THE authorities should have increased the 30 per cent foreign ownership limit on commercial banks rather than issue licences to new banks in what is an "already crowded market", according to ECM Libra Investment Research.

The research house said the issuance of new licences showed that the authorities seemed to be going on a U-turn in its consolidation exercise of the late 1990s by increasing the number of banks in the system again.

"While it may prove a good move to improve the banking sector's efficiency and competitiveness, we are a little concerned of the effects that the seven new entrants may bring to the smaller players in the industry with margins possibly crimped from the increased competition," it said in its banking sector update report today.

"Also, this certainly goes against the grain of the consolidation exercise which banking groups went through in the late 1990s to whittle down the numbers," it added.

Yesterday, the Prime Minister Datuk Seri Najib Tun Razak announced that the foreign equity holding in investment and Islamic banks as well as insurance and takaful firms had been increased to 70 per cent from 49 per cent.

Under the liberalisation, Najib, who is also Finance Minister, announced the issuance of another seven banking licences and two family takaful licences.

ECM Libra Investment Research said the general impact of the relaxation is expected to be muted in the near term given the current economic environment and state of financial institutions globally, which may probably limit the possibility of any entrant at this point in time.

According to the research house, almost all the domestic Islamic banks are not equipped to venture into the global market, even with the presence of a new equity partner as they are currently quite under-capitalised.

It said the requirement of US$1 billion paid-up capital will entail massive capital injections by parent companies of the respective Islamic banks. -- BERNAMA