Banking in perspective

pic by MUHD AMIN NAHARUL

IN RECENT weeks, we have started seeing banks being vilified by politicians and on social media. Even in spite of a large drop in their second-quarter earnings, there are people who say that banks are still making a profit and should, therefore, do more, such as extending the moratorium across the board.

This is despite the announcement that banks will be offering the extension of the moratorium in a targeted manner to those who are most in need, such as the unemployed.

Let me state clearly that I do not work in a bank, and neither do I own any shares in banks. In fact, I have no love or sympathy for banks, as I’ve had my own fair share of complaints with banks, such as that due to poor service. But as an accountant, one who audited banks in the past, I believe that there are a number of facts concerning the business of banking which are often forgotten or ignored.

First, banks have a duty to depositors. If borrowers do not repay their loans, how are banks able to honour deposit withdrawals? Just like any other business, banks need cashflow and liquidity.

Likewise, if banks extend the moratorium across the board (on the pretext of helping borrowers), this raises plenty of questions around the asset quality of banks. Banks cannot tell which loans are good and which are bad. Depositors have no idea whether their money is in safe hands.

Second, Malaysian banks are owned by the people. Some people feel that banks are making too much profit. This is debatable (especially when we look at objective indicators like return on equity or the price-to-book ratio). But let’s be clear, all our domestic banks are majority owned by Malaysians. In fact, there are many which are controlled by, or have substantial ownership by, government-linked investment funds, such as Khazanah Nasional Bhd, the Employees Provident Fund, Permodalan Nasional Bhd and Lembaga Tabung Haji.

Yes, even if individuals do not own any bank stocks, all Malaysians are indirect shareholders of banks. If banks do not generate profits and declare dividends, how can these funds sustain the high returns which we all expect and enjoy each year? Third, the business of banking is about promises. In Latin, “credit” means “he believes”. If borrowers can simply walk away from their promise to repay their loans, or if the government can simply instruct banks to offer a moratorium, contrary to what’s provided for in-loan agreements, this throws out certainty in contracts.

If businesses and individuals have little trust and belief that the other party is going to honour their promise, then Malaysia is not a good place for doing business, and it will be difficult for the economy to grow. What type of society will we become, if we don’t subscribe to the adage of “my word is my bond”.

Fourth, banks are like public utilities, providing useful and critical services to the economy. You need not like them, and often time, many would rather not have to deal with them. But when they do not function as they should, the economy suffers.

None of us hope for our public utilities to make less money. And while it is tempting to heed calls for promises like “free water” and “lower electricity tariffs”, we all know that these are bad ideas.

Proponents might say things like this will help ease the rakyat’s burden and lower the cost of doing business. Really? If anything, these measures promote wastage (one with a moratorium on a RM300,000 car loan enjoys a larger benefit than one with a RM30,000 car loan), and they lead to the underinvesting in capacity and good service. Think about the number of water disruptions we have been experiencing in recent years because of how state water companies are operated.

Finally, do we really want to harm and endanger the banking system that we have by throwing out good credit culture and discipline? Do we really want to follow in the ways of countries like Greece and Argentina which have gone through many banking and economic crises? Have we all forgotten about what happened to Malaysia during the Asian financial crisis because of weak banks?

Yusof Hamdan,
Klang


The views expressed are of the writer and do not necessarily reflect the stand of the newspaper’s owners and editorial board.