Tan Sri C. Rajandram, Executive Deputy Chairman of RAM Ratings and former senior official of the Central Bank of Malaysia, said the Malaysian government decided in 1990 to develop its domestic bond market when it felt the banking system could not sustain long-term growth.

"It realised that the banking system was not enough to take Malaysia to the next levels of development," he said.

Rajandram said an economy’s overdependence on the banking system to stimulate growth was a problem.

"Central Banks have to regulate banks because there is always a risk when the banking system finances long term infrastructure projects with short term funds. Therefore, the banking system is not sufficient enough for economic growth because their lending tends to be more on consumption," he said addressing a business forum organised by RAM Ratings and the Association of Chartered Certified Accountants last morning.

The Asian financial crisis of 1997 was the turning point for Malaysia. Rajandram was appointed as the Chairman of the Corporate Debt Restructuring Committee soon after the crisis hit. The committee was expected to prevent Malaysia’s banks from collapsing and big corporations from going under.

"We realised then that banks could not and should not have financed long term projects. We restructured the debts of 66 corporations and about 87 percent of them were converted into long term bonds amounting to RM 13.3 billion.

"By developing a vibrant bond market we were able to prevent the collapse of the banking system and keep these corporations going," Rajandram said. The number of banks in Malaysia was trimmed down to about 10 through consolidations and mergers.

Today, the bond market in Malaysia is 30 percent of capital formation in the country. Its stock exchange is about 20 percent, "but the stock exchange is a speculative market and it is something of an indicator."

Rajandram said most corporates in Malaysia now relied heavily on bonds for their long-term financing needs. Even the SME has access to raising funds through a bond issue on a collective basis.

Government support was vital for the development of the bond market, he pointed out and this not only made it possible for corporations to raise funds but the Malaysian government began to entrust infrastructure development projects to the private sector.

"Governing and policy is the area for governments while business should be left to the private sector.

"A large number of privatisations took place in Malaysia. This is important because the private sector is more efficient and capital would be put to more productive use. There has to be liberal understanding on the government’s part for this to happen," Rajandram said.

"Sri Lanka is poised for greater infrastructure developments which would require long term funding. With bonds, the maturity risks and default risks would be minimized," he said.

Realising the limitations of the banking system and the need to stimulate greater economic activity, the Securities and Exchange Commission of Sri Lanka has conducted various studies on corporate bonds and has for some time looked at the possibility of developing a market for corporate bonds in Sri Lanka.(Island)