The face of Malaysia’s banking sector is set to change next year, with a number of new overseas banks in line to receive licences to enter the market, a move that is expected to increase competition and stimulate domestic lenders to improve services.

Malaysia has not issued any new licences to foreign operators since 2000, though the 13 locally incorporated conventional foreign banks and three foreign Islamic banking institutions operating in Malaysia hold more than 25% of the domestic banking market.

Both the number of foreign operators and market share will be affected by the major overhaul of the financial sector unveiled by Prime Minister Datuk Seri Najib Razak in late April. It includes plans to issue seven new banking licences, two of them for Islamic banks, and an easing of foreign ownership rules by raising the limits of equity ownership from 49% to 70%.

The new licences are part of a wider series of reforms by the government aimed at improving Malaysia’s links with international economies, promoting greater regional integration, and providing greater access to consumers to a wider range of financial products and services.

The country’s central bank, Bank Negara Malaysia (BNM), will grant six new licences in the first half of 2010, with two going to commercial banks, two for Islamic banks and another two for takaful or Islamic insurance service providers.

Though applications for the licences do not close until the end of the year, BNM’s governor, Tan Sri Dr Zeti Akhtar Aziz, said that interest was already high.

“We are still receiving applications and evaluating them,” she said on November 14. “The evaluation process will take a few months, with the results announced in the first half of next year. The numbers have been healthy.”

While it will not be until the new year that the identities of the newcomers are known, one new entrant to the market has already been named. The Industrial and Commercial Bank of China (ICBC), China’s largest bank, was granted a banking licence by BNM, and is planning to establish a subsidiary in Malaysia in 2010.

In a statement issued to announce the decision by BNM on November 20, ICBC officials said that the subsidiary would work to integrate itself into the local financial market and play an active role in servicing bilateral economic exchanges and trade.

“The move would also boost Malaysia’s economic development through leveraging ICBC group’s extensive customer base, capital strength, network and state-of-the-art technology,” the statement said.

However BNM made it clear that the Chinese bank’s entry into the market is not a part of the measures announced by Najib in April. BNM governor Zeti said the licence was granted as a result of a bilateral arrangement between the central bank and the China Banking Regulatory Commission earlier this year, and was one of a limited number of licences that Malaysia may occasionally issue under such arrangements.

“It is separate from the new commercial banking licences that will be issued under the liberalisation initiative,” said Zeti.

The criteria applied for such a bilateral arrangement include the level of trade and investment linkages, the extent of existing participation of the country in the Malaysian financial sector and the value addition it would contribute to the overall development of the Malaysian financial system and the economy, she said.

While the government’s efforts to further open up the banking sector to foreign players will increase competition in the local market, most analysts believe Malaysian lenders were strong enough to cope with any influx of rivals.

According to Promod Dass, the head of financial institution ratings at RAM Rating Services, Malaysia’s domestic banking sector had good fundamentals and was well-prepared for liberalisation thanks to its strong capitalisation levels and profitability, he told a press conference on November 5.

“The local banks are in a good position to handle the liberalisation and the products niche, and are almost on par with the global banks,” he said. “They have moved ahead to expand regionally and the Islamic banking system will be another advantage.”

With Malaysian officials flagging further reforms for the financial sector, the deputy finance minister, Datuk Dr Awang Adek Hussin, said on November 10 that the present measures were by no means the end of the process. Indeed, as the market opens up, Malaysia stands to benefit from the advantages that foreign companies can bring, including new capital, technology transfer and increased competition.

The South Korea Index Fund jumped by nearly 1% on Monday following surprisingly strong GDP growth in the third quarter.

South Korea’s economy grew 2.9% from the second quarter, the biggest jump since the first quarter of 2002. That represents a 0.6% increase from the same period a year ago, the first year-over-year growth in four quarters. Economists had been expecting growth of 2.1% over the second quarter and a decline of 0.2% from a year ago.

The positive news increases the likelihood that the Korean central bank will begin hiking interest rates in the coming quarters. South Korea joins China and Australia as Asia-Pacific countries positioned to lead the way out of the global recession. Earlier this month, Australia became the first developed nation to raise interest rates, opening the door for others to do so in coming quarters.

So while this development is obviously a positive for South Korea and the Asia Pacific region, it potentially represents another source of downward pressure on the U.S. dollar. With the Federal Reserve expected to leave interest rates near zero for the majority of 2010, interest rates in other developed countries will become increasingly attractive over the next year.

iShares MSCI South Korea EWY was recently up about 0.8% in afternoon trading, adding to its already strong performance in 2009. The fund has gained almost 65% on the year and has more than doubled over the last 52 weeks. EWY has about 100 individual holdings, with a weight of about 19% given to Samsung Electronics. In total, nearly 30% of EWY is invested intechnology companies, a major component of the South Korean economy. EWY has nearly $3 billion in assets and an average daily volume of about 3.7 million shares.

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Michael Johnston is the senior analyst and founder of ETF Database, a Web-based investment resource providing actionable ETF investment ideas and an ETF Screener for investors analyzing potential ETF investments.

Leopard Capital, which last year launched Cambodia’s first multi-sector investment fund, announced the launch of a Leopard Sri Lanka Fund LP for early 2010.

“After several decades of civil war, peace has finally returned to the beautiful island of Sri Lanka, and a new investment cycle and growth upswing has begun.  Leopard Sri Lanka Fund will provide expansion capital and strategic guidance to mid-market Sri Lankan companies, and also help some expand their businesses into other frontier economies,” the firm notes.

Leopard Capital Sri Lanka will be headed by Colombo-based managers Nirosh De Silva and Ramanan Govindasamy.

Investor confidence in the island is high, as country visits surged this summer and plans emerged to expand hotel and resort facilities.  Moreover, official reserves surpassed the $4 billion mark in September–roughly equivalent to over 4.4 months of imports–and is Sri Lanka’s highest ever reserves level.  The Central Bank noted that this level should strengthen in coming months on the back of increased foreign exchange inflows.  Finally, the country’s exchange remains up over 40% since the offical cessation of violence in May.

HSBC, through its wholly-owned subsidiary  HSBC Asia Pacific Holdings (UK) Limited, has completed its acquisition of 88.89 per cent of PT Bank Ekonomi Raharja Tbk  for US$607.5 million in cash, paid in US dollars.

Bank Ekonomi is one of the largest providers of SME banking services to the fourth most populous nation globally and will almost double HSBC’s presence in the country to 207 outlets in 26 cities. This will enable HSBC to deliver its full local, regional and international capabilities to an expanded Indonesian customer base.

Sandy Flockhart, Chief Executive Officer of HSBC Asia Pacific, said: “This acquisition is further evidence that HSBC (NYSE: HBC) can continue to execute its strategy even in a time of significant economic turmoil. Together with recent investments in Vietnam, Taiwan and India, Bank Ekonomi will increase our presence in the world’s fastest growing markets. Indonesia’s GDP is forecast to grow by 2.5 per cent this year and by 4.5 per cent in 2010 – bucking the global downturn and demonstrating the country’s emerging strength. Bank Ekonomi and HSBC can play a central role in this success story, helping Indonesia’s SMEs drive one of the world’s most exciting economies.”

Rakesh Bhatia, Chief Executive Officer of HSBC in Indonesia, said: “The HSBC Group has long viewed Indonesia as a market with substantial opportunities for growth. This acquisition allows us to increase our footprint in the country where, following this acquisition, we are now one of the top three foreign banks by assets.”

Under the terms of the agreements, which were originally announced in October 2008, and according to Indonesian law, HSBC will be required to make a Mandatory Tender Offer (MTO) for a further 10.11 per cent of Bank Ekonomi. Details of the MTO, when approved by the local regulators, will be published in the Indonesian press and distributed to Bank Ekonomi shareholders in accordance with local regulations.

Bank Ekonomi will operate as a separate entity to HSBC’s existing Indonesian business and remain listed on the Indonesian stock exchange. HSBC’s existing customers will continue to be served by HSBC through its existing network.

HSBC provides personal financial services, corporate, commercial banking, institutional banking, treasury capital markets and Amanah Syariah services in Indonesia. The business delivered a profit before tax of US$121 million in 2008.