Malaysia's new banking rules aimed at raising objectivity of boards

A pedestrian walking past a CIMB Holdings bank branch in Kuala Lumpur, Malaysia, on Oct 10, 2014.
A pedestrian walking past a CIMB Holdings bank branch in Kuala Lumpur, Malaysia, on Oct 10, 2014. PHOTO: BLOOMBERG

Malaysia's central bank is proposing new rules to raise governance standards in the boards of financial institutions, a move that financial executives said could have wide implications for top state-controlled banks CIMB Holdings and Malayan Banking (Maybank).

The little-noticed proposed guidelines, which were issued to banks in mid-March and widely expected to be adopted in the coming weeks, will prohibit a former chief executive of a financial institution from taking over as chairman of the board of directors.

The proposed rules from Bank Negara Malaysia also stipulate that these institutions must have a majority of independent directors on their respective boards.

"The thrust of the new rules is to protect the objectivity of the chairman and to clearly lay out the separation between the board and management," a Bank Negara official told The Straits Times.

The official added that the central bank wants to avoid situations where a "chairman could be in a position to oversee policies that were put in place when that person was CEO.

"The whole idea behind this is to avoid self-oversight."

Financial industry executives say the new measures could have an impact on prominent banker Nazir Razak of CIMB.

Datuk Seri Nazir, the younger brother of Prime Minister Najib Razak, served as CIMB's CEO between 1999 and 2014 before taking over as chairman.

He recently took leave of absence from CIMB, pending a review by the bank on his role in disbursing more than US$7 million (S$9.6 million) in political funds that Datuk Seri Najib asked him to distribute ahead of Malaysia's general election in 2013.

A senior CIMB executive told The Straits Times that the bank is aware of the proposed guidelines and noted that it will consider the impact of the proposed guidelines on Mr Nazir's position only when "they become a ruling".

Mr Nazir declined comment, noting that he wanted the bank's review to run its course.

The planned guidelines could also have implications at state-controlled Maybank, Malaysia's largest lender.

Government sources said Mr Najib is considering appointing Mr Abdul Wahid Omar, the minister in the Prime Minister's Department in charge of economic planning, as the chairman of Maybank when Datuk Seri Abdul Wahid steps down from the Cabinet early next month.

Mr Abdul Wahid was Maybank's president and CEO between 2008 and 2013.

Once the new guidelines are in place, Mr Abdul Wahid cannot become Maybank's chairman.

The new guidelines were highlighted in a so-called concept paper Bank Negara issued in mid-March.

These papers are typically issued to give financial institutions advance notice on proposed changes to regulations and to invite industry feedback.

It is not clear whether the new rules are in response to fallout from the unfolding financial fiasco at state-owned 1Malaysia Development Berhad (1MDB), which has ensnared several Malaysian banks.

Bank Negara last September surprised many people by penalising Abu Dhabi's Aabar Investment PJS, which owns a 21.09 per cent interest in RHB Capital, Malaysia's fourth-largest lender.

The central bank capped Aabar's voting rights in RHB Capital to 15 per cent despite Aabar's much larger equity holdings.

Government officials said the move deeply upset the Abu Dhabi sovereign fund, which was playing a central role in guaranteeing much of 1MDB's international debt.

1MDB and Abu Dhabi's sovereign wealth funds, including Aabar and IPIC, are now locked in a bitter dispute involving billions of dollars in missing funds.

The 1MDB fallout also hit AMMB Holdings (AmBank Group), a mid-sized financial institution that emerged as an intermediary in the flow of funds into PM Najib's banking accounts.

Last November, Bank Negara issued a RM53.7 million (S$18.3 million) fine to Ambank Group for breaching undisclosed regulations. Officials said the penalty was directly tied to the 1MDB affair.

And CIMB's Mr Nazir became enmeshed in the 1MDB scandal after admitting that he disbursed political funds from Mr Najib's personal account to politicians and groups ahead of the 2013 polls.

A version of this article appeared in the print edition of The Straits Times on May 16, 2016, with the headline 'KL's new banking rules aimed at raising objectivity of boards'. Print Edition | Subscribe