Sabah Development Bank Berhad (SDB) has filed a lawsuit in the High Court against audit firm Ernst & Young PLT, alleging professional negligence in its audit work between 2017 and 2022. The bank is seeking RM1.97 billion in compensation.
According to Sabah Media, the Kuala Lumpur High Court has scheduled the hearing for July 2. The trial date was set during a closed-door case management session chaired by High Court Judge Roz Mawar Rozain, who also instructed both parties to complete the necessary documentation and trial preparations.
SDB claims that Ernst & Young’s audit failures caused severe financial losses, including misclassifying more than RM2.2 billion in loans as performing, when they were actually impaired or non-recoverable.
The bank’s current board was appointed in July 2023 by the Gabungan Rakyat Sabah (GRS)-led state government. Upon assuming office, the board launched a full internal audit and began pursuing accountability as part of a major reform of the institution’s governance structure.
The board is chaired by Datuk Seri Lim Haw Kuang and includes Datuk Mohd Sofian (Permanent Secretary of the Ministry of Finance), Senior Independent Non-Executive Director Patrick Ubin, Datuk Yong Yu Chiong, Dr. Dionysia Kibat, and Datuk Soo Guan San.
Finance Minister: ‘Creative Accounting’ Masked RM5 Billion in Bad Loans
On July 10, 2024, Sabah Finance Minister Datuk Masidi Manjun told the State Legislative Assembly that, as of May 2023, 75%—almost RM5 billion—of SDB’s RM6.6 billion in loans were impaired or non-performing.
He accused the former management of using “creative accounting” techniques by disbursing new loans to mask the failure of previous ones, thereby understating non-performing loans and artificially inflating profits.
Masidi said the issues could be traced back two decades, but were especially severe between 2017 and 2022. During this period, RM580 million in fictitious profits were reportedly recorded. He added that many unqualified companies received loans under lax approval standards.
“However, due to confidentiality obligations under the Financial Services Act 2013, details about borrowers cannot be disclosed to the public,” he said.
He also revealed that the bank had relied heavily on bond issuances for funding, but failed to collect enough loan repayments to meet bond maturities. This led to repeated refinancing—borrowing more money to repay maturing debts—which further expanded the bank’s liabilities.
Masidi noted that the former management failed to revalue its securities every two years, as required by best practices for financial institutions. As a result, SDB had earned the nickname “the bank of last resort,” a place where borrowers turned after being rejected by other banks.
He added that most of the RM5 billion in bad loans were backed by land assets and therefore could still be recovered. Since the new board was appointed in July 2023, active recovery efforts have been underway.
State Government Assumes Control; Finance Ministry Takes Over Oversight
In August 2023, Chief Minister Datuk Seri Hajiji Noor announced that SDB, previously overseen by Sabah Development Berhad, would now fall under the Chief Minister’s Department via the Chief Minister (Incorporation) Ordinance and be directly supervised by the Sabah Ministry of Finance.
Hajiji emphasized that the decision, approved by the State Cabinet, was aimed at strengthening the government’s oversight and support for SDB.
“The state government’s long-term goal is to support SDB in fulfilling its financial responsibilities and contributing to Sabah’s development objectives,” he said.
He added that SDB will now focus exclusively on financing socially and economically impactful, environmentally responsible development projects.
“SDB will become a key pillar in the Sabah Maju Jaya (SMJ) development agenda, ensuring the continuity of major state projects and delivering maximum benefits to Sabah. The bank will also pursue strategic partnerships with other development financial institutions (DFIs) to support Sabah’s broader development plans.”
Recovery Measures Underway: RM1.9 Billion Recovered, RM1.5 Billion in Loan Applications Rejected
Since taking office, the new board has initiated a series of sweeping internal reforms, including comprehensive audits, loan reclassification in line with Bank Negara Malaysia guidelines, clearer definitions of non-performing loans, and legal action against 43 major defaulting borrowers. Professional recovery firms were also engaged.
SDB has set a target to recover RM1 billion in non-performing loans each year for the next three years, starting in 2024.
In a statement dated August 24, 2024, SDB announced that with support from the Ministry of Finance, it had recovered RM1.9 billion in legacy loans from government-linked companies and successfully reduced bond liabilities from nearly RM5 billion to RM3.3 billion over the past year.
In the first five months of 2024 alone, the bank adopted strict vetting of loan applications and rejected proposals worth RM1.5 billion.
SDB affirmed the state government’s strong commitment to meeting all bond repayment obligations and maintaining financial stability. The bank also remains committed to supporting new, people-centric development projects—particularly in the oil & gas (RM426.5 million), energy (RM96.3 million), construction (RM62 million), and infrastructure (RM32 million) sectors—while strictly adhering to credit and risk management guidelines.
To strengthen its capital base and meet Bank Negara’s capital adequacy standards, the Sabah Ministry of Finance converted RM660 million in fixed deposits into redeemable preference shares.
SDB has also been designated the state’s main local financing institution for investment projects and is now working in partnership with reputable commercial banks and DFIs. Reflecting its improved financial health and governance standards, RAM Rating Services upgraded SDB’s debt instruments to AA1.
VOICE OF ASIA Editorial Note
At VOICE OF ASIA, we believe in amplifying the real voices of the people – especially those too often overlooked in national discourse. This translated article, originally published by Sin Chew, highlights a perspective from Sabah that resonates with our editorial mission: to go beyond headlines and politics, and shine a light on what truly matters to everyday Malaysians.
The original version can be found here.
