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Document Type

Case Study

Abstract

The Malaysian economy was relatively well positioned at the beginning of the Asian Financial Crisis. However, the government’s response of tight fiscal and monetary policy, along with contagion from surrounding countries, had severe negative consequences. The banking industry became particularly vulnerable due to substantial loan growth preceding the crisis and exposure to volatile sectors, leading to an increase in NPLs and capital deterioration. As part of its approach to assist the ailing banking sector, the Bank Negara Malaysia created Danamodal Nasional Berhad (Danamodal) on August 10, 1998, as a wholly owned subsidiary aimed at recapitalizing banking institutions. Funding for Danamodal came from RM3 billion in central bank seed capital and RM7.7 billion of five-year zero-coupon bonds. Beneficiaries submitted a recapitalization strategy to Danamodal, which performed assessments in conjunction with external advisors to determine the viability of the institution and required injection amounts. The first phase of injections consisted of interim Tier 2 Capital; beneficiaries then negotiated and signed Definitive Agreements that converted the temporary capital into various types of permanent capital and outlined a long-term relationship with Danamodal. Danamodal appointed two nominees to the beneficiary’s board of directors with additional appointments dependent on the amount of Tier 1 capital injected. Through its Board presence, Danamodal facilitated mergers and implemented behavioral reforms. Injections through Danamodal totaled approximately RM7.6 billion into 10 banking institutions and all funds were repaid by 2007 resulting in a final pre-tax profit of RM200 million.

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