk  memberikan  pandangan  dan
pendapat  saya  mengenai  keadaan  ekonomi serta peranan dan
prestasi  institusi-institusi  kewangan   di   negara   ini.
Seperti  dahulu,  saya bercadang untuk meneruskan amalan itu
dalam Majlis pada malam ini.
Ladies and gentlemen,
3.   Over the last couple of years, much attention has  been
focussed  on the state of the Malaysian economy.  Economists
have been pre-occupied with second-guessing the strength  as
well as the sustainability of the economic recovery.  Today,
there  is  no  longer  any  doubt that the recovery is fully
entrenched.  Latest  data  released  by  the  Department  of
Statistics  confirmed  that  real  GDP growth accelerated to
8.7%  last  year,  the  best  performance  since  1979.  All
indicators  point to  continued  strong growth over the next
few  years.  This year, first  quarter real growth was about
7.5%, the second quarter growth rate was closer to  8%. This
better-than-expected economic outturn is now well on  track,
with a strong revival across all sectors of the economy.
4.   More importantly, the initially export-led expansion is
being reinforced by rising domestic demand  as  incomes  and
profits  improve.   Consumer demand, in particular, has been
expanding strongly.  To a large extent, this represents  the
inevitable  release  of  pent-up  demand  during the 1985/86
recession.  As  a  result, car  sales  are booming  after  a
prolonged  slump.   Imports of consumer products are growing
at double-digit rates, and business is equally brisk in  the
wholesale and retail trade.  In terms of private investment,
the  indicators  are  equally encouraging, especially in the
manufacturing sector.  As sales orders   mount  and  profits
increase,  manufacturers  are  becoming  more  confident  of
business  prospects.  This is increasingly  being translated
into  higher  outlays  for  capital expansion  in plant  and
equipment,  as  reflected  in  the   surge  in   imports  of
investment goods.
5.   Clearly, all signs point to a sustained expansion for a
wide cross-section of the economy over the  next  couple  of
years.   Not with standing  the  sharp  rise in imports, the
balance  of payments  is expected to remain favourable, with
perhaps a small  surplus  over the medium term.  We can also
look  forward to further progress on the fiscal front as the
Government  continues   to   consolidate   its   expenditure
6.   Although the economic prospects are favourable, this is
no  time for complacency.  A lot is riding on the ability of
the major industrial economies to "engineer" what is  called
a soft-landing for the world economy.  Even as the IMF talks
of  continued  good  times ahead for world commodity prices,
the decline in the price of our rubber, palm oil and tin  in
recent  months  is a cause for concern.  We cannot afford to
subject  ourselves  to  the  vagaries  of the  world trading
environment.  While  conditions remain favourable, we should
redouble  our  efforts to reduce our reliance on commodities
and  the  external  stimuli  and  instead  promote  domestic
sources of growth. In  this  regard, banks have an important
role to  play in channelling  the large inflows of liquidity
from our buoyant  exports  into productive investment in the
domestic  economy.
Ladies and gentlemen,
7.   The banking system must thus be anchored on a solid and
unshakable foundation and this foundation must be reinforced
continuously to support the rapidly expanding economy.    As
you  are well aware, the banking system had gone through the
"acid test" during the turbulent years of 1985-86.  There is
no doubt that appropriate surgery has been performed on  the
major  weak  links  in the system, which surfaced during the
severe  recession.  The  system  is  now  stronger  and more
capable  of  withstanding future shocks.   With  the  coming
into force  of  the Banking and Financial Institutions Acts,
Bank Negara would have the power to intervene and  supervise
the  financial  system better.   It is not the desire of the
Government  to  have  more  regulations  but supervision  is
necessary in order to effectively promote monetary stability
and a sound financial structure.  We must all remember  that
it  is  the  Government  that  is called upon to provide the
safety net whenever banks are threatened with insolvency.
8.   Moreover, I am certain that the financial  institutions
would  have become wiser and more prudent after experiencing
the bursting of the "speculative bubble".  The lessons  have
been  costly  and  it  would be worthwhile to remember them,
particularly in the present mood, when the economy is on the
upturn again.   Management must impress  these  lessons  and
principles upon the new  officers who will be future leaders
of  their  institutions.    These  officers may not have had
first hand knowledge or experience of the  recent  turbulent
period of banking not only in Malaysia, but the world over.
9.   With  the  economic  outlook   distinctly   bright, the
banking  community  should  take the opportunity to build up
their  reserves  in  order  to  reinforce  their  ability to
support a   more  prosperous and more sophisticated economy.
The  best and easiest time for the banks to raise capital is
when they  have  surplus capacity and do not really need it.
Moreover,   the build-up in capital and reserves during  the
upturn  of  the  cycle  will not only enable them to grow in
the  future,  but  more importantly will place them in  good
stead to withstand shocks  and  absorb  any unforseen losses
during  future  downturns.
10.  Bank  Negara  has  recently  introduced  a   risk-based
capital  ratio,  formulated  along  the  lines of the  Basle
capital framework  to  be observed by all licensed banks and
finance  companies.  It is my  hope that, with the new risk-
based  capital  framework,  banks  will be more sensitive in
structuring  their  balance  sheet.   Adequate  capital  and
prudent assets and liabilities management will go a long way
in  avoiding the mistakes and excesses of the past.
Ladies and gentlemen,
11.  We are now in the third year of economic recovery  with
the    pace    growing    stronger.   Within   this    broad
development, I wonder whether  the  financial  institutions,
especially  the  banks are moving along at the same pace. If
we  take a cursory  glance at their financial statements, we
see apparent  gains and consolidation. However, a major part
of  the  profits  had  actually  come from recoveries of bad
debts.  I do not have any quarrel with the banks' efforts to
collect what is legitimately theirs, but I wonder whether it
has  not  become  an obsession  amongst  them  to  emphasise
recoveries of past due loans at whatever expense.
12.  I have heard that banks are too insistent on recovering
their  old  loans.  During  the   recession,   interest  had
accumulated  because  borrowers  could  not  get the cash to
service their loans.   On top of that, the banks had imposed
heavy penalty interests for such default. When things became
better,  borrowers  who  came forward to repay get  a  shock
when they  were informed of the amount owed.  Even for those
who  propose to pay the whole amount of  the  original  loan
together  with  accumulated  interests,  some  banks  refuse
absolutely  to waive the penalty interest or even a part  of
it.  These  banks  seem bent on getting their pound of flesh
even if it prevents their clients from making a recovery and
remaining as  their clients.  This is the kind of short-term
thinking that does not seem to reflect maturity.
13.  The banks and the country as a whole will not gain from
acts  which  prevent  good   borrowers  who  willingly  come
forward to pay their loans from recovering quickly. We  need
such businessmen who are able and honest enough to pay their
debts  as  soon  as they can.  They are responsible debtors.
They should be rewarded rather than penalised.  They  should
be helped to recover and to remain good clients of the banks
concerned.  They  are  truly  assets  to  the  banks and the
banking  system  as compared to those who would avoid paying
back loans for as long as they can.
14.  Malaysia is short on good businessmen  and  paymasters.
It  is  in everyone's interest to rehabilitate these people.
I hope that banks will be more businesslike in dealing  with
them.    The  faster these   people   recover and go on with
their business the better it will be for our  economy  as  a
15.  At  the  same  time banks must not be harsh on those of
their  clients  who  fell  on  hard  times  because  of  the
recession.  The collaterals they put up depreciated with the
recession and they were unable to pay up.   Many  were  made
bankrupt  because of  their  failure  and  are now unable to
restart their business. Yet with the economic recovery their
former  properties  have  appreciated.   Had they been given
time it is possible that they would repay the banks with the
recovery of prices of their collaterals.  But they have been
made bankrupts and are now not  able  to  repay  banks  with
their  limited  earnings.   And of course they cannot do any
business  as they cannot raise any capital.   They  are  now
useless  to  the banks, to themselves and to the nation.  It
is to me such a  waste.  Some  of  them  who  misused  funds
deserve to  be bankrupted.  But those who failed through the
property depreciation do not deserve to be so punished.
16.  Speaking of collaterals, the  banking  community  still
seems  to  regard them as the only worthwhile guarantees for
loans.  This  is  strange   because   we   have   seen  that
collaterals  in  the  form  of  properties  or shares can so
depreciate  as to be almost useless.  This was what happened
during  the recession. Despite  the  collaterals  being,  in
many instances, worth more than the loan  given  out,  banks
found themselves unable to recover the  collateral supported
loans during the recession.   The collaterals had  not  only
depreciated but there were also no buyers.
17.  Unfortunately  when the property appreciated during the
recovery  some  bankers  paid  themselves  off together with
interest and penalties.  Their clients recovered very little
from the appreciation  of  the  value  of  the  collaterals.
While  repayments in installments should be charged the full
penalties,  repayments  in   full  deserve   to  have  their
penalties  written  off  or  reduced.  Indeed even interests
deserve to be reconsidered.
18.  Banks should really  depend  less  on  collaterals  but
more   on   the   soundness  of   company   management   and
profitability  of  projects.   This  is especially  so  when
dealing with  new  enterprises  and new products.  If we are
ever to  move into non-traditional businesses, banks must be
prepared  to  study  projects or enterprises with a view  to
evaluating their potential.   Obviously these businesses are
not going to have a track record.  But if they are not to be
given any loan because they have no collaterals and no track
record,  how  is  there  going  to  be  new  businesses  and
19.  Admittedly  it  is  risky business to finance a venture
with no track record and no collateral.  But banking is also
a business and banks must also take risks.   More than  that
banks  must  be  prepared to lose money  or to share losses.
Banks are not entirely  without  blame  when  businesses  go
20.  A  few  years back, at an annual dinner such as this, I
suggested  that  banks  should  take  up shares and actively
participate in business. Then if the enterprises borrow from
the  banks they  will  be  in  a  position  to  oversee  the
management.  They  will be able to halt any wild ventures at
least through the boards.  Certainly they can make sure that
money is not misused.
21.  As  I  remember  it  the suggestion was welcomed by the
banking  fraternity.  But I  know  of  no  banks  which have
actually taken shares in companies and participated in their
management.    I  do hope that this   is  because banks have
their hands full running their normal business.  I also hope
that they will take up this suggestion in the near future.
Ladies and Gentlemen,
22.  At  a  recent  exhibition  of   Malaysian  science  and
inventions,  a  number  of  the  brainchildren  of Malaysian
inventors seem to cry  for  production and  marketing. If in
addition  our  researchers  take seriously the suggestion to
identify products which can be copied and  modified  through
reverse  engineering,  it  would  seem that there is a great
scope for the start-up of many  new  enterprises.    But  of
course such new enterprises would require venture capital.
23.  A  seminar was recently held in Kuala Lumpur on venture
capital.  If the seminar succeeded in  convincing  banks  to
the  need to  support  new  ventures, possibly involving new
inventions or reversely-engineered  products, we may yet see
the emergence of new manufacturing activities in Malaysia by
Malaysians.  At the moment of course  new  technologies  are
only  employed  by foreign manufacturers with reputation and
track records.  Yet at one stage  these  foreign  big  names
must  have  been small and unknown.  They must have had some
banking  backers  in  their  early days to be where they are
today. Cannot our small new  entrepreneurs  be  accorded the
same backing by our banks?
Ladies and Gentlemen,
24.  For  banks to venture into what are to them unchartered
seas, they must prepare themselves thoroughly.   An  ability
to  understand   cash-flows   alone  is   apparently   quite
inadequate.  Banks  must  have people who look  beyond  pure
money  lending.  They  must  understand  the  management  of
businesses, particularly new  manufacturing businesses. They
must  also  have   officers  acquainted  with  some  current
25.  Thus  equipped  they  will  be  able  to  make   better
evaluations  and  to take  the  kind  of  risks  involved in
providing  venture capital, directly or indirectly.  We need
this kind of  banking  skills and risk taking if we are ever
to  escape   from  the  traditional   areas  of  business  -
commodity production, properties,  construction  and running
kedais.  We  cannot go  on relying on these limited areas of
business  because,  in  the  final  analysis, they  are  all
commodity-based.   And  there  is  no  way  we  can  control
commodity prices. I  am   not  asking banks to be imprudent.
They  must be prudent but  not  to  the  extent of  stifling
entrepreneurship in this country.
26.  I realise  fully  that  banks  have  been  badly bitten
during  the  recent  recession.  They  know  that  even with
collaterals they can still lose their money.  They know that
some  business   people  including   valuers  do   overvalue
collaterals. Leasing companies have had very bad  experience
indeed. Once the  money  is given out the lenders lose sight
of it.   Since banks and other financial institutions cannot
possibly  supervise  the  way  all  their  loans  are  being
expanded,  the  role   of  the  auditors  becomes  extremely
important.  The  auditors  are  there  to  ensure  that  the
directors and managers manage their money properly.
27.  In our system the auditors are supposed to be appointed
by  the  shareholders  at  the  annual general meeting.   In
actual fact it is the management and the boards of directors
which  appoint  the  auditors.  This  being  so the auditors
often feel themselves  beholden  to  the  management and the
boards.  This is not healthy.  Banks which often  have  more
money  at risk than  the  shareholders  should really have a
proportionate  say  in  the  appointment  of  auditors.  The
auditors should be beholden to the  banks as well as to  the
shareholders.  This way the banks will have some supervision
over the money they have lent to the businesses.  This would
reduce  their  risks  and  consequently  their reluctance to
finance enterprises.
Ladies and Gentlemen,
28.  We should also not forget that insurance companies  too
need  to  move along a similar direction.  For too long, the
insurers have stayed in the background.   The time  has  now
come  for  the  insurance  industry  to  move  closer to the
forefront  of  economic  activities to  seriously   consider
providing   commercial  insurance  cover  to  the   hitherto
"averse"  risks   such   as  crop,   livestock  and  fishery
insurance; to  upgrade  risk  management techniques so as to
take on the more sophisticated megarisks of marine, aviation
and energy;  to  pool  resources  together  so as to  retain
domestically  as much  as  possible  the  large  premiums, a
substantial proportion of  which is now paid overseas, a big
contributor   to  our  invisibles,  to  package   the   most
cost-effective insurance products for the salary earners and
businessmen alike. All these are for the national good while
not   diminishing   the   profitability   of  the  insurance
Ladies and gentlemen,
29.  We all feel that Malaysia is experiencing an upturn  in
the economy.  We see evidence of it everywhere.  We see more
traffic  jams,  more  frequent full house notices by hotels,
more people eating out, more clubs and golfers, more  crowds
at  shopping malls, more smog and indeed more of everything.
All these sound good to businessmen and to bankers.  But for
all these growth to be accommodated and  sustained  everyone
must tidy up his act and upgrade facilities and services.
30.  Today  Malaysia's  population is 17.4 million.  When we
became independent there were only 5 million Malayans.   The
increase  is  rapid,  very  rapid.   Assuming  we   have   a
population  growth  of  2% and we have more than that, there
will  be  more  than  340,000 new Malaysians every  year  or
without  compounding  1  million  every  three years.  These
people  will  have  to  be fed, clothed and  housed  through
employment.  They  have to  be  transported and entertained.
Doing these  alone would mean more business.
31.  The  Government in anticipating these needs have set in
motion plans and policies designed for accelerated  economic
growth.      We   are   expanding   vast   sums   on  needed
infrastructures.  The  State   Governments,  you  may   have
noticed, are very  much  more active in attracting local and
foreign investments and generally  boosting   the   economy.
Even local authorities have adopted very positive attitudes.
32.  For  all  these  economic   growth  for  a   burgeoning
population  to  take  place,  capital  will  be needed.  The
financial  institutions  must play their role.  They must be
more  innovative  and  open-minded.  They   must  help   our
business people  seize opportunities as they appear.    They
must  not look merely at their immediate profits but also at
the  long-term  returns  they  will  get as  the  population
increasesand  businesses grow along with it.
33.  We do not want our rapidly growing population to result
in  the  lowering  of  our  standard  of living.  Per capita
income must increase even as the population increases. While
exports will continue to contribute more  and  more  to  our
economic growth, the health of the nation's economy would be
better  protected if  domestic  demands  also grow to reduce
dependence on export.
34.  Money  must  move.    It must not remain static.  Every
time money changes hands wealth  is  created.    The  faster
money  moves  the  greater  will be the wealth created.  The
financial institutions, the custodians of the nation's money
must  help  this  process,  must give guidance, must provide
expertise and must be more adventurous.  They  must  not let
their  money  stagnate  in  their vaults for any longer than
they can help.  They,  more  than everyone else,  must  keep
money moving and consequently growing.
Ladies and gentlemen,
35.  We have preached public and private sector cooperation.
We have  recently  begun  preaching  a three-way cooperation
between the  Government, the  businesses  and the workers to
heighten  economic  growth.  Now  we  want  to  suggest  the
participation  of  another important  partner  to  make it a
foursome.  We  would  like to see the financial institutions
throw their full weight behind the other three  so  that  we
will take off  on  a  sustained  economic  growth  path  for
the betterment of all of us.
36.  As you enjoy your dinner tonight try also to digest and
absorb some of the special menu I have just  cooked  up  for
you.  God willing we will build together a better Malaysia.