Last September, Abdullah Badawi, prime minister of Malaysia, announced that the government would hand out five new licenses for foreign brokers to enter the Malaysian market, and five new licenses to global fund managers to operate there as well. This week, half of that vision came true: Abdullah announced five new brokerage licenses, awarded to CLSA, CSFB, JPMorgan, Macquarie Bank and UBS.

But only one foreign fund house, Aberdeen Asset Management, was also announced as winning a new license. Fund executives in Kuala Lumpur and Singapore say only one, or perhaps two other firms had bothered to apply.

The new rules, announced in the latest budget, allow fund managers to fully own an operation in Malaysia, which will be a first. They will be allowed to compete against local players, but only for institutional business. Fund managers will not be allowed to market unit trusts domiciled in Europe, Hong Kong, Singapore or other jurisdictions.

Since capital controls were imposed in 1998, Malaysia's fund management industry has languished. There has been no infusion of know-how, ideas or talent in the investment management industry for over six years now. Singapore, on the other hand, has raced ahead, not only establishing itself as an important hub for the industry, but using its sway over fund managers to give its government critical intelligence on the global markets

The government's "master plan" to liberalize by 2007 is a recognition that it needs to build the skills of Malaysian talent and compete with the outside world. But that need to foster competition is running headlong into the desire to protect the local funds industry, in the hope of giving it enough of an advantage that it can survive after 2007, according to industry players in KL.

The government has already denied fully owned foreign houses to compete in the retail space. Its main allure is mandates from the $57 billion Employees Provident Fund, which the central bank, Bank Negara, last year said could invest up to 10% of its assets overseas.

More recently, the EPF has announced it will outsource M$1.9 billion ($500 million) for investing in offshore listed securities. Presumably this is just the start of a long-term outsourcing campaign, but it has not been enough to convince most global houses to leap through Malaysian hoops.

"You can't build a business on government handouts," says the head of a big US fund house with a regional presence. "It would help if they opened up unit trust business to outside managers. Otherwise we'd need to launch a whole new range of funds there, and there's not enough business to justify that."

Moreover the EPF mandates, while they are not peanuts, are not that big for a global house: the government has indicated it wants to split the $500 million five ways.

But for a niche player like Aberdeen, which has also just become the first foreign house to fully own a funds business in Thailand, the promise of this business was obviously sufficient. Aberdeen executives were unable to return phone calls by press time.

Nonetheless the hurdles managers will have to jump may prove high. For example, fund executives in Singapore say they were being told the 100% ownership was actually a fiction: some form of technology transfer and training with a local fund house was part of the deal.

Fund managers are also expected to set up an office in Malaysia, probably including a local portfolio manager as well as marketers. "You've got to pay to play," says a fund exec who passed on the opportunity.

They expect the EPF's new global custodian, Bank of New York, will also have to tie up with a local bank to serve as its sub-custodian in an arrangement that will include knowledge transfer. BoNY officials declined to comment.

Moreover, while the government is encouraging global players to come in on the institutional front, it appears to be actively punishing them domestically. Bank executives in Kuala Lumpur say that since the beginning of this year, Bank Negara has pressured them against selling foreign insurance and investment products.

Bank Negara allegedly requested banks give it a list of everything on their shelves, and then asked banks to prove they had been given permission to sell those products from foreign-owned entities. "They verbally told us we must sell only local products," says a bank executive. "But there's nothing in black and white - just strong hints that we must go local."

Bankers say Prudential Unit Trust, the fourth-biggest fund house in Malaysia and a unit of UK-based Prudential Asset Management, has been singled out on a blacklist because it is considered "foreign", even though the majority of the firm is owned by a local entity.

Prudential officials in Hong Kong and Singapore say they are unaware of any such discrimination.

If true, it is yet another reason why Malaysia is failing to attract global fund management companies. So far, the only foreign players that have been setting up fund management capabilities onshore have been affiliates of big insurance companies, such as AIG and ING. Aberdeen is breaking new ground, but it may be a while before it has company.