IT has been a month and a half since the country’s largest development financial institution (DFI), Bank Kerjasama Rakyat Malaysia Bhd (Bank Rakyat), found itself thrown into the public glare following alleged corruption involving its chairman and managing director.
The incident unnerved its stakeholders, with a few of its six million-odd customers choosing to withdraw deposits in a knee-jerk reaction, albeit in relatively insignificant amounts. It also cast a negative light on DFIs in general as critics questioned the perceived lax corporate governance standards and practices at such institutions in comparison with those at commercial banks.
Bank Rakyat chief operating officer and interim person-in-charge Md Khairuddin Arshad, in a candid interview with The Edge, says it is business as usual at the bank and does not expect the incident to have a financial impact on it. He believes the lender is in a strong position to grow and move past the scandal.
Managing director Datuk Mustafha Abd Razak was last month charged under Section 409 of the Penal Code with criminal breach of trust of the bank’s allocation for marketing expenditure involving RM15 million. The chairman, Tan Sri Abdul Aziz Zainal, was charged under Section 109 of the same law with abetting Mustafha. Both men have pleaded not guilty and are currently on leave from the bank. They face imprisonment of up to 20 years with whipping and are liable to a fine if found guilty.
According to Khairuddin, the bank is not bearing the cost of their legal fees.
“When the incident happened, at Bank Rakyat, we do have our own business continuity plan and crisis management plan, and we executed these accordingly. So, we put a so-called crisis management team in place, looking at areas which we thought would pose problems to our operations. We monitored liquidity, any unusual withdrawals at the branches and so on. The team would update us at the headquarters on a daily basis, twice a day, at 12 noon and at the end of the business day,” Khairuddin says.
“Fortunately for us, even though we were getting media attention for almost two weeks and getting a lot of calls, in terms of operations, it did not affect anything. We did have some withdrawals but these were either normal operations or probably because of the incident, but [the amount] was very small,” he adds.
He points out that the bank’s deposits in the third quarter of the year, when the incident happened, in fact increased by almost RM3 billion. “And we haven’t seen big withdrawals coming from there. So, in that sense, I would say it is business as usual.”
Following the incident, Bank Rakyat quickly appointed an interim chairman, Datuk Seri Alias Ahmad, a board member who is also the secretary-general of the Ministry of Education. And in the absence of a managing director, the bank set up a board oversight committee to which the management team — led by Khairuddin — reports. Khairuddin had historically been the person in charge when Mustafha was on leave.
“I’m taking charge now but the new MD may not necessarily be me. I presume Bank Negara is already in contact or having discussions with our board of directors and they probably have certain plans with regard to the new [MD] appointment. I am not privy to that information,” he says.
Khairuddin, who has been with Bank Rakyat for almost four years, was previously the COO of Malaysia Deposit Insurance Corp. And prior to that, he worked at Bank Negara Malaysia for close to 15 years, first in the bank’s regulation department and then in the Islamic banking and takaful department. “I was probably one of the pioneers of Islamic finance at Bank Negara,” he remarks.
Given Bank Rakyat’s size, Bank Negara is understood to be eeping a close watch on it following the scandal. The lender, set up in September 1954 under the Cooperative Ordinance 1948 (known as the Cooperative Societies Act 1993), is today the biggest Islamic cooperative bank in Malaysia with assets of RM96.9 billion as at June 2016. It is the second largest Islamic financial institution after Maybank Islamic Bank Bhd.
“They continue to monitor us. We have regular interactions with them ... they want to know what is being done here and in certain areas which they think require a review, like procurement. We do conduct regular reviews but when certain things happen, we need to see if there is need to tighten or whether certain things need to change. At the end of the day, you’re talking about continuous improvement to ensure that there exist checks and balances in the processes,” says Khairuddin.
He adds that investors need not fear the unexpected as the incident involves only two individuals and will not affect the bank.
As for the RM15 million, he says the bank has already recognised that amount on its books as an expenditure under the marketing and promotions side. “It’s under CSR. It will show up on the books as an expenditure. It’s not a loss, it’s a ‘given’. As in any organisation, as long as the expenditure is incurred, it will reflect as expenditure, but whether you achieve the deliverables is something else.”
After two straight years of growth, Bank Rakyat’s net profit dipped to RM1.78 billion in FY2015 from RM1.96 billion the year before, which the group blames on higher cost of funds. Despite the drop, its absolute dividend payout to its close to one million members, including 2,100 cooperatives, in FY2015 increased slightly to RM443.5 million from RM441 million in FY2014.
Bank Rakyat’s profit growth in recent years has been fuelled largely by its personal financing (PF) business. The largest PF player in town, this business accounted for about 80% of its RM66.7 billion gross financing book as at June 2016.
While unsecured financing comes with high risks in an environment of slower economic growth, Bank Rakyat takes comfort in the fact that most, or 80%, of its PF customers are civil servants; monthly instalments to the bank are automatically deducted from their salaries. This has kept its gross impaired financial (GIF) ratio for the segment low — under 0.5% currently — says Khairuddin.
The group’s overall GIF ratio, while also relatively low at 2.1% as at June 2016, however deteriorated slightly from 1.89% in December 2015. “It is mainly being pushed up by our corporate side. But these are inherited, legacy financing, prior to 2013,” he says. Apart from lending to small and medium enterprises and government-linked companies, Bank Rakyat is mandated by the government to help finance cooperatives.
In 1HFY2016, its net profit stood at RM800.38 million, down from RM946.33 million a year ago. Its allowance for impairments in the period came in at about RM177 million compared with RM152 million before, which Khairuddin says were mostly for construction, home financing and personal finance that did not come under the automatic salary deduction scheme.
Its financing loss coverage ratio, however, remains high at 108.5%. Khairuddin expects the GIF ratio to improve by the end of the year as the increase in impairment “is expected to be contained.
“The only thing we are concerned about with regard to our financing is on the corporate side, not the retail side. We had almost RM6 billion financing to corporates when I first came in [about 3 years ago]. Now, it’s around RM5 billion.”
He says Bank Rakyat’s gross financing is likely to grow between 5% and 8% this year, after around 5% last year.
“Whether we like it or nor, in terms of disbursement amount, we have already been pushing it up. But you have to understand, the rate is coming down, so the cost of funds sometimes is hurting us. Our net profit margin (NPM) is shrinking but we’re still managing it at above 2%. A year ago, it was between 2.5% to 2.8%. Three years back, it was above 3%. So you can see, the pressure of the cost of funds is reducing the whole thing.”
Khairuddin says his biggest concern now for the bank is the pressure to maintain its NPM. “We try to be competitive with other banks and we do understand that they command a better cost of funds than us, so they’ll always be at an advantage,” he comments.
Bad light on DFIs?
Khairuddin argues that contrary to common perception, Bank Rakyat and other DFIs, including Agro Bank, Bank Simpanan Nasional and Bank Pembangunan Malaysia Bhd do come under Bank Negara’s supervision. Unlike commercial banks, which are governed by the Financial Services Act (FSA) and Islamic Financial Services Act (IFSA), DFIs come under the Development Financial Institution Acts (DFIA).
“We have DFIA and the supervisor is Bank Negara. So, we are subject to all the examination, the rules and regulations being issued by the central bank. For us, because we are very big, Bank Negara naturally will have more interest in us to ensure that our operation is in line with prudent financial management. So, if you ask us, do we comply with the requirements? Definitely. Do you know that our requirements are sometimes on a par with those that the central bank imposes on the commercial banks? We follow quite strict regulations in terms of prudent banking, in terms of putting in place the infrastructure to support the operations,” Khairuddin says.
Critics often say, however, that rules under DFIA are less stringent than those under FSA and IFSA. But Khairuddin argues that while that may be the case today, DFIs are headed in the direction of stricter practices.
“No, DFIA may not be as stringent as IFSA or FSA but it’s going towards that direction. It’s just the manner in which they [Bank Negara] are going to impose the regulation on us. They do take note that if you have a lag of, say, 15 to 20 years against the commercial banks, you cannot simply push these things to DFIs to the level of the commercial banks ... because then, you’ll kill us. Some of the changes require investment, require changes in the way the business is done,” he says.
It is not fair to compare the performance of DFIs to that of regular banks, he adds.
“When people criticise the DFIs for making losses or making less profits ... you have to understand, we have a mandate. We are mandated to look after the cooperative movement. We still have to come up with financing for cooperatives. And we also establish the advisory desk for cooperatives, we provide training for them, which is at our expense. So, in other words, because of the mandate, we incur extra costs compared with the commercial banks. I don’t think this is the type of business the banks want to do. So, whether it’s us or SME Bank or Agro Bank, we complement the work being done by the government, so you still need DFIs.”
Bank Rakyat has three other entities to which it reports apart from Bank Negara — the Ministry of Domestic Trade, Cooperatives and Consumerism (which it comes under), the Malaysia Cooperatives Societies Commission and the Ministry of Finance.
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