Malaysia's central bank yesterday unveiled plans to set up investment banks to strengthen the sector and the relaxation of operational restrictions on foreign banks amid industry liberalisation moves.

"We will allow foreign banks unrestricted branching some time this year, subject to a formula on how they integrate with the domestic economy," Bank Negara Malaysia governor Zeti Akhtar Aziz said.

"This is the formula .... where you have so many number of urban branches, then you must have so many number of rural branches. It is the same as the local banks. It will truly be a levelling of the playing field," Zeti said.

Foreign banks operating in Malaysia were restricted in the number of branches they could operate in an attempt to protect local rivals.

To prepare the domestic industry for greater competition, Zeti said a framework on the creation of investment banks had been finalised and would be ready for implementation in the second half of 2005.

Under the plan, merchant banks and stock broking companies within the same banking group would be merged into an investment bank that would be jointly regulated by the central bank and the Securities Commission, she said.

The move would strengthen the capacity and capability of domestic banking groups to face the challenges of an open market, she said.

Increase in foreign equity

Foreign investors would be allowed to own up to 49 percent in an investment bank, up from the existing 30 percent cap for foreign equity in the banking sector, to strengthen global linkages and enhance transfer of skills, she said.

"Their integration will not only contribute to enhancing efficiency and effectiveness but also strengthens the potential to capitalise on expanded business opportunities."

A sweeping program three years ago merged Malaysia's 54 banks and finance houses into 10 groups and the central bank wants a second wave of consolidation to leave between six and eight banks ahead of full market liberalisation in 2007.

The government has said more mergers were crucial for local banks to survive because foreign banks in the country were already doing more business despite operational limitations.