Next Generation Investment Bank
Updated: Nov 22, 2019
Since the Global Financial Crisis (“GFC”) from 2007 to 2009, banking systems around the world have undergone significant structural changes. The GFC exposed to the world not only the excessive risks banks undertook prior to the GFC in a bid for hefty fees, backed by woefully inadequate capital and liquidity buffers, but also the weaknesses in the prudential framework that were meant to protect the banking system. In response, central banks globally have imposed increasingly onerous capital and liquidity standards on banks and increased supervision significantly so as to increase bank resilience to macroeconomic shocks. These measures are intended to reduce the probability of default for large internationally active banks to a low level, and significantly improve the system’s capacity to absorb the failure of a large institution. Since then, banks have been re-strategizing as they grapple with significantly higher
operating costs, capital requirements and the prospects of lower long-term profitability. Non-bank finance and non-bank financial institutions have gained a greater role in financing economic activity in the aftermath of the crisis. According to the Bank of International Settlements, corporate debt financing has increasingly shifted to capital markets in advanced economies, with bond issuance picking up noticeably. The global assets of both insurance and pension funds and “other financial intermediaries” (OFIs) (including managed funds and non-prudentially regulated financial institutions) have also expanded relatively strongly. In addition, continuous innovations in information technology have resulted in the emergence of numerous fintech companies that provide specialised financial services, particularly for those that are
“underserved”. An example would be Peer to Peer (“P2P”) platforms that match people and businesses who need loans to people who can provide loans.
The rise of non-bank financial institutions together with the rise of the fintech companies reflect the following phenomena:
1. The need for financial inclusion
Financial inclusion, as defined by the World Bank, refers to people and businesses having
access to affordable and useful financial products and services, delivered in a sustainable
manner. One of the challenges SMEs face are that their financial requirements are too large. for microfinancing and yet too small to be effectively served by corporate banking models. The
lack of access to financing is cited by SMEs as one of the main barriers to growth.
2. Investors’ thirst for yield
Since the GFC, interest rates around the world have been at an all-time low. While the bond
and sukuk markets were opened to retail participation in Malaysia in 2011, recent events such
as the Hyflux debacle in neighbouring Singapore have opened investors’ eyes to the reality that
bonds are not necessarily safe. Coupled with the fact that the Malaysian stock market has been
the “worst major market in the world” (up to 15 April 2019)3, investors, have limited options
other than to place their funds in banks’ fixed deposits, yielding extremely low returns.
Against this backdrop, LCM aims to build the “Next Generation Investment Bank” by providing financial services and funding solutions to the underserved clients as well as designing financial products that provide competitive returns with minimal risk to yield-starved investors.