Malaysia's centra I bank said Ihursday no new foreign banks will be allowed to entei the domestic market ui til alter 2007. giving local banks line to prepare for a decade of trail • liberalisation.

Bank Negara Governor Zed Akthar Aziz, laun lung a three phase plan to build up Malaysia's banks also said tut s capping foreign investment in nsurance firms would be relaxed.

‘ I be focus is o t developing a core of strong domestic banks to be the backbone < I the financial system said in a s leech outlining (he plan.

Malaysia's banks, regaining (heir health after t re Asian Iman cial crisis of 1997-18, say foreign competition is inevitable bin ate not readv to face global banking giants.

’ I his masterpl; n is necessary because condition. are changing so fast. It we don do something about it we will be left behind." said Azman Hashim, chairman of Arab-Malaysian Ba iking Group.

Foreign banks are already a force in Malaysia and will outnumber the local banking groups after 54 domestic financial institutions are consolidated into 10 banking groups under a programme ordered by the government last year.

At the end of 1999, 13 foreign

banks accounted ft r 29 per cent ol all banking assets and 31 pel cent ol all loans.

In (he first ph. se of the plan between 2001 anil 2003, Malaysia said it aimed to growth capacity of domestic banks ; nd strengthen (he financial inft.(Structure, including the development of Islamic banking anil financial products.

I he government will promote intensified domestic competition in phase two of the plan between 2001 to 2007. Afft i 2007 foreign competitors will be allowed as the sector is asslmil tied into the global market.

Analysts said the plan could help with the consolidation of the local sector, but they questioned whether keeping fresh foreign investment away conflicted with Malaysia's obligation to open up the financial sectoi by 2003 under a World Trade Organisation pact.

However, Zeti said there was no strict commitment to liberal ising the banking sector under the WTO.

"It will be based on negotiations." she said.

The financial sub-sector index .KI I I of the Kuala Lumpur Stock Exchange fell 1.56 pei cent to 5,174.75 on Ihursday as lire key share index KI ( I KI si fi ll more than one per cent to dow at 702 points.

Consolidation is also under way in the insurance sector, which had 56 general insurei* and 19 life Insurers, though no core firms have been named not dates set foi mergers. One deadline insurers do face is the end ol lune, when (he level ol minimum paid-up capital must be 100 million ringgit ($26.3 million), double existing icqulre-meiits.

Hie central bank said it will throw open re insurance business to foreigners, relax the cap on foreign equity for new insurers and allow financial and non-Tmancial companies to buy insurance firms.

The financial sector plan comes just a week after the Securities Commission Issued its 10-yeai capital markets' development plan, part ol a market shake-up delayed by the Asian financial crisis

One key feature highlighted in tire plan is the development of increasingly popular Islamic banking and insurance products for this mainly Muslim country.

Islamic Shariah laws forbid the payment or receipt ol interest, which is equated with usury', and the Islamic products make money instead using a system of profit sharing between parties drawing on returns from approved investments.