Outsourcing Loan

Processing Service

Loan Processing Service in

Low-Cost-Country

Malaysia

Topics of Discussion
1. Introduction

Company
Services
Loan Processing Issue
Services offshore to
Low-Cost-Country

2. Country Selection

Criterion
Comparison of
Alternative Countries
Cities within Selected
Country

3. Foreign Investment
Decision

Malaysia

4. Risk Analysis

Foreign Exchange Exposure

Pro-active Risk Management
Political risk management
Credit Risk

5. Islamic Financing
Major Differences
Available alternatives
Islamic Finance Market

6. Conclusion
7. Questions?

FDI Theory & Strategy

Modes of Foreign
Involvement Decision
2

Introduction

Malaysia

Company:
An independent community bank.
Family owned and operated since 1953, has grown gracefully, along with customers and
communities.
16 locations including four full service offices and twelve senior residence facilities.
We help both individuals and organizations like a religious or social service groups to fulfill their
special financial needs.
More than $290 million in assets. More than $29 million in shareholders equity in Dec.2007
Provides banking services ranging from personal and business banking, personal and
commercial financing, Trust and investment and Merchant services.

Services:
A full service community bank offering commercial and personal banking, commercial,
automobile, real estate and mortgage loans, trust and international services.
Offer a broad range of electronic banking services from online banking, Check Free Web Pay to
ATM/Debit Cards and Touch Tone Teller.
Our service is personalized to the individual needs of our customers and our communities.
For example, observers of Islam who prefer to avoid interest-based loans or mortgages due to
their religious prohibition, we offer non-interest based Islamic financing program.
Source: Devon Bank; http://www.devonbank.com

Introduction (Contd)

Malaysia

Loan Processing Issues:

Currently, one of the biggest challenge is to find a cost effective method to process loans.
Average cost of processing a loan in the U.S is $1300.
Longer turnaround and processing time
Fluctuation in Volume therefore staffing requirements
75% of our current loans are under Islamic Financing Program (Special needs in processing)
Considering to process loans in low-cost-country (outsource or subsidiary / joint venture ?)
Benefits and risks associated with outsourcing are as follows
but not limited to:
Risks
Benefits

Customers private information at risk

Decrease processing costs by up to 50%

Quality of work

Reduce processing complexity

Less control

Eliminate bottlenecks in post closing and servicing Security threats

Improve customer service

Less advantages of financial incentives

Improve workflow/efficiency (24/7 operation)

Focus on core Business
4

Introduction (Contd)

Malaysia

Subsidiary / Joint venture in Low-Cost -Country: Advantages and Disadvantages:

Advantages

Disadvantages

Lower processing cost

Higher investment

Comparative advantage

Inability to consolidate

Access to New Markets

Unknown cost of purchase

Easy control

Long period for development

High protection to customer privacy

Less advantages of financial incentives

Access to local expertise

Services under consideration to be moved in Low-Cost-Country :

Initially, Loan processing of residential, commercial, auto loans.
Typical seven steps in loan processing (Pre-Qualification, Application, Opening the file,
Processing, Underwriting, Pre-closing and Closing).
Pre-Qualification: Applicant income and debt, credit history and risk assessment to recommend
loan amount , rate and program.
Opening the File: Set up loan file, Loan number assignment.
Processing: Review borrowers provided information, Input data, track processing activities,
Dispose records, Prepare complete package for Lenders underwriting
Pre-Closing: Title insurance is ordered, all approval contingencies, if any, are met, and a closing
time is scheduled for the loan.

Introduction (Contd)

Malaysia

These Services can

be completed in an
Overseas /
Outsource
location(s)

Country Selection

Malaysia

Criterion:
Following Main Criterion:

Labor force experience

Compensation cost

Political stability

Tax & regulatory cost

Infrastructure Cost

English Language

Cultural Adaptation

Strength and weakness vis--vis India, Malaysia and China

Comparison of Alternate
Countries:
India, China and Malaysia, Top
three services outsourcing
locations (AT Kearney)
Reviewed the Strength and
weaknesses in these countries.
Banking regulations and Credit
ratings considered.
Other benefits considered
7

Country Selection (Contd)

Malaysia

Source: The Heritage foundation; http://www.heritage.org/research/features/index/searchresults.cfm

Above table for 2007 and 2008 reveals Malaysia is Scored better in each of the ten (10) categories
when compare to India and China.
Data compiled for ten categories for Economic Freedom by Heritage foundation.
Based on above data and Strength and Weakness Chart, Malaysia is country of Choice

Country Selection (Contd)

Malaysia

Country Selection (Contd)

Malaysia

Labor force experience - What does Malaysia offer:

Multi-lingual workforce:
Multi-racial workforce that is typically proficient in more than one language
besides English: Malay, Chinese, Hindi/Tamil commonly spoken; Korean, Japanese
growing use; (Frost & Sullivan)

Managerial experience:
Natural choice to recruit project managers and other senior level personnel to
manage multi-cultural project teams for global and regional project implementation
(Frost & Sullivan)

High quality education:

To achieve 60,000 knowledge workers by 2008; (sourcingmag.com)

International experience:
Three decade of foreign direct investment; High level of returnees among foreign
graduates (sourcingmag.com)

10

Country Selection (Contd)

Malaysia

Compensation cost ($) Where does Malaysia stand:

National Average higher than India
and China but other advantages
Monthly Salary: Loan Clerk $250 ~
340; Credit & Loan officer $500~780;
Account & credit control manager
$1250~1560(Kelly Services)
Low wage inflation (5.5%) and low
attrition rate in Malaysia (5%)
compared with other top Asian
countries.

Malaysia

Diverse culture and open immigration

policy attract talented knowledge
worker from yet lower wage countries.
Kuala Lumpur and Penang cost
competitive with Shanghai and
Singapore
Wage inflation pressure high in India
and China; by 2009, wage difference
between Malaysia and India will be
14% compared with 43% in 2004

Source: Frost & Sullivan

11

Country Selection (Contd)

Malaysia

Political Stability
Malaysia is more Stable than India and China (See Emerald Insight rating)

Source: emeraldinsight.com
12

Country Selection (Contd)

Malaysia

Tax and Regulatory Cost

Government pro-FDI policy:
Multimedia Super Corridor (MSC)
Bill of Guarantees (BOG)
Financial Incentives

MSC (Multimedia Super Corridor)

growth area specifically to unlock multimedia's full potential by integrating innovative
cyberlaws and outstanding infrastructure in an attractive and eco-friendly environment

BOG (Bill of Guarantee)

Provide a world-class physical and information infrastructure
Allow unrestricted employment of local and foreign knowledge workers
Ensure freedom of ownership by exempting companies with MSC Malaysia Status from local
ownership requirements.
Give the freedom to source capital globally for MSC infrastructure and the rigt to borrow
globally.
Provide competitive financial incentives, including no income tax for up to 10 years or an
investment tax allowance, and no duties on import of multimedia equipment.
Become a regional leader in intellectual property protection and cyberlaws.
Provide globally competitive telecommunications tariffs.
Tender key MSC Malaysia infrastructure contracts to leading companies willing to use the
MSC Malaysia as their regional hub.
Provide an effective one-stop agency - MDeC.
Source: msc.com.my
Source: Frost & Sullivan
13

Country Selection (Contd)

Malaysia

Tax and Regulatory Cost

Financial Incentives
Pioneer Status -100% exemption from taxable statutory income. This incentive is granted for a
period of 5 years for the first round.
A 100-percent Investment Tax Allowance (ITA)
Eligibility for R&D grants (for majority Malaysian ownership MSC Malaysia-Status companies)
Freedom to source capital and borrow funds globally.
Duty-free importation of multimedia equipment .
Tax breaks that encourage Islamic Banking

Infrastructure Cost:
Five Cybercities within the MSC Malaysia
Multimedia Development Corporation, MDeC, ensure that MSC Malaysia Cybercities are
always adopting the latest in intelligent cities standards.
High-capacity, digital telecommunications infrastructure meet the highest international
standards in capacity, reliability and pricing
Well developed Infrastructure at low cost
Source: msc.com.my
Source: Frost & Sullivan
14

Country Selection (Contd)

Malaysia

Cities within Malaysia:

Major cities in Malaysia compared based on:

Rental Rates for Prime office Space

Cost of Living
Access to basic amenities
Living Standards
Location (Close to Financial Markets)
Special Tax Incentives

Kuala Lumpur or Petaling Jaya were

identified as the Cities of Choice
Both Cities are located close to each other.
Petaling Jaya is a suburb of Kuala Lumpur
(the Capital city)
Developing very fast and real state value is
strongly increasing.

Rental Rates for Prime Office Space

Location
Alor Setar, Kedah

RM
15.00 - 25.00

US$
4.23 - 7.05

Georgetown, Penang

16.00 - 32.29

4.51 - 9.11

Ipoh, Perak

13.00 - 19.00

3.67 - 5.36

30.00 - 165.00

8.46 - 46.55

Petaling Jaya,
Selangor
Kuala Terengganu,
Terengganu
Kota Bharu, Kelantan

26.00 - 52.00

7.34 - 14.67

21.30 - 24.50

6.01 - 6.91

9.50 - 35.50

2.68 - 10.01

Kota Kinabalu, Sabah

15.00 - 27.00

4.23 - 7.62

Kuching, Sarawak

18.00 - 30.00

5.08 - 8.46

Kuala Lumpur

The above rates are approximate rentals (gross) per sq.

metre per month inclusive of service charge. Note: 1 sq.
metre = 10.76 sq.ft.

Source: Malaysian Industrial development Authority; http://www.mida.gov.my/

15

Foreign Investment Decision

Malaysia

FDI Theory and Strategy :

Why FDI?:
Malaysia provides an attractive base for the firm with new markets and
marketing channels, cheaper production facilities, access to new technology,
products, skills and financing
For Malaysia, the investment, can provide a source of new capital, processes,
products, organizational technologies and management skills
FDI has come to play a major role in the internationalization of business.
The change in trade and investment policies of the governments such as trade
policy and tariff liberalization, easing of restrictions on foreign investment and
acquisition in Malaysia.
For our company, the opportunities that lies ahead in the mortgage industry are
profound.
FDI represents an opportunity to become more actively involved in international
mortgage industry.
Imperfections in markets translate into market opportunities for MNEs.
Other reasons for FDI include Saturated domestic market, Declining market
base And Tighter government regulations and credit market.

16

Foreign Investment Decision (Contd) Malaysia

FDI Theory and Strategy :
Basic Decision Criteria
Assessment of internal resources:
Senior management support for the investment in Malaysian subsidiary.
Internal management and system capabilities to support the set up time
as well as ongoing management in Malaysia.
Competitiveness:
From a competitive standpoint, it is important to be aware of whether a
companys competitors are expanding into a foreign market and how
they are doing that
Market Analysis:
Extensive market research involving both the industry, product and local
regulations governing foreign investment
Market Expectations:
How foreign subsidiaries are affecting domestic clients within Malaysia.
Often, it becomes imperative to follow the expansion of key clients
overseas if an active business relationship is to be maintained
17

Foreign Investment Decision (Contd) Malaysia

Modes Of Foreign Involvement Decision: :
The FDI Sequence:
The FDI Sequence:
Foreign Presence and Foreign Investment
Foreign Presence and Foreign Investment
Greater Foreign Presence

Competitive
Advantage

Change competitive Advantage

Production at Home:
Exporting

Exploit Existing Competitive

Advantage Abroad
Production Abroad

Licensing Management
Contract

Control Assets Abroad

Joint Venture

Greater Foreign Investment

Wholly Owned
Subsidiary

Greenfield Investment

Source: Fundamental of multinational Finance:

Moffet, Stonehill & Eiteman. P426

Acquisition of a
foreign Enterprise

18

Foreign Investment Decision (Contd) Malaysia

Economic SWOT for Malaysia:
Strengths:

Weakness:

Stable democratic and Political environment

Malaysia's economic over exposure may bring a high

degree of volatility

Strong economic alliance with west

Standards of corporate government has improved
since Asian financial crisis of 1990s
Lavish tax breaks and concessions

Ethnic tensions
Doing business in Malaysia to some extent mean
staying on sides with political powers

Largest exporter of rubber, palm oil, pepper, tropical

hard wood. Net exporter of crude oil.
Well-educated workforce

Opportunities:

Threats:

Malaysias move to managed float exchange rate

should allow the central bank to stabilize the ringgit
against its trading partners

Higher wages may be long-term hindrance to

economic expansion. conceivably, of losing out to china
and Thailand.

Private sector growth will improve as governments

divestment of states shareholdings.

Export competitiveness may eroded if the exchange

rate is allowed to appreciate rapidly.

Malaysia is eager to compete globally in banking.

19

Risk Analysis

Malaysia

Foreign Exchange Exposure:

Potential of risk exists with every MNEs.
Management needs to consider the use of financial derivatives to meet the objectives
of speculation and hedging
Properly used financial derivatives protect firms financial performance otherwise may
be very destructive to firms profits

Foreign Exchange Exposure:

Transaction Exposure:
Gains / loses due to settlement of financial obligations.
Operating Exposure:
Change in the present value of the firm due to cash flow
Translating Exposure:
Change in financial statements due to translation of foreign currency

20

Risk Analysis (Contd)

Malaysia

Pro-Active Risk Management:

Adapt diversification strategy to minimize foreign exchange risks
To reduce transaction exposure, management needs to consider the use of financial derivatives to
meet the objectives of speculation and hedging.
Common proactive measures include:
Matching currency cash flows
Risk-sharing agreements
Back-to-back or parallel loans
Currency swaps

Political Risk Assessment and management

Firm-specific Risks (Micro risks):
Governance Risks: conflicts between the firm and Malaysian Government
Country-specific (macro risks):
Cultural and institutional:
ownership structure, human resource, religious heritage, nepotism and corruption,
intellectual property rights, and protectionism
Transfer risk:
Blocked funds
Global Risks:
Terrorism and war, Anti globalization, Environmental concerns, Poverty , cyber attacks
21

Risk Analysis (Contd)

Malaysia

Credit Risk and Management:

Recommendations:
The firm should evaluate policies related to the granting of loans and making of
investments
Firm should establish and adhere to adequate practices, and procedures for evaluating
the quality of assets and the adequacy of loan provisions
management must set prudential limits to restrict firms exposures to single borrowers
or groups of related borrowers
In order to prevent abuses arising from connected lending, firm should place
requirements to related companies and individuals on an arms-length basis, that such
extensions of credit are effectively monitored, and that other appropriate steps are
taken to control or mitigate the risks
Firm must be satisfied that banks have adequate policies and procedures for
identifying, monitoring, and controlling country and transfer risks in their international
lending and investment activities, and for maintaining appropriate reserves against
such risk

22

Islamic Financing

Malaysia

Major Differences between Traditional and Islamic Financing:

Quran (Holy book of Islam) prohibits all interest bearing transactions.
There is some dispute about exact interpretation of Quran on finance and interest.
In 2002, some scholars influential scholars interpreted that Quran did not prohibit all interest payments
and charges, but only those which have excessive interest and cross the line of usury
Strict interpretation prohibits all interest bearing transactions.
Prohibition of interest led Islamic Banks to offer products by treating loans more like Leases or Profit
Sharing arrangements.
Islamic mortgage are very close to a lease-to-own deal.
The bank buys the house. The borrower makes installment payments to the bank for a period of years. At
the end of which borrower gets the title to the house.
Profits for banks comes from renting the house and not lending the money
Islamic Mortgages are relatively costly due to the main reason of more paper work for two home sales
(first by bank and second by borrower)
Under Islamic Banking, Depositors share profits and losses with banks, unlike in conventional banks
where only receives interest.
Business Loans are very close to Equity investment where bank shares profit (or loss) with the borrower.
Source: Islamic loans turn profit for banks in USA by By Paul
Wiseman, 03/26/08 USA TODAY
http://www.usatoday.com/money/industries/banking/2008-03-26islamic-finance-sharia_N.htm

Source: Devon Bank; http://www.devonbank.com

23

Islamic Financing (Contd)

Malaysia

Some Alternatives (Shariah-Compliant) for Islamic Finance:

Murabaha:

Involves a cost plus sale of the

property to the customer.
Total price paid in fixed installments
over pre-determined time.

Ijara:

Is a rent to own sale of the property to

the customer.
Rental adjustment period is agreed
upon (either daily, monthly, annually,
every three years or every five years)

Musharaka:

Also a rent to own sale of the property

to the customer.
Customer and bank shares profit and
loss upon sale.

Islamic bonds:

Known as Sukuk
Selling of property to investors and
lease it back.
Investors earns money from the rent,
not interest

Source: Devon Bank; http://www.devonbank.com

24

Islamic Financing (Contd)

Malaysia

Islamic Finance Market Worldwide:

According to Moody's Investors Service; Global Islamic finance market has grown about 15%
every year for the last 3 years
Worth about $700 billion worldwide.
According to U.S.A Today (March 26th 2008); Nearly,$33 billion of Islamic bonds were issued
last year, up from $5.5 billion in 2001
Freddie Mac spokesman Brad German says the company bought more than $250 million in
Islamic mortgages in 2007. (U.S.A Today)
Giant Financial Groups such as Citigroup, HSBC, Deutsche Bank and others have affiliates
devoted to Islamic finance.
Kuala Lumpur, Capital of Malaysia, has emerged as Islamic finance global capital partially due
to tax-incentives to promote Islamic Banking.
Hong Kong and Singapore are enthusiastic to catch up by offering Islamic finance to become
true International financial center (John Tsang, Hong Kong's financial secretary: cited in U.S.A
Today).

Source: Islamic loans turn profit for banks in USA by By Paul Wiseman, 03/26/08 USA TODAY
http://www.usatoday.com/money/industries/banking/2008-03-26-islamic-finance-sharia_N.htm

25

Conclusion

Malaysia

Based on our teams analysis and comparisons, we believe the best option is to form a Joint Venture with a
Malaysian Bank to process Loans in a Low-Cost-Country.
Following are the Pros (Benefit) and Cons (Disadvantages / Risks) that were considered before our final
recommendation.
Risk and disadvantages can be justified with the potential of long term growth and larger benefits.

PROs
PROs

Loan Processing Cost will be reduced by almost 40%.

Loan Processing Cost will be reduced by almost 40%.
Access to expertise in processing / new products offering for Islamic
Financing
Access to---expertise
processing
/ new
products
offering for Islamic
Currentlyin75%
loans are
Islamic
Finance
Financing --- Currently 75% loans are Islamic Finance
Reduce turnaround and improved efficiency / workflow for loan
processing
Reduce turnaround
improved
/ workflow
for loan
--- paralleland
processing
in efficiency
two different
time zones
processing --- parallel processing in two different time zones
Access to New Markets
Access to New Markets
Higher protection to customer privacy compared to outsourcing
Higher protection to customer privacy compared to outsourcing
Superior infrastructure, Tax incentives, Govt. policies and stable
political
Superior
infrastructure,
Tax incentives,
Govt. policies and stable
environment
compare
to other low-cost-countries.
political environment compare to other low-cost-countries.
Long term overall cost efficiency after factoring in relatively low
inflation,
Long term
overall
efficiency
after factoring in relatively low
quality
andcost
financial
incentives.
inflation, quality and financial incentives.
Knowledge worker immigration policy and intense education system
overcome
Knowledge
worker
immigration
labor
shortage
in futurepolicy and intense education system
overcome labor shortage in future
Access to Knowledge worker with higher managerial, international
and
Access
to Knowledge
with higher managerial, international
cultural
adaptabilityworker
experience.
and cultural adaptability experience.
Cost of living in Kuala Lumpur (capital city and Islamic financial
capital)
Cost ofisliving
Kuala
Lumpur
(capital
citySingapore.
and Islamic financial
lowerinthan
Shengai
(China)
and
capital) is lower than Shengai (China) and Singapore.

CONs
CONs

Higher FDI (initial cost) compare to outsourcing

Higher FDI (initial cost) compare to outsourcing
Currently Cost of Loan processing will be higher
relative
Currently
Costand
of Loan
processing
will be higher
to India
China
due to wages.
relative to India and China due to wages.
Will require relatively longer time to implement
when
Will require
relatively
longer time to implement
compare
to Outsourcing
when compare to Outsourcing
Current shortage of knowledge worker.
Current shortage of knowledge worker.
Must fulfill the requirements for percentage of
Islamic
Must fulfill
the requirements
forthe
percentage
of
Banking
to fully realize
TaxIslamic
Banking
to
fully
realize
the
TaxIncentives.
Incentives.

26

References

Malaysia

1.

Devon Bank Home Page

http://www.devonbank.com/

2.

Index of Economic Freedom, The Heritage foundation;

http://www.heritage.org/research/features/index/searchresults.cfm

3.

Islamic loans turn profit for banks in USA by By Paul Wiseman, 03/26/08 USA TODAY
http://www.usatoday.com/money/industries/banking/2008-03-26-islamic-finance-sharia_N.htm

4.

Fundamental of multinational Finance: Moffet, Stonehill & Eiteman. P426

5.

Central Intelligence Agency. The World Factbook 2007 Malaysia, CIA Factbook website.
https://www.cia.gov/library/publications/the-world-factbook/geos/ms.html

6.

Malaysian Industrial development Authority

http://www.mida.gov.my/

7.

Asian Development Bank website.

http://www.adb.org/Malaysia/default.asp

27

Malaysia

Questions?

Thank You for Listening

Questions Please?

28