Sabah Development Bank sees red ink on books for first time after ‘creative accounting’ uncovered

KOTA KINABALU, July 10 — The state-owned Sabah Development Bank (SDB) will record unprecedented losses in 2023 and 2024, after years of being treated as a lender of “last resort” and funding projects no other bank would finance.

Sabah Finance Minister Datuk Masidi Manjun said that after reporting profits of around RM580 million for the past six years, SDB will book significant financial losses for 2023 and 2024 due to “inherited issues”.

“It is not just financial losses but also poor quality of existing loan assets: out of a loan portfolio of RM6.6 billion as of the end of May 2024, 75 per cent or RM5 billion are non-performing loans (NPL),” he said when answering Opposition Leader Datuk Seri Shafie Apdal.

Masidi also told the state assembly that total loans approved to companies from Peninsular Malaysia from 2018 to 2023 was RM8 billion.

He further said there was “creative accounting” at the bank that obscured the losses and new loans issued to mask delinquent accounts.

“In the banking market, SDBank was nicknamed ‘the bank of last resort’, meaning borrowers who were turned down by other banks would try their luck with SDBank. When some of these borrowers succeeded, the bank ended up with 75 per cent non performing loans (NPLs).

“There had been little or no legal actions taken to recover these bad debts, and instead, creative accounting was used to disguise many of these NPLs as performing loans, resulting in a governance nightmare with weak oversight, checks and balances, and ineffective internal controls in credit and risk management,” he said.

The minister said that while SDB appeared to be financially sound, it was effectively “cashless” as most transactions only existed on paper.

This cash flow problem also meant the bank could not repay bonds it previously issued.

The Karanaan assemblyman said a new board installed in 2023 was trying to turn things around and undo the “creative accounting” already in the books while a new Asset Management Company (AMC) would seek to aggressively recover non-performing loans.