ANALYSTS said they were disappointed that Malaysia's latest moves to open up the financial market did not include raising the 30 per cent foreign ownership limit on commercial banks.

"We would have preferred that the limit be increased for existing banks rather than licences be issued to new banks in an already crowded market," ECM Libra Investment Research said in a note to clients yesterday.

There are already 39 licensed banks in Malaysia, it noted.

By increasing the number of banks in the system again, Bank Negara Malaysia seems to be doing a "U-turn" on its efforts in the late 1990s to reduce the number of banks, ECM said.

"While it may prove a good move to improve the banking sector's efficiency and competitiveness, we are a little concerned on the effects that the seven new entrants may bring to the smaller players in the industry, with margins possibly crimped from the increased competition. "Also, this certainly goes against the grain of the consolidation exercise which banking groups went through in the late 90s to whittle down the numbers," it remarked.

Keeping the 30 per cent foreign ownership cap while bringing in new players would squeeze smaller players, a banking analyst with a foreign research firm told Business Times.

"I find it confusing why you'd not allow them to dispose of more of their banks to foreign investors to stay competitive," the analyst, who declined to be named, commented.

Bank Negara governor Tan Sri Zeti Akhtar Aziz, when asked by reporters on Monday about the decision to retain the 30 per cent limit, said that for now Malaysia wanted domestic institutions to hold more than half of the financial market.

On Monday, it was announced that Malaysia had raised the foreign ownership limit of investment and Islamic banks, as well as insurers, to 70 per cent from 49 per cent.

It also will allow in as many as seven new foreign banks, including up to two mega-Islamic ones, by 2012.

ECM said the impact of this relaxation is muted in the medium term as the weak economic environment and state of financial institutions globally may limit new entrants at this point in time.

OSK Research, meanwhile, believes that the entry of up to two new commercial banks with "specialized expertise" is unlikely to create significant competitive headwinds for local banks given the niche focus.

However, the entry of up to three world-class foreign banks in 2011 will encourage local banks to further improve on cost-effectiveness, operational efficiencies and product innovation.

"The impact of increased competition would only be felt after 2011, providing sufficient time for our local banks to beef up operation competitiveness," its analyst Keith Wee said.

He believes that the local banks are well-equipped to face the competition and maintained a "neutral" call on the banking sector.