The home front
As with liberalisation elsewhere, the opening up of the domestic legal sector (or at least talk of it) will only serve to encourage domestic law firms to broaden their own horizons. It will force them to look to internationalise and regionalise their practices despite a worldwide economic slowdown that is hitting Malaysia just as hard as other economies in the region. “There is no doubting that the Malaysian economy has suffered because of the financial tsunami and by extension so too has the legal market,” Azmi says. “But we have had another factor affect things domestically. For much of this year the focus has been on elections and changes in government. This has distracted everyone a little from the economic situation.”
But with the Najib Tun Razak now well and truly settled into his position as Prime Minister, the focus of the nation has reverted back to its stalling economy. The latest figures state that Malaysia’s economy shrank by 6.2% in the first quarter of this year and estimates for the full year predict further contraction – somewhere between 5–6%. It is figures like these which Azmi says should be the catalyst for domestic law firms to look outside Malaysia to sure up growth over the short- to mid-term. However, it is not necessarily about establishing branch offices in each corner of the region, but rather utilising resources that are already at domestic law firms’ disposal. “Economic problems here are forcing law firms to look to other parts of this region for growth, to embrace globalisation and compete on the international stage,” he says. For Azmi & Associates this has occurred through membership of international legal associations, such as Terralex, and the establishment of close working relationships with a number of international firms.
Lee Hishammuddin Allen & Gledhill’s Muthanna Abdullah cites a similar trend sweeping through Malaysia’s legal community. For domestic firms to regionalise, he says, is difficult, but firms have a ready-made vehicle to this end in Islamic finance. “There is no huge investment into Malaysia like there is in other Asian countries – there are no big-ticket items,” Muthanna says. “But what we do have is unrivalled expertise in Islamic finance, interest in it from countries throughout the region like Indonesia, Thailand, Vietnam, Singapore and even places in the Middle East. This interest should drive regionalisation of legal practice. Malaysia can be the hub of Islamic finance in ASEAN.”
Malaysia is now virtually unchallenged as the largest Islamic banking and financial market. It boasts US$30.9bn in total Islamic banking assets, Takaful assets totaling US$1.7bn and the largest Islamic private debt securities (IPDS) market in the world, comprising of 45.5% or US$34bn of domestic corporate bonds. And the progressive nature of the industry in the country is only expected to consolidate this position in the short term. “2010/2011 should be when we see Malaysia established as the hub for Islamic finance in the region,” Muthanna says. “It is not overly ambitious when you have Khazannah [the investment holding arm of the Malaysian Government] already investing in the region very heavily.”
To this end, all the lawyers that spoke to ALB refused to rule out the possibility of establishing a physical presence in emerging economies across the region. Indonesia, Thailand and Vietnam were all noted as possibilities, especially as the first two step up their efforts to claim a stake in the lucrative retail Islamic finance market. The role envisaged would be one of know-how and technical knowledge transfer. Just as Singapore has played a pivotal role in transferring its banking & finance and dispute resolution knowledge regionwide, so will Malaysia in Islamic finance. Much of the groundwork for this has already been laid out in a raft of industry initiatives under the MIFC. These include the establishment of an institute of Islamic banking and finance, an international centre for leadership in finance and an international centre for education in Islamic finance. “Malaysia will lead the region,” Azmi says. “We are already present in over 60 countries and that will only increase as more incentives appear and liberalisation takes place in the sector over the coming years. Each time a Malaysian lawyer interacts with lawyers from Indonesia, Thailand or other countries they will be playing a role in transferring what we know across the region.”
Diversification
If they look to spread internationally Malaysian firms will find there is a need to diversify their practice, or risk falling victim to the slowdown in staple areas of work such as M&A and corporate. It is a slowdown that not even a boom in the counter-cyclical areas of litigation and insolvency & restructuring can compensate for. “M&A and capital markets work has certainly slowed down from the levels that it was at in 2007, following a worldwide trend,” Muthanna says. “Interest in debt capital markets have risen and the rates are high, but the markets are adjusting to this.”
So the question is, have firms also adjusted to the changed environment? Azmi thinks that most have made good in-roads but there is plenty more work to be done. “Malaysian firms have generally had an ad hoc approach to practice diversification. Many tend to rely on political or other connections and there perhaps is not enough time spent on forward planning,” he says, adding this is evident in the fact that all of the country’s major firms have had to shed staff in the past few months, some by as much as 20%.
“Redundancies have not only been happening in the US or UK; they have also been happening in Malaysia, but no one has released any information on them,” Azmi says. “What is the cause of this? The financial crisis has had a role to play but it also due to some firms’ over-dependence on one or more practice areas. Over dependence of this kind is very common in Malaysia and reflects the developing nature of our legal market.”
He believes that the key to weathering the financial crisis for many law firms in Malaysia is taking some risks rather than being risk averse. “Everyone is looking for so-called green shoots at the moment,” Azmi says. “But just how do you identify them and make business out of them? In some cases you can’t just sit back and wait for them to appear themselves and sometime you cannot even wait for clients to lead you there. You need to go out and find them for yourself.”
Lee Hishammuddin Allen & Gledhill’s Muthanna agrees, citing his firm’s burgeoning technology and life sciences practices as evidence of this. “For firms to survive, they need to identify sectors that no other firms are in, or only a few are in; they need to make the commitment of manpower and resources and stick by it,” he says. “We looked at telcos – a sector in which there are less than 10 specialist lawyers in Malaysia – and got in there. We’re now moving quite well.”
Heavy government investment in the sector has no doubt helped Muthanna implement such diversification plans. Similarly, life sciences, biotech and agri-tech have all been earmarked for heavy government investment in the next five years and, along with continued efforts to stimulate the country’s manufacturing sector, are expected to help domestic firms on the road to diversifying their practices.
“The Malaysian Government has said repeatedly that it plans to increase spending in these areas and has already established technology clusters to this end. This helps law firms expand the type of work they are doing and also opens up doors to practice in other areas,” Muthanna says. “What may start out as a joint venture contract can quickly turn into advising on funding work, litigation work, IP enforcement and protection and more general corporate work.”
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