A trusted solution for development finance institutions

Development Finance Institutions (DFIs) play an important role in supporting strategic sectors that are important to the country. However, it can be difficult for DFIs to monitor and manage their funding, as they are not licensed to take deposits and therefore unable to open current accounts for borrowers.

DFIs must rely on the borrower to open a designated account in the borrower’s name with a commercial bank. Its only means of control over the bank account is to make a DFI staff member one of the borrower’s authorized signatories. The account, however, still legally belongs to the borrower. If the DFI wishes to update or change the authorized signatories of these nominated accounts, it must require each borrower to individually issue a board resolution to the banks.

This exposes DFIs to certain operational and legal risks, if they remain dependent on borrowers to fulfill loan conditions. It also lengthens the time for disbursement of loans and possible modifications to be made, if necessary.

This cumbersome process can now be incorporated into Standard Chartered Malaysia’s Bare Custody Trust Structure (BCTS), which is the first of its kind for DFIs.

Over the past year, Sabah Development Bank has entered into an agreement with Standard Chartered to adopt BCTS, thus establishing a win-win condition conducive to both lender and borrower.

“Disbursing the loan in a trust structure gives confidence to the main contractor so that the borrower can focus and be financially supported to launch the project.” -Pong

“We recognize that BCTS is addressing some long-standing challenges in the industry. Therefore, disbursing the loan in a fiduciary structure provides assurance to the main contractor that the borrower is focused and financially ready to start the project,” said Datuk Vincent Pung, CEO of Sabah Development Bank.

In the meantime, the DFI having the assignment of the proceeds of the project may receive reimbursement, which may be delayed in the traditional mode. The reason for this is that the borrower needs time to reconcile their single operating account which is mixed with all types of collection – meaning that with the borrower having better visibility of planned project collection, the borrower can also apply excess after loan stunts which is more timely than before.”

Not to mention misconduct from anywhere, issues can be better managed from the outset since the funds are held by an independent trustee on behalf of the borrower while the activities are at the behest of IFD,” he adds.

How did the Bank find this solution?

Sabah Development Bank Berhad is not the Bank’s first client for BCTS. One of the previous articles on the same offering was the trust structure co-created with Malaysia Debt Ventures Bhd (MDV), a wholly owned subsidiary of the Minister of Finance (Incorporated). For MDV, the Bank has applied an alternative bank where trust accounts are maintained with Standard Chartered Saadiq Berhad and governed by Shariah principles instead.

“Similar trust structures have been widely applied in the other areas of the financial industry such as asset management companies for a very long time – which we have now optimized for institutions such as DFIs,” observes Mak Joon Nien, Director general and responsible for the commercial service of the companies. & Institutional Banking (CCIB) for Standard Chartered Malaysia.

With BCTS, DFIs need only engage the trustee SCBMB Berhad and direct the opening of designated trust accounts, registered in the name of the trustee for the borrower as beneficiary. The Trustee, in turn, allows DFIs to operate Designated Trust Accounts in the same way that traditionally the Borrower includes the DFI as an authorized signatory of its Operating Cash Account. In BCTS, banking activities are all done through Straight2Bank, i.e. the proprietary channel of the Bank.

These trust cash accounts are segregated by purpose and the borrower remains the beneficiary of the excess proceeds after the loan repayment cascade, terms and conditions. These balances, if any, are returned to the borrower’s operating cash account which has been determined in advance.

Where there are reserves and/or sinking funds imposed by DFIs, there is no need to wait for borrowers to open these reserve/sinking fund accounts with banks. The administrator can receive these advanced loan installments from the borrower into a designated reserve cash trust account with visibility to the FDIs.

The lengthy documentation process like imputation, assignments, lien and set-off, stamping, etc. that are tied to traditional reserve accounts held in the borrower’s name alone, which are time-consuming, are no longer relevant.

“We are proud to be part of this journey. We strongly believe that by replicating the solution, we will be able to help other similar organizations inside and outside Malaysia in time to come. .” -Mak

“Trust accounts, segregated by purpose, are registered in the name of the trustee. They are independent of both lender and borrower, and transparent, so they support pre-disbursement terms almost immediately after account opening. This is usually done within five business days, subject to customer due diligence,” says Mak.

Pung adds, “As a result, our loan disbursement period is now timely and we have better visibility into our loan utilization and repayment trends. Since cash in trust accounts are registered in the name of an independent trust company, this improves transparency.

“We are pleased that this public-private partnership has improved the efficiency and monitoring of loans for the Sabah Development Bank. Mak believes this solution will strengthen DFIs in Malaysia and accelerate the planned socio-economic and governance agenda in the country.

“We are proud to be part of this journey. We strongly believe that by replicating the solution, we will be able to help other similar organizations, inside and outside Malaysia, in time to come,” he adds.

“Being a tested solution, we are confident that this program can be customized to our customers’ needs when offered across the region to benefit more countries.

The conduct of the trust company incorporated in Malaysia is governed by:

1. Securities Commission of Malaysia, securitized assets are involved;

2. Bank Negara Malaysia from the perspective of Anti-Money Laundering, Anti-Terrorist Financing and Targeted Financial Sanctions (AML, CFT and TFS); and

3. Enterprise Commission, as a permanent concern.

To find out more about Standard Chartered Bank’s bare custodial trust structure, please write to [email protected]

Marianne R. Winn