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Bank Islam Losses Throw Spotlight On Malaysia's Banking Controls

by Mary Swire,, Hong Kong

08 November 2005

The Malaysian parliament was told last week that the government would seek to expose and punish those responsible for losses suffered by Bank Islam Malaysia Berhad if it found evidence of wrongdoing by the bank's employees.

Bank Islam recently reported a loss of RM480 million (US$127,000), largely the result of high non-performing loans from its Labuan offshore unit. It closed its financial year with a total provision of RM774 million, and total non-performing loans of RM2.2 billion.

The huge losses emerged when Bank Islam converted its Labuan office from a subsidiary to a branch last December, and the affair has cast doubt on the effectiveness of Malaysia's regulatory and supervisory control of its banking system.

"We have no intention to hide this," Deputy Finance Minister Datuk Tengku Putera Tengku Awang stated in parliament last Thursday.

"If there was negligence or it was intentionally done, those responsible will be brought to book," he went on to warn.

In a statement, Bank Islam explained that an internal investigation into the affair, led by the bank's management team under managing director, Dato’ Noorazman A. Azizis, who was appointed in April to help clean up the bank's books, is already underway.

"We are working very closely with Bukit Aman, the Anti Corruption Agency and Bank Negara Malaysia to investigate the inconsistencies which caused Bank Islam’s high non-performing loans," Noorazman said.

"We have also mobilized a team of senior managers and external professionals to carry out a thorough review on the credit administration and approvals at the Bank’s Labuan branch, the originator most of the bad loans," he added.

The bank went on to admit that in January of this year, "trouble was brewing" at the Labuan office, and closer inspection of the company's accounts revealed that losses were "much larger than what the head office in Kuala Lumpur had expected".

"Loans were given out generously without sufficient understanding of the risks involved, including country and project risks," the bank said.

"Now, most of the old guards at Labuan have left, and the branch is overseen directly by Bank Islam’s board," it added.

The bank’s clean-up plan includes putting RM1.7 billion of its delinquent loans in a special purpose vehicle (SPV). The company said that the SPV is expected to generate write-backs to Bank Islam within three to five years.

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