Asian Financial Crisis Case Study

Asian Financial Crisis (AFC) 1997

In 1997 the financial crisis came to light, and essentially being a short term phenomenon, it caused crash of the Malaysian economy. Among the factors that caused the financial crisis in Malaysia were speculative attacks, deficiencies in risk management, form of corporate governance and equity market, and the legal infrastructure .The Malaysian economic was vulnerable due to the unsustainable pace of economic growth and over-valued exchange rates. The relationship between firms, government and banks in Malaysia in the financial crisis period cannot be describe as good compared to the other Asian countries. There was no clear policy on directed lending to big firms, and to that extent one cannot say that the

The currency mismatches had also happened in Malaysia, with the exchange control regime requiring approvals for foreign currency borrowing. Several prominent corporations were allowed to raise foreign currency loans, although they only had ringgit cash flows. Due to the sharp ringgit depreciation, these corporations were faced with massive foreign exchange losses or insolvencies because of their currency mismatches and inabilities to hedge exposures. Moreover, the banking system in Malaysia was very risky and this caused bad macroeconomics. It was an explosive mix for any corporate entity which had over-borrowed and assumed too much maturity period or currency mismatches. The high risk nature of banking in distinction to fund management had risen from its high gearing and massive asset liability mismatches, and in particular, from its tendency to borrow for a short period and lend for even longer. The overdependence on banks in Asia was caused by their over-protection, as well as by the over-regulation of capital markets, and had also affected the Malaysian financial system. This had caused the under-development of non-banking financial institutions, capital markets, and risk management products,

The investment decisions were based on the relationship model rather than on market prices, whereas contracts need not manage the supply of capital relative to investment opportunities, which were limited. In order to protect their interest, foreign lenders to Asian corporations and banks invariably made short-term loans; relying on the threat of not rolling over the loans to ensure borrowers serviced the latter. When the Asian economic crisis occurred, a majority of the lenders took back their loans and this caused the capital to outflow without any control. This was considered to be a rational response by the lenders in taking their time and going to courts to enforce their rights; given the poor laws and weak