DFIs must assess loan applications strictly to reduce non-compliance

By RAHIMI YUNUS

DEVELOPMENT financial institutions (DFIs) in Malaysia must assess loan applications as rigorously as commercial banks do, to reduce non-compliance despite carrying specific mandates to develop and promote strategic sectors of the country.

Zico Law chairman Datuk Seri Dr Nik Norzrul Thani Nik Hassan Thani said DFIs are regulated and supervised under the Development Financial Institutions Act 2002 (DFIA), to ensure financial and operational soundness, similar to the regulations imposed on commercial banks.

He said DFIs are also reminded to look into the commerciality and credit worthiness of loan applicants, as well as the projects involved as a lender, while playing a greater complementary and developmental role in supporting the nation’s socio-economic objectives.

“One thing to be mindful of is their socioeconomic perspective and it may affect lending in general. It is not an easy task to involve in lending activities for socioeconomic purposes with multiplier effects.

“They must ensure compliance and apply a rigorous process similar to commercial banks even though socioeconomic aspects are attached to the loans,” Nik Norzrul Thani told The Malaysian Reserve (TMR).

On Tuesday, a former president and MD of a bank with a Datuk title were detained by the Malaysian Anti-Corruption Commission with three other individuals for allegedly receiving bribes estimated at S$3.17 million, or about RM8 million, as commission to approve a financial loan application of RM400 million for a purportedly non-existent project.

It was also learned that the project was approved some 10 years ago.

The approval of the project was done with the cooperation of insiders, by deliberately creating an illegal project with the intention of applying for a financial loan, according to sources.

All the detainees are between 49 and 53 years old.

Lawyer Wan Azmir Wan Majid said DFIs are private entities where the exercise of discretions in approving loans is not exposed for public scrutiny. Instead, internal security practices are available and enforced.

On the issue of criminal intention to defraud, conflict of interest and corruption, he said there are always loopholes that allow discretions, and this may lead to human error or bad business judgement, which sometimes is indistinguishable from a criminal act which may raise suspicion.

“Is there an error on the government in not imposing more scrutiny in DFI’s loan approval practice? My take is that private institutions left unchecked will foster arbitrary practices that are not good industrial practice,” Wan Azmir told TMR.

He said personal accountability is currently the method used to combat abuses of power in DFIs, which is a reactive method instead of a preventive one.

DFIs are specialised institutions established by the government to provide a range of specialised financial products and services to suit the specific needs of the targeted strategic sectors, including agriculture, small and medium enterprises, infrastructure, maritime, export-oriented sector, as well as capital-intensive and high-technology industries.

With the enactment of the DFIA, selected DFIs have been placed under the regulatory purview of Bank Negara Malaysia (BNM).

There are six DFIs prescribed under the DFIA, namely Bank Pembangunan Malaysia Bhd, SME Bank Bhd, Export-Import Bank of Malaysia Bhd, Bank Kerjasama Rakyat Malaysia Bhd, Bank Simpanan Nasional and Bank Pertanian Malaysia Bhd, according to BNM’s website.

There are also other DFIs that are not prescribed under the DFIA.

A source told TMR that circumstances in DFIs could lead to potential interference from certain ministries as the organisations are also under the purview of these ministries in addition to the central bank.

The informed source added that ministries could push a certain agenda or policy that may affect the autonomy of the DFIs board in making decisions. Hence, a rigorous approach is needed to monitor DFIs’ board metrics and skillsets.