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Banks make a business of lending money. They want it back, with interest. When a bank considers making a loan, the purpose of the loan is important. They don't want to lend money where a risk of loss is visible.
Because it is not always possible to estimate with precision the financial strength or business acumen of the borrower, the bank officer will often insist that the borrower deposit with the bank some comparable asset as satisfactory collateral, which is subject to forfeit if the loan is not repaid as agreed. Generally the lending of money for the purpose of buying shares of corporations is prohibited by law and the policy of the bank.
Putting up shares to be purchased as collateral for the loan itself is an irregularity that is both risky and technically impossible. The shares cannot be put up as collateral if they have not been purchased. If the shares are in a foreign enterprise the loan is immediately stamped as not feasible.
Often the bank will require the guarantee of a second person who is both financially strong and has a credit record of being a responsible borrower. If the borrower fails to repay the loan the bank can then require the co-signer to make the loan good.
Banks lend out money that is received from the founders of the bank as a fund of initial capital. Profits from operations are added to this pool, and the bank is then able to make more loans. In this way the bank grows. If the loan officers are competent the loan business will prosper, contributing to the bank's assets.
Banks offer other services, such as credit cards and checking accounts. They also offer to pay you interest on the money you place with them for safekeeping in a savings account. Some of the money which you deposit in your checking account may be used for loans. All of the money in your savings account may be used for making loans to others.
When you deposit money into your checking or savings account, you become a lender to the bank. As a lender, you want assurance that the banks will be able to return your money, with interest. You want to know that the bank is a safe place. The bank wants you to think this also. That's why they are careful not to lend money where the risk of loss is high. Too many bad (non-performing) loans will eventually cause the bank to fail, and when you go to visit your money, the doors will be closed.
In order to conduct their loan business prudently, the loan officers must have independence in their judgement of credit risk. If they feel the loan is for an improper purpose, or that the risk of loss is too high, they must be free to deny the loan without undue criticism or pressure from outside influences.
In Malaysia all banks are part of a "banking system" which is regulated by the federal bank, the Bank Negara. The Bank Negara wants the banks to be successful and to use conservative lending practices so that the banking system will be strong and healthy. The lending of money for risky enterprises is discouraged, and the banking system is constantly monitored to detect fraudulent diversion of funds.
There is an area of business which has high risk, balanced by concommitant high reward. The funding of new and innovative technical companies is a typical instance, where money is loaned for startup capital. This area of banking is called venture capitalism, and is not appropriate for the public banks where your savings are kept.
In Malaysia, the head of the Bank Negara is now promoting this area of lending for the public banks. Because it has risk beyond that normally associated with commercial and savings banking, this should be resisted. The Bank Negara is now suggesting that loan officers reduce their guard, and lend money without collateral. For banks this is the kiss of death. If you have money that you think is safe in the bank, you may soon find that the money has been loaned out to someone without collateral.
Four banks in Malaysia have loaned over three billion ringgit to a local businessman to enable him to buy shares in a foreign steel company. The shares were put up as collateral. The loan is now a total loss. The banks have to write off the loan as a reduction of their assets. It appears that the loss, though now fully realized, will only appear on the quarterly accounting statements of the banks over a period of years. This is a deceptive practice, and as such should be denounced. The shareholders of the banks suffer the major brunt of this fiasco, but if the banks become bankrupt as a result of this loan, and other loans of this type, your money is in jeopardy.
The practice of loose lending and the consequent loan loss is already a fact of life, with yet unforeseen results. The BN led government is naturally interested in stimulating the economy, and is now prodding the banks to reduce their normal lending standards. This is seen in the new policy of the federal bank to actively promote the making of loans without collateral. This policy must be viewed as irresponsible. For Malaysia it is the kiss of death.