Cash Management in Malaysia
Malaysia has had a broad-based recovery that gained momentum in 2002. Real gross domestic product (GDP) grew by 4.2 per cent in 2002, up from 0.4 per cent in 2001. From the supply side, growth was supported by the rapid expansion in the services and mining sectors and the favourable expansion in the manufacturing sector. The services sector grew by 4.5 per cent in 2002, supported by the recovery in domestic demand, the expansion in trade-related activity and the growth in tourism.
Through the fourth quarter of 2002 to the second quarter of 2003, the Malaysian economic recovery was hit by a series of events: the Bali bombings in Indonesia; the start of the Iraq war; and the Severe Acute Respiratory Syndrome (SARS) outbreak. Despite these challenges, the economy proved to be resilient with the fundamentals of the Malaysian economy remaining intact, providing for continued price stability, an increase in foreign reserves, low unemployment rates and improved balance sheet strength in the banking and corporate sectors. In August 2003, Rating Agency Malaysia Berhad revised upwards the GDP projection for 2003 to 4.8 per cent from 3.8 per cent. This was based largely on a more positive economic outlook for the second half.
As financial and corporate reforms continue, the banking sector remains healthy with a capital adequacy ratio of above 12 per cent. Asset quality improved as a result of the stronger economic recovery, significant progress in corporate debt restructuring and rehabilitation programmes undertaken by the banking institutions to enhance the debt-servicing capacity of borrowers. The sector recorded a pre-tax profit in 2002 and return-on-assets and equity improved.
There are 10 domestic banking groups, 14 foreign commercial banks, two Islamic banks, 10 merchant banks and 10 finance companies. As part of the Financial Master Plan for Malaysia, Bank Negara Malaysia (BNM) has advised that it will allow market forces to follow through on the onward merger of the ten domestic banking groups into six groups.
Acting as a central banker and financial advisor to the government, BNM’s supervisory role was extended by the Banking and Financial Institutions Act of 1989, which enabled it to monitor the financial sector more effectively.
There are three payment and clearing systems in Malaysia:
Current accounts are available to both residents and non-residents in ringgit (MYR) and foreign currencies. A non-resident company may maintain an external account with any financial institution in Malaysia. Banks are not permitted to pay interest on current accounts maintained by corporations.
Resident and non-resident corporations may also hold foreign currency accounts governed by specific conditions in the Exchange Control Act. The Labuan Offshore Financial Centre, which includes more than 100 financial institutions, can in certain circumstances be an advantageous location to conduct tax-advantageous foreign-currency business within Malaysia.
While interest cannot be paid on current accounts, overnight call deposits offered by banks with principal dealer status are a way to earn short-term interest.
Continuing from changes effected in the previous year, the government has further liberalised the exchange control regulations in 2003. Key highlights include:
Various cash management services are offered by local and foreign banks in Malaysia. These services range from simple solutions, such as the setting up of account structures, to the more sophisticated, such as cash pooling and customised reinvestment opportunities. Outsourcing of certain non-core financial activities to banks is also becoming more acceptable not only among the foreign companies set up in Malaysia and Malaysian multinational corporations, but also among the large local corporations.
The key issue faced by treasurers in Malaysia is how to better manage their accounts receivable, given the number of disparate domestic paper-based clearing zones across the country. Treasurers want to optimise their liquidity management by working with a bank that can provide customised solutions to improve the predictability of their cash flow and the visibility of their cash, and to reduce leakages.
Cheques remain the main mode of payment in Malaysia. The trend is moving towards outsourcing of cheque payments to banks to allow corporates to focus more on their core businesses. Along with improved back-room efficiency, cheque outsourcing also reduces the risk of cheque frauds as these payments are made by bank drafts/cashier’s orders. Electronic funds transfer is also used, generally for single payments for same-day value via real-time gross settlement (RTGS) and SWIFT. Use of the IBG system for payments below MYR50,000 is also expected to increase, as currently only local banks are members of the system.
MEPS was requested by BNM to set up a Financial Process Exchange (FPX) to facilitate secured business-to-business Internet payments.
The collection services provided by banks are traditionally cheques and inward remittances from local and cross-border parties. For corporates with voluminous cheque collection, some banks provide a retail/wholesale lockbox service that essentially takes over all cheque receipt functions and ensures timely credit of proceeds to the current account. Inward remittance in local currency is done effectively through RENTAS, which provides for same-day clearing for amounts greater than MYR50,000.
Banks in Malaysia provide various liquidity management solutions to enable corporates to optimise their liquidity. These include zero-balance accounts (also known as concentration accounts) and notional or cash pooling. Only MYR pooling and concentration accounts between domestic accounts (excluding external accounts) of the same legal entity are allowed in Malaysia.
The Malaysian government has put in place incentives to encourage multinational corporations to relocate their headquarters to Malaysia. Some of the incentives include:
Qualifying services for an approved OHQ include:
The above incentives, along with a relatively low-cost environment, skilled and multilingual labour, has encouraged multinational corporations to centralise their operations to achieve better control and economies of scale, by setting up shared service centres (SSCs) in Malaysia. Learning from the foreign counterparts, local corporates – especially the large local corporates – are also setting up SSCs to reap benefits from centralised operations and better control.
Corporations will continue to strive for improved efficiency and better cost effectiveness in running their business. Non-core areas will continue to be outsourced as corporations become more focused in their day-to-day operations. With attractive incentives in place, Malaysia will increasingly be looked upon as a destination for the setting up of SSCs in Asia.
On the liquidity front, the situation in Malaysia is not too different from the rest of Asia, where many corporations are flushed with liquidity. Superior cash management will be a key requirement to ensure that not only do companies obtain the best return on surplus funds but also, together with their bank, cash management processes are fine-tuned to improve the predictability of cash flows.