Oleh/By : DATO' SERI DR. MAHATHIR BIN MOHAMAD
Tempat/Venue : PETRONAS MANAGEMENT TRAINING
INSTITUTE, BANGI
Tarikh/Date : 07/01/91
Tajuk/Title : PROGRAMME ON PROJECT APPRAISAL AND
RISK ANALYSIS MANAGEMENT FOR BANKERS
Tan Sri Ahmad Sarji,
President, The Harvard Club of Malaysia;
Distinguished guests;
Ladies and gentlemen.
For decades Harvard University has been renowned for
its excellence in the field of studies involving business
and the management of business. Today, thanks to the initi-
ative of the Harvard Club of Malaysia, in collaboration with
the Harvard Institute for International Development and the
Institute of Bankers Malaysia, a selected number of non-
Harvard graduates will be able to participate in and benefit
from the famous Harvard case-study method of teaching. I
would like to extend a warm welcome to the participants from
our ASEAN neighbours, Indonesia, Singapore and Thailand. I
hope you will enjoy not just this course but also your stay
in Malaysia. By the end of this programme, I am sure all
the participants will emerge better equipped with the latest
techniques as well as become "hands-on" competent on the PC
in project appraisal and risk analysis management. The cor-
porate sector and the financial world is becoming increas-
ingly competitve and complex and technologically more
sophisticated, and so technical competence in project ap-
praisal and risk management are essential to the efficient
conduct of modern business. I applaud this move to provide
high-quality technical training in this area and hope that
this Harvard training programme will not be the last.
Ladies and gentlemen,
2. Talking about economic advancement, I am glad to say
that Malaysia had recorded yet another year of excellent
economic performance in 1990. Despite the challenges and
uncertainties in the world economy caused by the crisis in
the Gulf, Malaysia managed to retain economic stability and
a largely inflation free growth.
3. It may be assumed that as a net oil exporter, Malaysia
should of course be able to do this. But in reality,
Malaysia like other countries in the region and elsewhere,
faced inflationary pressures that could negate the gains
from higher oil prices. Malaysia warded off inflation by
refusing to increase retail petrol prices in step with the
rise in crude oil prices, which at one time exceeded
US$40/-. Had Malaysia raised fuel prices, the cost of
transport and other goods would have gone up. As is well
known, once goods and services increase in price due to
whatever reason it almost never returns to original levels
even when the causes are removed. Because Malaysia contin-
ued to retail petrol at roughly the prices prevailing when
crude was below US$20/- there was no increase in the cost of
goods and services. Thus when crude came down to more rea-
sonable levels there was no problem with prices remaining
at a high level.
4. The price paid for this strategy was loss of revenue
for the government and the smuggling out of petroleum pro-
ducts. But this is considered a small price to pay for con-
taining inflationary pressures.
Ladies and gentlemen,
5. The outlook in the immediate term remains favourable
for Malaysia. Even when the expected slowdown in world
trade and growth is factored in, the Malaysian economy can
reasonably be expected to continue to coast along to record
another creditable performance in 1991. Having managed the
initial disruption of the Gulf crisis, Malaysia can now en-
joy the yield from better prices for crude. More impor-
tantly, domestic sources of growth, particularly private
investment outlays and consumption spending have been ex-
panding strongly since 1988 and should have enough built-in
momentum to carry the economy through in the next 1 to 2
years.
6. In this regard, the sustained surge in investment in-
terest has been particularly encouraging, with over $21
billion ringgit worth of projects already approved by MIDA
during the first nine months of 1990. Equally encouraging
have been the indicators on consumer spending, which contin-
ued to register strong double-digit growth.
7. The surge in domestic economic activity and continuing
favourable economic expectations have inevitably given rise
to some areas of concern. First, there is the fear of in-
flation, in particular, the build-up of inflationary expec-
tations, which -- if left unchecked -- could become
self-fulfilling. As a government, we have begun to use fis-
cal measures to ease the situation. But in the final analy-
sis, what we need to do is to be more productive if we want
to consume more. That is really the only way to combat in-
flation -- i.e. higher production with higher productivity.
Second, because of continuing economic growth, our labour
market has become much tighter, leading to pockets of short-
ages and some wage pressures.
8. Increases in wages are not bad for the economy. Indeed
they promote greater consumer spending and generally con-
tribute to wealth creation. But wage increases without
commensurate or improved productivity will almost certainly
result in a wage-price spiral in which of course the in-
creases in wages become meaningless. Workers and management
must always bear this in mind. Inflation as a reason for
wage increases is suicidal but wage increases because of in-
creases in productivity should not be resisted by manage-
ment. The government would like to see Malaysian wages rise
with increasing productivity.
Ladies and Gentlemen,
9. Apart from the threat of inflation, the buoyant economy
has also created a third problem in that our infrastructure
facilities have shown early signs of strains in keeping pace
with the ever increasing demands of a rapidly growing econ-
omy. In some of the more densely developed industrial
areas, such as the Klang Valley, infrastructural constraints
have become more visible. To cope, the government will need
more funds than can be reasonably expected from the usual
revenue sources. Excessive borrowing to finance
infrastructure will land the government in tight financial
situations later on.
10. To overcome this financial constraint and yet provide
the required infrastructure on time, the government will use
privatisation to the maximum. This way government money
will be expanded only on infrastructure with no possible
commercial potentials, as for example rural roads, schools
and clinics. Industrial estates, ports, airports, toll ways
etc, will be built and operated by private enterprise and
will be paid for largely by those who use them directly.
Our experience has convinced us that privatisation pays and
we intend to resort to it as much as possible. We do not
see why a car owner in a remote small town should pay for
highways and city by-passes which he will hardly ever use.
Certainly if the financing of these infrastructure is by
public funds, as for example higher petrol tax, the small
town car owner will share the burden equally without equally
sharing the benefits. Privatisation is therefore a more eq-
uitable approach towards providing infrastructure rapidly
without diverting funds needed for normal development. Bor-
rowing will have the same effect of spreading the burden
without spreading the benefits equitably.
11. Despite the problems which are a consequence of rapid
growth, I am confident that the Malaysian economy will be
able to march forward with confidence. The banking sector
has so far played its role well in financing the growth
process. As the credit situation tightens, the banker's
role in funding Malaysia's next phase of growth towards a
broad-based industrialised economy becomes more critical.
Experience in the 1980s have taught bankers to be wary of
character lending or collateral lending. Many are finding a
need to go back to basics -- hence, the quest for expertise
and the upgrading of skills. In particular, this calls for
effective management in risk analysis and project appraisal.
12. The government is torn between a desire to be liberal
and the need to control banking in order to protect the in-
dustry and the people. As is well-known, banks just cannot
be allowed to go bankrupt as other businesses can. The col-
lapse of even a small bank has such wide implications and
effect on the economy of a nation that government is forced
to intervene. Interventions cost a lot of money -- public
money. If the Government is to be responsible with regard
to the performance of banks, then it must wield some author-
ity. This is to ensure that banking prudence is not just a
catchword but is actually practiced. Still this Government
believes in minimal control, which of course means bankers
must exercise self-control and be professional. Any move to
upgrade banking skills and professionalism will therefore
have the Governments unstinting support.
13. When, during the recession, many bank clients got into
difficulties, the creation of Funds by the Government did
not only help the client of the banks to recover but they
also help the banks to recover their loans. In other words
in rescuing the borrowers the Government is also rescuing
the banks. Banks should therefore acknowledge this by being
willing to forego such sources of profit as penalties and
the interests on interest. Bankers should also accept that
during bad times they themselves must suffer some losses.
14. This does not mean that bankers must be too forgiving
towards their clients. The degree of forgiveness should
match that of the Government towards the banks. Neverthe-
less good bankers must have some foresight and not lend so
much to so few people that their fate becomes tied com-
pletely to the fate of these clients.
15. Foresight is a scarce commodity. No one predicted the
invasion of Kuwait for example. One or two did of course
but they were regarded as quite mad when they foresaw such
nonsense. But it does not require occult capabilities for
bankers to reduce or spread their exposure. By acquiring
certain skills they can reduce the role of instinct and gam-
ble in their dealings. This is where expertise and experi-
ence in the techniques of project appraisal and risk
management come in.
16. Despite the sustained upswing in the economy in the
past four years, there is still a large overhang of problem
loans, a legacy of the 1985/86 severe recession. The proc-
ess of loan rehabilitation, whether with or without Govern-
ment financial assistance, is still an area of major concern
to the banking community. Yet the viability of many stalled
projects should improve significantly with the economic up-
turn, despite the Gulf crisis. We badly need special skills
at reviving many stalled projects, particularly the aban-
doned housing projects.
17. On the other hand being over-cautious with new ones are
not good either. I believe bankers should always be pre-
pared to "go the extra mile" in order to achieve an amiable
and mutually beneficial solution to the projects placed be-
fore them. Foreclosure or bankruptcy proceedings, like a
war, can never be the best solution for both parties, and
can at times be even destructive to the economy as a whole.
I would urge the banking community to constantly upgrade its
appraisal skills and management techniques in loan rehabili-
tation and in the management of corporate turnaround in par-
ticular. The successful turnaround of stalled projects
would help conserve the nation's scarce pool of entrepre-
neurs, restore productive capacity and in the final analysis
help economic growth.
Ladies and Gentlemen,
18. Efforts should also be directed at promoting new indus-
tries, particularly those with innovative and new ideas. In
business, success cannot always be attained simply by re-
peating what has been done successfully. Economies of na-
tions will stagnate if there are no new ideas or approaches
to business and products. On the other hand bankers are
conservative people although they usually describe their at-
titude as prudent. They tend to be wary and unsupportive of
new things. Consequently if bankers are to have their way,
nothing new will enter the business scene and the economy
will stagnate and even regress.
19. Clearly there is a need for bankers to be more adven-
turous and to provide venture capital for selected projects.
The skills in the selection of such projects must be devel-
oped by every bank and they must keep close watch on the
performance of the projects they finance. Such skills usu-
ally come through experience but experience is a costly
teacher. It is important therefore for those who have had
the experience to pass them on through the numerous tech-
niques of teaching that have been developed by such business
schools as the one at Harvard.
20. Bankers cannot depend exclusively on collaterals and
track records. On the other hand those people with innova-
tive ideas and products must understand that knowing how to
do or make things does not mean that a profitable business
can result if the capital is available. If there are rich
inventors, it is because somebody else took their inventions
and marketed them. Left to themselves the inventors can
only fiddle in their laboratories. Ford did not invent the
car nor Ray Kroc the hamburger. They are basically success-
ful marketeers. But in their own way they were innovators
and banks must learn to recognise and support innovators.
21. Risk analysis should not be confined to quantitative
and tangible factors only. Indeed, the borrower's character
should be of paramount importance. An entrepreneur who has
the vision, dynamism and the spirit to fight against all
odds should never be overlooked. This, unfortunately, is
rarely included in the credit decision process.
22. Besides the borrower's character, another important
factor should be customer loyalty. People do not easily
forget those who deny them aid in times of need. A banker
once said that a good client is a rare precious asset; in-
deed, it is quite impossible to find one who does not al-
ready have his own banker. Often, the only way to get one
is to steal one or alternatively, to "grow" one. In a young
emerging nation like Malaysia, I am sure there is no short-
age of enterprising people for the bankers to cultivate
their own pool of loyal clients. Bankers have to learn to
be more far-sighted. Professionalism and expertise would
certainly help in the process.
Ladies and Gentlemen,
23. For its part, the Government has set aside $250 million
ringgit under the New Entrepreneurs Fund to provide low-cost
financing opportunities to the new breed of indigenous en-
trepreneurs. As at the end of November 1990, only $21
million ringgit have been approved under the scheme to fi-
nance 127 new projects. With the present economic upswing,
there should be no shortage of fertile ground for new ven-
tures. What is needed are bankers who have the foresight
and vision as well as the skills to take the risk and
nurture budding entrepreneurs from the cradle.
24. To me, the slow utilisation of the Fund reflects a
shortage of this new breed of bankers rather than the lack
of budding entrepreneurs. I would urge the banks to step up
their efforts to help new enterprises get off the ground.
Emerging small and medium size enterprises should be given
the opportunity to start up and to grow -- they represent
vital links in the economic backbone of the country.
25. To this end, I note that regulatory restrictions have
already been relaxed for some time to allow banks to invest,
within prudent limits, in the shares of newly formed
start-up manufacturing concerns. Such a form of equity fi-
nancing allows the implementation of promising projects with
long gestation periods without the burden of having to meet
early demands for repayment, as would be the situation in
traditional lending.
Ladies and gentlemen,
26. The Government has recognised the important role that
venture capital can play in expanding and diversifying an
industrial base and has provided attractive tax incentives
for venture capitalists. The market also rewards the ven-
ture capitalists for the risk they undertake by providing
the opportunity for capital gains that would arise from the
initial public offering of the shares of a successful com-
pany. But, before this can happen the Bankers must play
their role and take reasonable risk, for which they must
equip themselves with the skills of proper investment ap-
praisal and risk analysis techniques. I believe the oppor-
tunities offered in this programme will go a long way in
building expertise in a very exciting area of financing.
27. In this regard, the Government would also like to see
the capital market deepen and broaden further in order to
enhance the efficiency and risk-bearing capacity of the fi-
nancial system. For some time now, concerted efforts have
been directed at developing the corporate bond market to en-
able large corporations to raise funds directly from the
capital market in a flexible manner and at lower cost.
28. Our first credit rating agency, Rating Agency Malaysia
Berhad, which was incorporated in November 1990, should
start operations this year. This rating agency is expected
to boost investors' confidence in the Malaysian bond market
and provide the necessary impetus to the corporate sector to
raise long term funds directly from the market.
29. Concurrently, the government is also encouraging the
development of a financial futures market, to allow for the
more efficient management and distribution of risks. The
availability of a wide range of hedging instruments can be
expected to enhance the risk-bearing capacity of a market
oriented economy. This would help increase capital forma-
tion, raise savings and promote economic growth. With the
increasing sophistication of the capital market, the need
for expertise in risk management and project appraisal will
undoubtedly become more urgent in the coming years as the
choice of financing and hedging instruments widens.
30. Lest it be thought that a sure recipe for success de-
pends solely on professional skills and technical compe-
tence, I should emphasise that these are but necessary
ingredients; and on their own, they are not sufficient. We
need honesty and integrity in our bankers. Indeed, I would
go so far as to say that the fruits of our labours in sus-
taining economic growth in the past three decades would come
to naught, if there is a widespread absence of these fine
human qualities in our bankers, businessmen and the people
as a whole. The managers of our financial institutions in
particular, as mobilisers and custodians of public savings
and the channel to provide the oil for the wheels of our
economy, are expected to display the highest integrity and
sense of honesty in their endeavours.
31. I am told that at the Harvard Business School today,
all MBA students must take basic courses in Business Ethics.
This is a good sign and augurs well for the future. It
should not be accepted that honesty is essentially a moral
choice, and morals and business do not mix. I believe that
morals are an integral part of business.
32. Economists and game theorists do tell us that trust is
enforced in the market place through retaliation and reputa-
tion. In fact, I would go further to say that those who en-
gage in fair dealing will prosper. Ultimately, the caring
society we are trying to foster in Malaysia is one where
businessmen and entrepreneurs choose virtue and honesty be-
cause we want to believe in ourselves and want others to re-
spect and believe in us.
33. Businessmen should keep their promises because it is
the right thing to do, not because it is good business. Any
society that is not built on trust cannot last. I can find
no better way than conscience to explain why trust is the
best basis for any business relationship. Fortunately, the
environment we live in Malaysia honours honesty, whether or
not it is profitable. Right is right and wrong is wrong.
There can be no two ways about this.
34. On this note, ladies and gentlemen, I now have much
pleasure in officially declaring this course on "Project Ap-
praisal and Risk Analysis Management for Bankers" open.
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