British banks in colonial Malaya

Professor Emeritus Peter J. Drake, University of New England and Australian Catholic University

The British East India Company acquired Penang in 1786, Singapore in 1819, and Malacca in 1824. The three territories were united in 1867 as the Straits Settlements, a Crown Colony under the London Colonial Office. In 1874 the British encroached also on the Malayan state of Perak and began to exert influence over other Malay states. All these territories flourished economically under Britain’s powerful position in global trade, and its economic philosophy of free trade.

From the mid-19th century, international trade in the constituent territories in what came to be known as British Malaya prospered. As the industrial revolution in western countries gained momentum, there was a hunger for the natural resources of their colonies. European, and especially British, trading companies set up operations to trade in British Malaya’s booming natural resource industries, initially tin, and later in the early 20th century, rubber. These industries required substantial capital investments for the purchase and clearing of large tracts of jungle land, for the importation of new technology, and for the payment of large numbers of workers.

Capital was raised through British public joint-stock companies. Large British agency houses, such as Guthrie and Co., Edward Boustead and Co., and many others, helped to promote Malayan commodities among potential European investors and to raise money on the London stock market. Supporting the advancement of British trading activities and encouraged by the British Colonial Office, several major British banks, such as the Chartered Bank and Hong Kong and Shanghai Banking Corporation (HKSBC) established branches, initially in the Straits Settlements and later in Malaya’s tin and rubber commercial centres, such as Ipoh, Perak and Kuala Lumpur.

British banks provided the agency houses with crucial financing. Initially having a limited role, they increasingly provided investment advice, short-term credit lines, and foreign exchange. The British Colonial Office, through its control of government and the use of other networks in Malaya, including exclusive social clubs, provided a supportive legislative, institutional, and policy environment to nurture the trading companies and banks to further their economic interests, as well as to protect them in various ways during periods of low prices and recession (Sultan Nazrin Shah, 2017).

Chartered Bank Building, Kuala Lumpur (1909)

Source: British Colonial Buildings and Monuments in Malaysia, 2009. Dr. Kamarul Syahril Bin Kamal

Eclipse of Chinese capital

Leading Chinese entrepreneurs had already been investing in the modern sector of British Malaya’s economy such as mines, estates, and banks, but Chinese capital became increasingly marginal and able to exercise very little leverage in the face of increased competition. The two important developments that posed direct challenges to Chinese investments in British Malaya were the introduction of joint-stock companies controlled by London and the emergence of western banks to finance technical advances in the tin industry, which until then had been monopolized by the unique practice of Chinese credit, the truck system. Between the 1870s and 1890s, the truck system provided advances to tin mine owners for operating expenses; in return the advancer claimed one-tenth of the tin output for free, and the rest at below market rate. The system also supplied loans, provisions, and other necessities to labourers at above-market rates, and could also buy the mining lease (Wong, 1965).

However, the introduction of agency houses and banks ensured that financial services and institutions were increasingly in European—especially British—hands, and the colonial government set the rules of the game in their interest. This was strikingly apparent from the stunted development of Chinese banking and the marginalization of Chinese-owned shipping (Fee and We, 2004).

Chinese customers were extremely important to the British banks. The banks had considerable Chinese clientele and could not afford to be isolated from the Chinese community.  Chinese compradors were engaged by British banks to act as intermediaries between their own countrymen and the banks. The comprador's intimate knowledge provided the bank with detailed information about its Chinese customers.  However, reliance on a comprador was an obstacle to every good banker's wish to know personally his customers and their businesses.

Economic role of British banks

British banks set up in the territories, originally as agencies of branches in India, but Penang merchants wanted full banks, not mere agencies. The Chartered Bank, the Eastern Bank, and the Mercantile Bank were all incorporated in the United Kingdom (UK) under Royal Charter, while the HKSBC was incorporated in the British colony of Hong Kong. These British exchange banks were the pioneers of banking in Malaya. “Exchange” consisted of gold against silver and sterling against local dollars. The bank branches were put in funds for sterling by their UK offices and their funds were augmented with local dollar deposits.

The value of London connections had several dimensions: the pound sterling was a hard currency; London had historical pre-eminence as a world financial centre; Malayan exports were denominated in sterling and settled in London; and the UK was the largest source of Malayan imports. These features underpinned Malaya’s sterling exchange currency system, in which sterling and local dollars were exchangeable at published rates. Whenever local currency was scarce, the banks added to the money supply by making loans and thus creating deposits, which were fully convertible into specie. Local banknotes were first issued in 1849.

The first British bank in the Straits Settlements was the Oriental Bank Corporation. It had been established in Bombay in 1842 and opened in Singapore in 1846. After great early success, it was forced into liquidation in 1884 as a result of the international tumble in coffee prices—a sector it had invested heavily in. The Chartered Bank opened in Singapore in 1858, initially as an agency but soon raised to branch status. The HKSBC opened in Singapore in 1877, also originally as an agency but later becoming a branch. Under an energetic manager, T.S. Baker, it expanded during the first decade of the 20th century into Ipoh, Kuala Lumpur, and Malacca. The Malacca branch was encouraged by the Straits Governor, Sir John Anderson, with government deposits. The HKSBC also opened a sub-agency in Johore Bahru.

The years 1903 to 1906 saw currency reform: a switch from the silver standard to the gold standard and a rate of exchange fixed at Straits$1 = 2s 4d. The reformed Malayan monetary system was simple, inexpensive to manage, and perfectly suited to a period of development, investment, and capital migration. When Britain went off the gold standard in 1931, the Straits dollar was on a sterling exchange standard, still at the 2s 4d rate.

Business in the Straits Settlements was slack in 1907–1908, especially in the bazaars, causing the HKSBC to tighten its lending. The Bank’s comprador feared for the solvency of Heng Moh & Co, one of the oldest established dealers in the native bazaar. And fail it did, owing the HKSBC $10,905 on exchange contracts—a substantial sum. In Penang the bazaar was in a very bad state and there were fears of a general collapse.

Market Square in Kuala Lumpur shortly after the construction of the Hongkong Bank’s new office, far right, which was completed in 1914.

Source: HSBC: its Malaysian Story, 2004, pp 54. Reproduced with the permission of HSBC Holdings plc (HSBC Archives)

Banking expansion

When the HKSBC embarked on its expansion into the Malay peninsula, it was after careful commercial assessment of competitive threats to its existing branches. The move was a bold contrast to the bank’s cautious expansion on its home turf of China. It opened an office in Ipoh, Perak—the centre of Malaya’s tin mining—to obtain business from the Eastern Smelting Company and supported the mining companies’ exchange business.¹The Mercantile Bank, meanwhile, competed for the tin export business from southern Thailand and later opened a branch in Kuantan in 1929, primarily to service the Pahang Consolidated Company, which ran Malaya’s only underground lode mine (Wong, 2004). The HKSBC put pressure on other banks owing to its acquisition of government deposits and to its strong Chinese connections. The Chartered Bank, for example, was forced by the competition to reduce its overdraft rates. By 1914 the HKSBC was well established in Malaya, with 25 European staff in the Straits Settlements and the Malay states.

The Mercantile Bank opened in Singapore in 1855, Penang in 1860, and Malacca in 1882. It built its business on deposits from the large trading houses, and it secured its share of government business in 1882 by paying 3 per cent interest on government deposits. In common with British banks everywhere at the time, its policy was trade finance rather than capital loans.

The Chartered Bank was the predominant bank in colonial Malaya, though pressed hard by the competitive HKSBC from the later years of the 19th century. It was also the only British bank anchored firmly in the Straits Settlements; as such it was the first port of call for merchant firms and for the Strait Settlements, the Malayan state governments, and their staff members. In the early 20th century another British bank emerged—the China-based Eastern Bank, which opened in Singapore in 1928.

Station Road, Ipoh just before the Hongkong Bank decided to open a branch in the town.

Source: HSBC: its Malaysian Story, 2004, pp 52 (with credit to John Falconer)

The Great Depression and the declining influence of British banks

Major challenges to UK banks in British Malaya, as well as in other colonies, followed the 1929 Wall Street crash and the ensuing Great Depression, in which investments fell sharply globally, alongside demand for goods and services. British Malaya was not spared. The impact was felt especially in urban centres, in tin-mining townships, and on rubber estates, which were heavily dependent on international trade. The British banks ultimately weathered the storm but many of their jobs were lost.

International trade finance was historically the chief interest of the banks, but it declined after Malayan independence in 1957 and the growth and broadening of the Malayan economy. Some international banks merged—the Eastern Bank was acquired by the Chartered Bank in 1957 and later absorbed into Standard Chartered Bank, as was the Mercantile Bank by the HKSBC. The emergence of local banks and the establishment of Bank Negara Malaysia—the central bank—in 1959 changed the involvement of the British banks with the local economy. While in absolute terms the business of the British banks grew, their share of Malaysia’s banking business diminished, as local bank branch representation widened and their lending for local enterprises increased.