Tuesday, March 13, 2007

EPF Track Record

Both the Prime Minister, Datuk Seri Abdullah Badawi, who is also the Finance Minister as well as the Employee Provident Fund (EPF) CEO, Datuk Azlan Zainol have argued that they will employ banking professionals to run RHB Bank which EPF has acquired, subject to approvals.

In addition to issues relating to higher risks which have been raised earlier, EPF's decision in this case raises a few additional questions.
  • Firstly, why does the EPF Board believe that they are the best judge of banking professionals to operate and manage the Bank? Wouldn't an existing banking institution, with the necessary expertise be a better judge to do so?

    Hence wouldn't the interest of EPF and its contributors be better served if another banking institution which has the necessary expertise and experience, has taken over the stake from Utama Banking Group (UBG)?

  • Secondly, it is worth noting that the EPF Board has no proven track record to speak of, in recruiting the best candidates to operate its own subsidiaries. In fact, in its 63% owned subsidiary, Malaysia Building Society Berhad (MBSB) which is a financial institution in itself, has performed terribly in recent years.

    One of the key reasons for EPF’s poor investment returns are due to EPF’s involvement in questionable projects and bad loans given out by MBSB. MBSB is notorious for giving huge loans to politically-connected companies such as to the failed Perwaja Steel Bhd. In Melaka alone, such bad loans by MBSB amount to more than RM 150 million.

    Non-performing loans by MBSB reached a high of RM 4.45 billion in 2002 and is at RM 4.33 billion in 2003. MBSB achieved the dubious distinction of having the highest non-performing loan ratio of 62% amongst all banks in the country, against the banking average of 7.4% in 2002. MBSB lost almost RM 1 billion in profits from 1998-2002, reducing its shareholder funds of RM 1.1 billion to only RM 70 million.

    If EPF is unable to find the “right” banking professionals to manage an existing subsidiary which suffered such heavy losses, why does the Prime Minister and the EPF board believe that it can do any better for a much larger financial institution in RHB Bank?
EPF should stick to its charter to prudently manage the retirement funds of Malaysian workers utilising low risk strategies such as a diversified portfolio in equities to generate safe and reasonable returns. EPF has no business attempting to be a “business owner” which leads to re-aligned objectives and incentives as well as significantly higher risks.
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