Introduction

Construction activities are wide and are not confined to technical and administrative aspects only such as
design development and construction processes. It is also include quality management and financial
aspects. Financial aspect starts since the very first stage of the construction. It will be depended on the
characteristics of construction industry and the lending institutions.
The main characteristics of construction industry are as follows:
1. It is ordered in advance
2. It is different in terms of design, size, specification and its end-use.
3. It is large, heavy and costly
4. It has a long life span
5. It uses components which are produced by other industries
6. It involves different professionals
From the above main characteristics, we may understand that construction industry is very important to the
economy of a nation. The construction industry has its own characteristics and qualities that make it
Financing Construction Project in Malaysia
Lenders Requirements
Seng Hansen
Master Student of Construction Contract Management UTM
Email: hansen_zinck@yahoo.co.id
economy of a nation. The construction industry has its own characteristics and qualities that make it
different with other industries. Due to its importance, financing a construction project is as important as
developing the national welfare.
Sources of Finance
Generally, a developer obtains his project finance either from internal or external sources. The internal
source, also known as equity capital, is risky as the developer or the investor does not have security that he
will recover the returns of his investment. However, if an external source of financing is made, the loan
needs to be paid according to a fixed program and duration.
Further, the external source of finance can be divided into public and private sources. The public sources are
mostly subjected to government policies and current economic conditions. It is mainly deal with the
infrastructure projects such as highways, dams, conservations, etc. While private sources normally do not
deal with this type of project. Bank, finance company, insurance company etc are some of the private
sources where a developer may seek funds.
In giving their loans, these lending institutions of course have a set of requirements to be met by the
borrower so that it will ensure that the borrower has the ability to repay the loan after the duration of
finance. This paper will be discussed about some lending institutions in Malaysia and their requirements in
giving loan.
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Commercial Bank
Commercial bank is the biggest and most important financial source in many countries as well as in
Malaysia. It has two basic services; 1) as a place where individuals and companies deposit and withdraw
their money whenever needed and 2) as a place that provides credit facilities for customers. This bank
offers financing for construction project by charging a competitive interest rate.
Commercial banks provide facilities like overdrafts, long-term loans, bridging finances and performance
bonds and in many cases these banks also nvest in government securities. The loan from commercial banks
has generally been regarded as the cheapest of finance for clients.
It has been a practice that commercial banks will advance loans on overdraft depending on the borrowers
financial standing and type of collateral security offered. The interest rate charged will normally vary
depending on the banks current interest rate which fluctuates. In certain cases nonetheless, the interest
rate can be fixed throughout the loan duration.
Merchant or Investment Bank
The establishment of merchant banks is primarily to compliment and supplement the activities offered by
other financial institution. This banks are expected to play the role of advisors and financiers to large
companies. They also function as financial intermediaries specializing in capital market. They offer
specialized expertise especially those that are fee-based.
As they deal more with large corporations and provide almost exclusive facilities to them, these banks are
regarded as wholesale banks, distinct from Commercial Banks and other financial institutions which are
more involved in retail banking. Merchant banks are prevented to compete with Commercial Banks by their more involved in retail banking. Merchant banks are prevented to compete with Commercial Banks by their
inability to operate current account. The banks are authorized to operate fixed deposit to corporations,
associations, clubs, etc subject to minimum tenure and amount by Bank Negara.
Islamic Bank
Bank Islam Malaysia Berhad is the pioneer Islamic bank operating in Malaysia, under the Islamic Banking
Act 1983. Since its establishment, Bank Islam has progressed tremendously and has branched in each state.
The facilities and services offered by these banks are basically similar to those conventional banks but their
operations and activities are based on the principles and foundations of Islamic practices. As such, these
banks accept deposits under demand and savings deposit and term deposit in the forms of investment
deposits and special investment deposits.
Islamic banks provide facilities like letters of credit, project financing, term financing, trade financing and
also corporate financing, all under Islamic principles.
Building Society
The Malaysia Building Society Berhad (MBSB) was established to take over operations in Malaysia from
Malaya Borneo Building Society Ltd (MBBS) which started its operation in 1950. MBBS was restructured
after the separation of Singapore from Malaysia. MBSB was established in 1970 and listed on the Kuala
Lumpur Stock Exchange in 1972. MBSB had continuously progressed well and in 1994 extended its services
to property development and provided property financing through its branches.
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Pizzey (1990) stated that the functions of a Building Society are to accumulate funds through accepting
deposits and issuing shares, and using this accumulated funds largely to finance housing loans though
installments. The housing loan repayment is generally distributed over a long period of time during which
time the society holds the mortgage on the property. Up to now, the Building Society has remained as one
of the important sources of finance provider for housing loans among individuals desiring to own houses for
owner occupation. MBSB also provides credit facilities such as term loans, bridging finance, combination of
term and bridging loan, and end finance. It also involves in property leasing and construction project
management.
Insurance Companies
Chwee (1984) stated that insurance companies are financial institutions that provide compensation to the
parties being insured with the agreed amount of money should there be any mishaps, in return for a much
smaller amount of money or premium. Insurance companies provide development finance with an interest
rate as high as the rate charged by Merchant Banks, with options given upon completion of construction,
that is, whether to convert the loan into a long-term one or to purchase the development for investment
purposes.
Not many insurance companies are actively giving out loans to the construction industry and most of them
only provide long-term loans.
International Institutions (World Bank and Asian Development Bank)
International institutions such as World Bank and ADB have aim to provide funding for public sector like
infrastructure and public construction financing. Therefore it is used more for the government rather than infrastructure and public construction financing. Therefore it is used more for the government rather than
by individuals or private companies.
According to the World Bank report, the bank generally gives a financial help and stimulation to developing
countries in which they will finance on public sector domain. The main purposes of the Bank, as outlined in
Article One of its Articles of Agreement are:
to assist in in the reconstruction and development of territories of members by facilitating the investment
of capital for productive purposes" and "to promote the long-range balanced growth of international trade
and the maintenance of equilibrium in balances of payments by encouraging international investment ...
thereby assisting in raising the productivity, the standard of living and conditions of labour in their
territories"
Different with the common commercial bank, the world banks interest is lower than market interest.
Interest rates on World Bank loans are revised every six months and typically, the Bank charges borrowers a
rate of interest 0.5 per cent above its own cost of borrowing on the international market, the proceeds
going towards paying the Bank's operating costs and to add to reserves.
Loans were originally supposed to be given only to "specific projects"usually infrastructural projects, such
as the construction of highways, dams, and telecommunications facilities, and social welfare projects, such
as those in the health and education sector.
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Common Requirements Imposed by Lending Institutions
Banks are the most common source of finance in construction industry. However, their requirements are
not much different from other lending institutions requirements. Below are several common requirements
that need to be reviewed by lending institutions before accept and grant the borrowers proposal.
1. The developer or contractor must be registered with organizations recognized by banks and other parties
like CIDB, PKK and Ministry of Finance
2. The company is free from bad reputation in the market
3. The company is not blacklisted by PKK, BNM and CCRIS
4. The management or key players of the company must have at least three years experiences in similar
projects
5. The company must have all his projects completed within two years of the scheduled time. The following
information needs to be supplied:
- All projects completed for the past two years
- All existing projects and status of completion
6. The company has obtained commendable profits in the last two years.
7. The company must be free of any debts (or must have positive net worth)
8. The company has maintained an active and stable account for the last six months and there has been no
incidences of bounced cheques due to shortage of money in the account in the last six months
9. All applications are bound by terms and conditions of the current credit assessment
10. The company must submit a copy of construction contract document (if any) for the proposed project.
The lenders will firstly rely on the contract document to have a preliminary analysis. They must review the
terms and provisions of the construction contract to make sure that it is properly coordinated and
consistent with the construction loan as to such issues as time for completion, payment terms and
requisitions, limitations and procedures for changes, and dispute resolution. requisitions, limitations and procedures for changes, and dispute resolution.
11. The company must submit the total loan amount that indicating the construction budget.
12. The company must be able to repay the loan plus its charged interest
13. The company must submit the complete construction plan and its specification (if any)
14. The company must submit the project cash flow projection (if any)
15. Construction insurance (if any)
In addition, the lending institutions will evaluate the capability and experience of the companys
management, management structure, companys aims and objectives, competitiveness and market
pressure that the company is able to face.
While for international lending institutions such as World Bank and ADB, there will be special requirements
of the goods, works, consulting services and other items of expenditure to be financed out of the proceeds
of the Loan and the allocation of amounts of the Loan among the different categories of Goods, Works,
Consulting Services and other items of expenditure shall be in accordance with the provisions of Lender to
this Loan Agreement. Other additional requirements which imposed to the borrower are about
strengthening community participation, capacity building and project management. Strengthening
Community Participation includes implementing programs to promote awareness and develop skills and
capacities of communities to participate in livelihood opportunities arising from heritage management and
tourism. Whereas capacity building relates to the effort of improving institutional capacity at the borrower
countries for sustainable site management and preparation site and management plans, and ensuring
Project Management by giving specific provision of equipment, logistical support and Consulting Services.
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Conclusion
Due to its nature and characteristics, financing construction projects are important to the economy of a
nation and therefore it is as important as developing the national welfare. However, financing construction
activities are not a simple matter. It involves many parties and interests as well as conditions and
requirements.
There are some sources of finance in Malaysia such as commercial banks, merchant banks, Islamic banks,
building society, insurance companies, and international institutions (World Bank and ADB). In giving their
loans, these lending institutions of course will set out a list of requirements that must be met by the
borrowers (the government/developer/contractor) so that it will ensure the ability of the borrower to repay
the loan to the lender plus its interest and without any legal or contractual issue arisen.
Some of these requirements are the company must be registered, must be free from bad reputation, must
be not blacklisted, must have at least three years experiences in similar projects, must provide the list of
past and on-going projects, must obtained profits, must maintained an active and stable account, etc.
Moreover, during the construction period, monitoring process is required for the construction loan in order
to minimize risk. The lending institutions will be having evaluation in each stage of construction in order to
ensure the loan is spent properly regarding to the progress, and this might affect to the subsequent
disbursement.
References
Khairani Ahmad. 2009. Construction Economics. Selangor: Pearson Malaysia Sdn Bhd.
Philippe Benoit. 1997. The World Bank Groups Financial Instruments for Infrastructure. Philippe Benoit. 1997. The World Bank Groups Financial Instruments for Infrastructure.
www.agc.org. Guide to Construction Financing. Second Edition.
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