International Business Research and Strategy Development for Banking in Malaysia

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  • 1. Running Head: Banking in Malaysia Page |1 Banking in Malaysia MGM355-1203A-02 International Business Practices Phase 5 Individual Project Sabrina Mergenthaler Colorado Technical University Online Professor Asmeret Beyene August 13, 2012
  • 2. Banking in Malaysia Page |2 Abstract Business expansion undergoes many considerations prior to action. As businesses travel across oceans and country lines to engage, greater needs arise in order to ensure the success of the business. One such need includes banking. Regional banks are businesses that also take part in overseas expansion to facilitate certain business functions. Not unlike any other company, challenges can be anticipated based on the region in which the bank pursues setup. The challenges may be related to the culture, economics, and government of the nation in which there is intention to enter. Throughout this document, we will explore some of the challenges to be expected when expanding a regional bank into the country of Malaysia. Particularly addressing the culture, political, legal and economic conditions of Malaysia will lend to an assessment of the risks and benefits associated with such an expansion. The final assessment will contribute to a conclusive decision of pursuit or termination of the plan to engage.
  • 3. Banking in Malaysia Page |3 Introduction Once a dependant nation, Malaysia has risen as a diversified country by developing aneconomy upon manufacturing, services, and tourism (Malaysia, 2012). The diversification ofMalaysia contributed greatly to the country’s rise as a large financial center. The growth oftechnology has further strengthened the country’s role in the banking industry; and as such, is thefocus of regional banking expansion from the United States (History of Banking, n.d.). The New Environment: A Challenge or a Welcome Mat? Malaysia is greatly diversified, not only in its product, but in its people as well. WhileMalaysians make up 50% of the population, the next largest group—the Chinese—haveingrained a lot of culture on the country; for example, in religion, cuisine, and policy (Malaysia,2012). However, it is these same aspects that create Malaysia’s “close-to-home” appeal forAmerican businesses. Though the main language of Malaysia is Malay commerce and banking is typicallyconducted in English. Similar to America, the educational system of Malaysia is conductedunder the guidance of the government; and starting at age six, children are required to attendpublic school (or another acceptable educational facility). A slight difference provides studentsthe opportunity of attending post-secondary educational facilities funded entirely by thegovernment (Hsu, 2009). Education has immensely affected the nation, as well. As more and more Malaysiangraduates enter the working-class, a growth of individualism has sparked. In fact, the rise inMalaysia’s individualistic approach in society has increased the concern of many nationalists ofMalaysia who address the “new attitude” as being linked to greed and arrogance (Hsu, 2009).
  • 4. Banking in Malaysia Page |4Political and Legal Systems While much of the social and educational standards of Malaysia do not deviate from thefamiliar types of the US, the government and legal systems have a slightly varied approach. Forexample, the ruler, or King is elected to serve for a five year term by the hereditary rulers of thenine states. Nomination of the King is based on a rotation of those state rulers (Malaysia, 2012). Though the role of the king is primarily ceremonial, the ruler appoints the representativesof the specific branches of government. Under the Constitution of Malaysia, the king is grantedthe power to elect these officials in order to safeguard the country’s position and interest (Means,1991). The branches of government define policies and carry out rulings based on the mixedlegal system of English common law, Islamic law, and customary law (Malaysia, 2012).Intervention in the Private Sector The granting of such a broad role has been a reward to the private sector which workshand-in-hand with the public sector to achieve maintaining the position and interest of Malaysia.In fact, Malaysia has remained an attractive location for businesses through policies that favorbusiness growth and profit. To facilitate such an environment, the Malaysian government goes togreat lengths to keep an open line of communication and consultation between government andbusinesses (Why Malaysia, 2010). With influence from companies fueling policies, politicaldecisions, and tax breaks, a financial institution in the country can only improve its bottom lineand position.Economics and International Trade Restructuring efforts continue in the four pillars of economic freedom, and more thanever before, the regulatory framework has become more efficient as business procedures havebecome streamlined. This reform is largely accredited to the implementation of policies which
  • 5. Banking in Malaysia Page |5support open markets and encourage an effervescent private sector and have been communicatedby the companies of the nation. The result is enhanced investment flows and the improvedstrength and amount of entrepreneurship (Malaysia, n.d.). Having gained its independence in 1957, Malaysia has gradually relaxed its economy.Government now stakes ownership in sections such as banking, media, automobiles, and airlines.Though it has come a long way from its dependence on the export of natural resources, Malaysiastill engages in exports of electronics, agriculture, and information technology products(Malaysia, n.d.). In fact, the country has maintained a positive trade balance: exporting morethan it imports (Malaysia—International, 2012). This growth in international trade is representative of the government’s role in buildingthe country’s attractiveness. Through Malaysia’s Ministry of International Trade and Industry(MITI), strives to put policies and incentives in place to coerce trade and agreements betweennations. In pursuit of creating a more liberalized and fair global trading market, Malaysia hasentered into trade agreements with many countries, including: the US, Japan, Pakistan, NewZealand, India, Chile, and Australia to name a few (Malaysia’s FTA, 2012). Coupled with thestability in Malaysia’s banking industry, the work of the government to establish and maintainsuch a strong global trading market only increases the potential for expansion of a bank withinthe Malaysian nation. Presence in Malaysia: A Potential Benefit for Future Investments Because Malaysia pushes so eagerly to build trade between nations, it is without a doubtthe bank can pursue greater interests using Malaysia as a starting point. The country is currentlyinvested in a regional integration with many provinces of the island of Sumatra in Indonesia, andsouthern Thailand. Established in 1993, the Indonesia-Malaysia-Thailand Growth Triangle
  • 6. Banking in Malaysia Page |6(IMT-GT) only hopes to expand into additional neighboring lands. In fact, Malaysia has takenfervent action towards engagement with the Association of Southeast Asian Nations(ASEAN) for several years, and encourages a speedier process by the Asian nations to completethe expanse of free trade into those member nations by 2015 (Malaysia Says, 2006). Personal Address Previous to the research conducted for this document, little was known regardingMalaysia to the writer. I saw a movie called Entrapment many years ago in which CatherineZeta-Jones and Sean Connery were thieves. Working together the two concocted a plan to “rob”the International Clearance Bank located in Kuala Lumpur. After a minor search, I found thereferenced bank was real and located in a state of Malaysia. While this was the initial intentionbehind selecting Malaysia, I was quite pleased throughout my research to find the region was sosupportive of investing businesses and the banking industry more specifically. This laughableapproach led me to select and stick with Malaysia as a choice-nation for advancing a regionalbank. Assessment As a manager, and the researching agent for the pursuit of this particular endeavor (openingan overseas office in Malaysia for a regional bank of the United States), all findings point toconcluding that such a movement would be in the best interest of this bank. Because thegovernment of Malaysia takes an active role in expanding and supporting growing businesses, itgoes without saying that any advancement into the nation will be welcomed and assisted. Inaddition to being a nation open to and attractive to businesses, the Malaysian governmentactively participates in communication with companies to ensure that its policies are made tomaintain the appealing corporate environment. Such an appeal inspires this writer to believe that
  • 7. Banking in Malaysia Page |7any financial investment to the nation is well worth the risks. The stakeholders, including thevendors, investors, customers, and employees of our bank, can rely on the continuous stability ofthe banking industry in Malaysia to provide a satisfactory return on investment (ROI). Malaysia has also proven that diversity has lent an immense texture to the cultural, social,political and educational aspects. As well, these diversities have greatly contributed to theindividualistic attitude and behaviors similar to the United States. Adaptation for ourrepresentatives will likely be less difficult due to the similarities discussed. In fact, with suchsimilarities and the active role of government, one can expect that the greatest challenge will liein managing the change itself, combating the resistance to the change by staff, and providing thesupport tools necessary to make such a great transition (Robbins & Judge, 2010). Presence in Malaysia Not entirely unlike the U.S., Malaysia recognizes businesses as sole proprietorships,partnerships, and registered companies. Because the bank has shareholders, it is advisable thatengagement of a presence in Malaysia be conducted under a registered company to meet ourobjectives. A registered company is legally independent of its owners. Essentially, the companybecome an artificial person which can own property, pay taxes, and be sued regardless of whoholds the highest shares. Governed under the Companies Act of 1965, such a presence wouldprotect our investors and shareholders in the event of tragedy (Registered Company, n.d.). Conclusion of Part I Businesses expand with crucial input on the host nation of choice. As they move theiroperations abroad, their needs for conducting simple business functions also expand with them.As a financial institution, it is in the best interest to pursue engagements abroad to ensure thatother businesses can function accordingly. It is additionally important to protect the interests of
  • 8. Banking in Malaysia Page |8the bank, and in so doing, much research should be invested into selecting an adequate hostnation. Malaysia is a country not unlike the United States—with similar interests, cultures, andpursuits in business. The stability of the nation during its rise to whole economic freedom speaksvolumes about the promising future and the potential benefit which could be gained by pursuingan expansion. With a government focused on increasing fair global trade, entrance into the nationof Malaysia can only be viewed as a portal which will inspire the future growth of this bank.Additionally, the entrance of the bank into the global market greatly contributes to a sense oftrust and brand identity for our clients who conduct business overseas. To overlook such anopportunity would be as caustic as shutting the doors to the bank on payday and cutting allinvestments. Advancement into any nation will come with challenges. Those challenges are partof the growth a company must endure and overcome into to be successful in any endeavor. Thisbank should be no different in its efforts to expand. Part II Introduction To further demonstrate the benefit of such a move, we can look to our role as provider forGlobiTech. GlobiTech is one of our multinational corporation clients. The company advancesaerospace technology across the globe to governments and widely funded space programs. Theintellectual level of the company contributes to an atmosphere of competence, reliability, andsuperiority in product, which puts them among the most notable companies in their industry. GlobiTech’s next endeavor includes designing a plant in Chile. Making up one of ourlargest clients, the founder and current president of the company has requested the advice of thebank’s top advisors. As such, a team has been developed to investigate the factors lending to a
  • 9. Banking in Malaysia Page |9decision, including: foreign currency exchange, government regulation, inflation, and interestrates. Affecting FinancingOptions GlobiTech is, like any company, with limited resources to carry out its operations. Theorganization has three options for obtaining the necessary funds to expand into the LatinAmerican region of Chile: borrowing (which will create a debt with financial institutions),issuing equity (or stocks), and internal funding (from parent companies or internationalsubsidiaries) (Wild & Wild, 2012).Foreign Exchange and Currency Risks While each option has its pros and cons, a bigger issue of concern is the transference offinances across nations. There are many risks to be aware of when financing internationaloperations. First and foremost will be the rate of exchange, whereby in some nations the cost tofund processes will greatly outweigh the benefits to be gained due to the exchange rate.However, even the exchange rate is secondary to the convertibility of funds in certain nations.With supply and demand acting as the force which determines the convertibility of currency,nations without strong financial positions or adequate reserves of foreign currencies may notreadily exchange funds (Wild & Wild, 2012).Hedging Governments will often implement policies that restrict currency exchange as well. Suchpolicies include multiple exchange rates, import deposit requisites, and quantity restrictions.Nations may pass such policies in order to conserve hard currencies, safeguard currencies fromspeculators, and to keep native residents and businesses from investing in other countries. For
  • 10. Banking in Malaysia P a g e | 10these very reasons, the company will require to insure its finances against possible losses due tounexpected changes in the exchange rate. Also known as currency hedging, this practice willdecrease the risk connected to the transfer of international funds, as well as protect the companyin credit-based transactions (Wild & Wild, 2012).Instruments of Exchange In addition to hedging currency, GobiTech can employ the use of foreign exchangeinstruments. The instruments are broadly defined as standard contracts in which foreignexchange is the primary asset. There are many types of instruments available and it would bewise to investigate each one to precisely determine the best solution for GlobiTech. However, inlight of Chile’s emerging marketing, with an exchange that is not entirely free, it would be agreat interest to Globitech to employ a foreign exchange option (FEO). An FEO is a contractwhich allows the buyer to buy or sell currency at a defined rate within a certain period of time.Use of this particular instrument eliminates much of the risk while allowing potential profits togrow unrestrained (Sekirin, n.d.). Government Regulations of Chile In light of these risks, Chile has strengthened itself as a business-friendly country. Assuch, Chile is also involved in many trade agreements. Growth of the nation is widely influencedby its market-based economy, and the government of Chile is fixated on continuing the growththrough active engagement in creating business-friendly policies. However, the Chileangovernment strictly controls the stock market of Chile, and works closely with businesses todisperse economic wealth throughout the country through public employment programs(Financial Times, 2010). The Time to Decide: Inflation and Interest Rates
  • 11. Banking in Malaysia P a g e | 11 Despite the many risks to consider when engaging GlobiTech into the new market, timingwill greatly be influenced by inflation and interest rates. Inflation reflects supply and demand,and ultimately is dependent on interest rates. When interest rates are low, more debt is eagerlyconsumed. This impacts supply and demand as having access to low-interest credit increasesconsumer demand, which increases the need for suppliers to supply. The movement of the cyclerequires GlobiTech to be aware of the movement of interest rates in order to capture funding atthe lowest rate, and profit at the greatest rate. Though this does not necessarily indicate the needfor Chilean rates to be low, it does indicate the need to have a balance on the side of Malaysianinterest rates and Chilean exchange rates (Wild & Wild, 2012). Conclusion As the advising and financial representative for GlobiTech, it crucial to adhere to andunderstanding how the foreign exchange market operates. It is possible for GlobiTech to obtainlow interest rates from a Malaysian financial institution and exchange the funds in their LatinAmerican location. However, timing is pertinent. Low interest rates must be compatible withChile’s inflation rates and current economic conditions in order for GlobiTech to achieve amaximum profit.
  • 12. Banking in Malaysia P a g e | 12 ReferencesFinancial Times. (2010). Retrieved from Chile Surges Forward on Good Policies, Good Timing: http://blogs.ft.com/beyond-brics/2010/10/06/chile-surges-forward-on-good-policies- good-timing/History of the Banking Industry in Malaysia. (n.d.). The Association of Banks in Malaysia. Retrieved from http://www.abm.org.my/history_of_the_banking_industry_in_malaysia.aspxHsu, D. (2009). Malaysia and a Declining Standard of Social Behavior. Dr. Hsu on Malaysia. Retrieved from http://hsudarrenpress.com/2009/09/16/5489/Malaysia. (2012). The World Fact Book. Central Intelligence Agency. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/my.htmlMalaysia—International Trade. (2012). Encyclopedia of the Nations. Retrieved from http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Malaysia- INTERNATIONAL-TRADE.htmlMalaysia’s FTA Involvement. (2012). Ministry of International Trade and Industry. Retrieved from http://www.miti.gov.my/cms/content.jsp?id=com.tms.cms.section.Section_8ab55693- 7f000010-72f772f7-46d4f042Malaysia Says Southeast Asia Must Speed Up Economic Integration. (2006). Association of Southeast Asian Nations. Retrieved from http://www.aseansec.org/afp/167.htmMeans, Gordon P. (1991). Malaysian Politics: The Second Generation. Oxford University Press: England. Retrieved from: http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=3697900Registered Company. (n.d.). My Government—Malaysia’s Official Government Portal. Retrieved from http://www.malaysia.gov.my/EN/Relevant%20Topics/MakeaBusiness/Business/PlanBusi ness/FormsOfBusiness/Company/Pages/company.aspxRobbins, S. & Judge, T. (2010). Essentials of Organizational Behavior: Tenth Edition. New Jersey:Prentice Hall.Sekirin, E. (n.d.). Foreign Exchange Instruments. EHow Money. Retrieved from http://www.ehow.com/list_6793287_foreign-exchange-instruments.html
  • 13. Banking in Malaysia P a g e | 13Why Malaysia. (2010). Malaysian Investment Development Authority. Retrieved from http://www.mida.gov.my/env3/index.php?page=government-policiesWild, J. J., & Wild, K. L. (2012). International Business: The Challenges of Globalization. Sixth Edition. Upper Saddle River, NJ: Pearson Prentice Hall.