Malaysia: 51% equity in insurance applies to all firms

by Martin Khor

PENANG: The conclusion of the financial services pact at the WTO and its purported benefits has been received with some scepticism here.

The Malaysian offer to allow foreign insurance companies up to 51% equity will apply to all companies, Malaysian leaders said here, in replying to queries about the reported unhappiness of the US that one of its companies, the American International Group (AIG), would have to reduce its present 100% equity in its Malaysian insurance subsidiary.

Meanwhile, an establishment Malaysian newspaper has commented sceptically on the positive claims about the agreement, stating that its results showed the sharply reduced bargaining position of Asian countries as a result of the financial crisis.

Answering questions at an ASEAN private sector conference in Kuala Lumpur on 13 December, Prime Minister, Dr Mahathir Mohamad said that Malaysia had offered foreign companies up to 51% equity in insurance ventures as the country could not afford to open the sector totally.

"We have already decided to allow an increase on foreign participation from 49 to 51% ", he said. "Other countries have agreed but the United States says we need to open up 100%. But we are firm on the matter, we can't open up any more."

Mahathir also said the decision applied to all companies.

"I have explained to many from the US that we are not strong enough to open up our financial markets," he added. "Big foreign companies and banks can afford to lose in Malaysia because they can make money elsewhere but our smaller Malaysian companies cannot afford to do so. If we do, then that is the end of us."

He remarked that the strength of foreign companies would overwhelm local companies and lead to the mergers and acquisitions of local companies. "Then, there will no longer be any more Malaysian banks and companies. Now that the Malaysian stand is accepted, all companies must conform to it."

Mahathir also commented: "We are not willing to allow 100% foreign owned banks to come here and compete with our small banks. It is not just about level playing fields. You cannot let a child of only a few years old to compete against a 250- pound American football player."

Malaysia's 51% equity policy

On 14 December, International Trade Minister, Rafidah Aziz confirmed that foreign companies have to adhere to the Malaysian policy that allows foreign financial companies to hold only up to 51% equity in local ventures.

She said: "Malaysia's offer to the WTO on foreign equity in financial and insurance ventures stands. Foreign insurance companies certainly have to comply with whatever the Finance Ministry and Bank Negara (the Central Bank) put up."

She was answering questions from reporters who asked whether the American Insurance Group, which wholly owns the American Insurance Assurance (AIA) in Malaysia, would have to adhere to the 51% equity policy.

Rafidah said that the US had agreed to the Malaysian offer of 51% foreign ownership of insurance companies and Malaysia also accepted the US counter-proposal that there will be no new (Malaysian) entrants of insurance in the US, and no branching activities of banks in the US.

[The US-Malaysia deal, about the exceptions at the WTO, seems to apply only to the insurance field - of insurers or banks branching into insurance.]

She remarked that the US conditions were "quite all right with us" because no Malaysian insurance company wanted to venture into the US, while Malaysian banks were not asking for branching activities there.

Justifying the 51% offer, Rafidah said: "We have always maintained that the capacity of developing countries' banks and insurance companies are limited and will not cause any impact on the economies of the developed countries if they opened up branches there. On the other hand, one multinational company from a developed country like the US, Europe or Japan opening up a branch in developing countries will have a significant impact."

She said there was already a very high foreign presence in both the banking and insurance sectors in Malaysia. Three quarters of the life insurance business was in the hands of foreign firms whilst the bulk of the less profitable general insurance was held by Malaysian companies.

The foreign banks also held high levels of deposits and loans.

Finance Minister, Anwar Ibrahim was also asked by reporters on 14 December, if the 51% ceiling will be imposed on all companies. He replied: "Yes, our position on 51% is for all existing companies."

When asked if US-owned insurance companies in Malaysia will have to divest, Anwar said: "Our position is that we are only committed to 51%, so we will have to study the implications vis-a-vis domestic policy. The US position is that they have expressed reservation against this specific provision. Nevertheless, domestic policy will be decided by the country's leadership."

"Malaysia has made a substantial contribution to these negotiations as it remains committed to the principle of progressive liberalization as inscribed in the WTO," he said.

He added that Malaysia was satisfied with the WTO financial services agreement, which "sent a positive signal to the financial market at this critical time, that governments remain committed to liberalization as a means to promote a sound financial system."

Meanwhile, the establishment paper, The New Straits Times in an editorial said that the WTO financial services agreement "offers the biggest hint so far of the Asian countries' sharply reduced bargaining position" because of the region's financial problems.

Noting that in 1995, Asia's emerging economies balked from opening their markets up to better-equipped foreign competitors, the editorial said that "this time, equal market access was hard-sold as a confidence-restoring measure for the badly hit Asians".

"Several developing countries barely concealed their dismay at having to buy that line in spite of their justifiable fears. International perceptions about Asia have changed, and its once high-flying economies are being made to pay needlessly, without a voice of their own... The WTO deal and the IMF programmes are claimed to be good for investor confidence. It is hard to see how they can work if these measures only succeed in shrinking the countries' economies and weakening their monetary control."  (Third World Economics No.175, 16-31 December 1997)

Martin Khor is the Director of Third World Network.