Banking Regulation

Jurisdictional comparisons

Second edition 2014

General Editor:
Ren Bsch Homburger

General Editor
Ren Bsch Homburger
Commercial Director
Katie Burrington
Commissioning Editor
Emily Kyriacou
Senior Editor
Lisa Naylor
Publishing Assistant
Nicola Pender
Design and Production
Dawn McGovern

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2014 Thomson Reuters (Professional) UK Limited

Malaysia

Malaysia
Rahmat Lim & Partners
Azman bin Othman Luk, Chen Lee Won, Lum Sher Vin,
Karen Foong, Elaine Heung & Lim Teong Sit
1. REGULATORY FRAMEWORK OVERVIEW
Financial Sector Blueprint 2011-2020
On 21 December 2011, Bank Negara Malaysia (BNM) the Central Bank of
Malaysia, published the Financial Sector Blueprint (Blueprint). The Blueprint
is intended to chart the direction of the Malaysian financial system over a
10 year period as Malaysia transitions towards becoming a high value-added,
high income economy. There are nine focus areas under the Blueprint: (i)
effective intermediation for a high value-added and high-income economy;
(ii) the development of deep and dynamic financial markets; (iii) financial
inclusion for greater shared prosperity; (iv) strengthening of regional and
international financial integration; (v) internationalisation of Islamic finance;
(vi) a regulatory and supervisory regime to safeguard the stability of the
financial system; (vii) electronic payments for greater economic efficiency;
(viii) empowering consumers; and (ix) talent development to support a more
dynamic financial sector.
In line with the Blueprint, new legislation in the form of the Financial
Services Act 2013 and the Islamic Financial Services Act 2013, was brought
into force on 30 June 2013 to regulate the conventional and Islamic finance
industries respectively.
The Financial Services Act 2013 (FSA) is a single master-class statute
governing the conventional finance industry, and replaces the Banking and
Financial Services Act 1989 (BAFIA), the Insurance Act 1996, the Payment
Systems Act 2003 and the Exchange Control Act 1953. The Islamic Financial
Services Act 2013 (IFSA) is the FSAs counterpart for the Islamic finance sector,
and replaces statutes such as the Islamic Banking Act 1983 and the Takaful
Act 1984.
Malaysia International Islamic Financial Centre (MIFC)
Malaysia implements a dual banking system, namely a fully-fledged
conventional banking system operating in tandem with a fully-fledged
Islamic banking system. Islamic banks and international Islamic banks
subsist alongside conventional banking institutions and offer a wide range
of Islamic financial products in any currency to non-residents and residents.
Focus areas of the MIFC are sukuk origination, Islamic fund and wealth
management, international Islamic banking, international takaful and human
capital development. Various incentives are accessible to financial institutions
participating in the MIFC initiative, including new licences for conducting
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foreign currency businesses, attractive tax incentives and facilitative

immigration policies. The MIFC initiative has gained global recognition
for its efforts in shaping the Islamic financial industry, and the Malaysian
Government remains strongly committed to positioning Malaysia as a leading
international Islamic financial hub.
Labuan International Business Financial Centre
The Malaysian Government has, since 1990, promoted Labuan as the premier
International Business and Financial Centre (IBFC) in the region. The Labuan
Financial Services Authority (Labuan FSA) serves as the one-stop supervisory
and regulatory body for the Labuan IBFC. Entities operating in the Labuan
IBFC are subject to a separate set of federal legislation specific to the Labuan
IBFC. Labuan banks and Islamic banks are subject to the Labuan Financial
Services and Securities Act 2010 (LFSSA) and the Labuan Islamic Financial
Services and Securities Act 2010 (LIFSSA) respectively.

2. AUTHORITIES, REGULATORS

2.1 Supervisory architecture nature, characteristics

BNM has broad powers of supervision and control over banking institutions
licensed under the FSA and the IFSA. In discharging its supervisory functions,
BNM adopts a risk-based supervision approach, pursuant to which financial
institutions are assessed and monitored based on risk profiles and adequacy
of risk management systems. The supervisory framework applies to all types
of financial institutions, thereby ensuring consistency in the treatment
of similar risks throughout the financial sector. This enables seamless
consolidated supervision of financial conglomerates. The supervisory
approach focuses on the quality of oversight and risk management control
functions in mitigating risks inherent in significant activities of the financial
institutions, to ascertain residual risks.
In the supervisory process, substantial reliance is placed on an
institutions internal oversight functions and risk management control
functions, to anticipate and respond to emerging risks, as well as to ensure
that identified vulnerabilities and weaknesses are followed up on and
effectively rectified. To complement this reliance-based approach, BNM
has taken measures to strengthen the calibre of the boards and senior
management of financial institutions to ensure more effective leadership
and oversight roles, and to nurture a strong risk culture and an ethical
workforce within the financial industry. BNM also relies strongly on the
work of external auditors and actuaries appointed by financial institutions.
In this respect, BNM has regular discussions with these external auditors
and actuaries to enhance awareness and clarity of BNMs expectations of
their roles, and the degree of reliance placed on their work for supervisory
purposes.

2.2 Lead bank regulators

BNM is empowered to act as the regulator of banking institutions not only
under the FSA and IFSA respectively, but also under the Central Bank of
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Malaysia Act 2009 (CBA). The Minister of Finance of Malaysia (Minister)

also plays an active role in the regulation of banks and Islamic banks,
and is the approving authority for applications for banking licences,
with the power to impose conditions on such licences. Other powers of
the Minister in relation to banks and Islamic banks include the power
to revoke licences and the power to direct investigations in prescribed
circumstances.

2.3 Other authorities

Malaysia has investment banks which undertake capital market activities in
addition to banking activities. These banks are also regulated by the Securities
Commission of Malaysia (SC). The SC is a statutory body established under
the Securities Commission Act 1993 and is the primary regulatory authority
for capital market activities in Malaysia.
BNM and the SC have formalised arrangements between themselves to
ensure that their responsibilities in regulating investment banks are well
defined, and have jointly issued a set of guidelines known as the Guidelines
on Investment Banks. BNM is responsible for the prudential regulation
of investment banks to ensure their safety and soundness and the overall
stability of the financial system, whereas the SC is responsible for the
investment banks business and market conduct, so as to promote market
integrity and investor protection in the capital markets.
Separately, companies and businesses carrying on business in Malaysia
(other than in the Labuan IBFC) are also generally subject to the regulatory
supervision of the Companies Commission of Malaysia. Since the 1990s,
banks in Malaysia (with the exception of international Islamic banks and
Labuan banks) have been required to carry on banking business through
a company locally incorporated under the Companies Act 1965 (CA).
At present, the IFSA allows an international Islamic bank to be either a
locally incorporated company or a branch registered with the Companies
Commission of Malaysia, whereas Labuan banks must either be incorporated
or registered under the Labuan Companies Act 1990.

2.4 Role of central bank

The role of the central bank of Malaysia is entrusted to BNM under the CBA.
BNM reports to the Minister and keeps the Minister informed of matters
pertaining to monetary and financial sector policies.
The principal objects of BNM are to promote monetary stability and
financial stability conducive to the sustainable growth of the Malaysian
economy. In promoting monetary stability, BNM pursues a monetary policy
which serves the interests of the country, with the primary objective of
maintaining price stability giving due regard to the developments in the
economy. A Monetary Policy Committee has been constituted and is tasked
with the responsibility of formulating the monetary policy and policies for
the conduct of monetary policy operations.
As banker and adviser to the Government, BNM plays an active role in
advising on macroeconomic policies and managing the public debt. BNM is
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also the sole authority in issuing currency as well as managing the countrys
international reserves. Other functions of BNM include the regulation and
supervision of financial institutions which are subject to the laws enforced by
it, exercising oversight of payment systems and providing oversight of money
and foreign exchange markets.

3. BANKING LICENCE

3.1 Characteristics, nature

Commercial banks and investment banks are licensed under the FSA, while
Islamic banks and international Islamic banks are licensed under the IFSA.
Licences are issued by the Minister who may, in circumstances permitted
under the FSA or the IFSA, revoke the licences or impose restrictions or
conditions on a licensee. The Minister and BNM are separately empowered
under the FSA and the IFSA to issue guidelines, and BNM has issued various
guidelines and circulars applicable to banks in relation to, inter alia: capital
adequacy, financial reporting, anti-money laundering and prudential limits
and standards.
The Labuan FSA may grant the following banking licences under the LFSSA
and the LIFSSA: a Labuan banking licence; a Labuan investment banking
licence; a Labuan Islamic banking licence; and a Labuan Islamic investment
banking licence. Labuan banks holding any of these licences are only
permitted to carry on business in, from or through the Labuan IBFC, and in
currencies other than Ringgit Malaysia (RM).

3.2 Regulated activities, scope of licence

The activities which require a banking licence under the FSA are banking and
investment banking business. These terms are defined in the FSA. Banking
business is defined to mean the business of accepting deposits, paying
or collecting cheques drawn by or paid in by customers, and provision of
finance or such other business as BNM, with the approval of the Minister,
may prescribe. Investment banking business on the other hand is defined
as the business of: (i) accepting deposits on deposit account and providing
finance; (ii) any regulated activity carried on pursuant to a Capital Markets
and Services Licence under the Capital Markets and Services Act 2007 (CMSA);
and (iii) such other business as BNM, with the approval of the Minister may
prescribe.
Islamic banks in Malaysia provide retail and wholesale services based
on approved Islamic principles. The range of Islamic financial products
offered in Malaysia includes, amongst other things, current deposits and
savings deposits under the concept of Wadiah (guaranteed custody), equity
or partnership financing under the concepts of musyarakah, musyarakah,
mutanaqisah and mudarabah, lease-based financing under the concepts of
al-ijarah, al-ijarah muntahia bi al-tamlik and al-ijarah thumma al-bai; salebased financing under the concepts of istisna`, bai` bithaman ajil, bai` salam,
murabahah and musawamah, and fee-based activities under the concept of
wakalah.
International Islamic banks are, in concept, essentially the same as Islamic
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banks except that their Islamic banking business must be carried on in

currencies other than Ringgit Malaysia (RM). BNM has issued guidelines
which set out procedures for the establishment of an international Islamic
bank. The guidelines also set out the requirements to be observed where
an international Islamic bank transacts with a resident and where an
international Islamic bank engages in RM transactions.
Labuan banking business is defined under the LFSSA as the business of
receiving deposits, Labuan investment banking business, Labuan financial
business, Labuan Islamic banking business, or such other business as the
Labuan FSA, with the approval of the Minister, may specify, subject to
compliance with the applicable exchange control restrictions under the FSA.

3.3 Licensing procedure (parties involved, nature and form of

application, duration, cost, licensing decision)
It is a prerequisite that an applicant for a commercial banking licence, an
investment banking licence or an Islamic banking licence must be a company
incorporated under the CA. As mentioned in section 2.3 above, the IFSA
allows a foreign institution to operate an international Islamic banking
business through a branch registered in Malaysia.
An application for a commercial banking licence or an investment
banking licence should be made in writing to the Minister by submitting the
application through BNM. If BNM is satisfied that the applicant fulfils the set
criteria and that it would not inter alia be detrimental to the soundness of the
financial system of Malaysia to grant a licence to the applicant, BNM may
make a recommendation to the Minister as to whether the licence should be
granted or refused and the conditions, if any, to be imposed on the licence.
The procedures are largely similar for an application for an Islamic banking
licence or an international Islamic banking licence. BNM may not, however,
make a recommendation to grant an Islamic banking licence unless it is
satisfied that two conditions are met, namely: (i) the aims and operations of
the banking business which the proposed Islamic bank desires to carry on will
not involve any element which is contrary to the Syariah; and (ii) there must
be a provision in the articles of association of the bank for the establishment
of a Syariah committee.
In relation to Labuan banking licences, an applicant for a Labuan
banking licence or a Labuan investment banking licence must be a Labuan
company, a foreign Labuan company (ie, a foreign company registered
to carry on business in Labuan) or a Malaysian bank. An application for a
licence to carry on Labuan banking business or Labuan investment banking
business must be made in writing to the Labuan FSA by or on behalf of the
applicant.

4. FORMS OF BANKS
4.1 State-owned banks

There are no state-owned banks in Malaysia, although there are Governmentlinked investment companies which control significant stakes in large
domestic financial groups.
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4.2 Universal banks, commercial and retail banks

Today, there are many large banks in Malaysia with commercial and
investment banking capabilities that are able to offer their clients a full suite
of banking and financial services. However, the term universal bank is not a
recognised legal term in Malaysia.
As indicated in sections 2.3 and 3.3 above, all commercial banks are
required to be incorporated in Malaysia. Commercial banks are allowed to
provide Islamic banking services, subject to the prior written approval of
BNM. A commercial bank providing Islamic banking services is also subject
to the provisions of the IFSA insofar as such provisions relate to the Islamic
banking business that the bank is approved to carry on. As some of the
activities of commercial banks could involve dealing in securities, advising on
corporate finance, the provision of investment advice and fund management
(all of which are activities regulated by the SC pursuant to the CMSA), there is
a regime for licensed commercial banks to register themselves with the SC in
accordance with the CMSA. By so registering, these banks may carry on such
regulated activities without requiring separate licensing under the CMSA.

4.3 Investment banks

Investment banks were created in Malaysia in 2005, through rationalisation
of existing merchant banks, discount houses and stock broking companies
within domestic banking groups. Investment banks are allowed to conduct
activities based on the types of licences held prior to their rationalisation,
and are additionally allowed to undertake fund management and unit trust
businesses in line with securities laws and guidelines issued by the SC. In
relation to banking activities, investment banks are allowed to mobilise
deposits subject to compliance with the prescribed minimum thresholds,
engage in lending activities which are necessary for investment banks to
complement their fee-based activities and offer comprehensive investment
banking packages to their clients.

4.4 Private banks

There are no private banks in Malaysia. There are, however, an increasing
number of banks that have dedicated divisions which provide services to high
net worth individuals.

4.5 Other banks

There are two other categories of financial businesses which come within
the purview of the FSA, but do not require banking licences. Approved
businesses require either approval from or registration with BNM, and
include inter alia the operation of payment systems, the issuance of
designated payment instruments, money broking business, and financial
advisory business. The final category of businesses includes factoring,
leasing, hire-purchase, and financial intermediation (including inter alia, the
acceptance of deposits and the giving of advances, loans or other facilities);
these businesses require neither approval nor registration with BNM, but are
still subject to the regulatory oversight of BNM under the FSA.
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4.6 Regulation of Systemically Important Financial Institutions (SIFIs)

In Malaysia, Development Financial Institutions (DFIs) are specialised
financial institutions established by the Government of Malaysia with a
specific mandate to develop and promote key sectors that are considered to be
of strategic importance to the overall socio-economic development objectives
of the country. These strategic sectors include agriculture, small and medium
enterprises, infrastructure, maritime, the export-oriented sector, as well as
capital-intensive and high-technology industries.
The Development Financial Institutions Act 2002 was enacted to make
provision for the regulation and supervision of DFIs. Selected DFIs are under
the purview of BNM, mainly to enable BNM to monitor the activities and
financial performance of these institutions. As specialised institutions, DFIs
provide a range of specialised financial products and services to suit the
specific needs of the targeted strategic sectors. Ancillary services in the form
of consultation and advisory services are also provided to the identified
sectors.

5. ORGANISATION OF BANKS

5.1 Corporate bodies corporate governance

The Malaysian regulatory framework imposes a high standard of corporate
governance for licensed banks.
The prior written approval of BNM is required before a person may be
appointed as a chairman, director or chief executive officer (CEO) of a
licensed bank. BNM also has its rigorous fit and proper tests, contained
in the Fit and Proper Criteria and Guidelines on Corporate Governance
for Licensed Institutions. These guidelines are applicable to banks and
holding companies of banks. The Guidelines on Corporate Governance for
Licensed Institutions are formulated based on the fundamental concepts of
responsibility, accountability and transparency, and contain broad principles
dealing with board matters, management oversight, accountability and audit
and transparency. For Islamic banks and international Islamic banks, the
Guidelines on Corporate Governance for Licensed Islamic Banks contain
similarly high standards of corporate governance.
The principles, standards and requirements under the Guidelines on
Corporate Governance for Licensed Institutions are expressed to be aligned
with the Malaysian Code on Corporate Governance, the international Bank
for International Settlements (BIS) Guidelines on Enhancing Corporate
Governance for Banking Organisations and other international best practices
on corporate governance.

5.2 Organisation (requirements, corporate documents, audit function

etc)
The organisational structure of a bank should include four important forms of
oversight in order to ensure appropriate checks and balances: (i) oversight by
the board of directors; (ii) oversight by individuals not involved in the dayto-day management of the different business areas; (iii) direct line supervision
of various business areas; and (iv) independent risk management, compliance
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and audit functions.

The board of directors of a bank is ultimately responsible for the proper
stewardship of the bank. In this regard, the board must have an appropriate
number of directors commensurate with the complexity, size, scope and
operations of the bank. The board should comprise directors who, as a group,
provide a mixture of core competencies such as finance, accounting, legal,
business management, information technology and investment management.
Further, the board is required to establish the following committees:
(i) a nominating committee; (ii) a remuneration committee; (iii) a risk
management committee; and (iv) an audit committee.
Nominating committee
The role of the nominating committee is to, inter alia: (i) establish the
minimum requirements for the board, namely the required mix of skills,
experience, qualification and other core competencies required of a
director; (ii) establish minimum requirements for the CEO; (iii) oversee
the overall composition of the board (in terms of appropriate size and
skills) and the balance between executive directors, non-executive
directors and independent directors; and (iv) establish a mechanism for
the formal assessment of (a) the effectiveness of the board as a whole and
(b) the contribution of each director to the effectiveness of the board, the
contribution of the boards various committees and the performance of the
CEO and other key senior management officers.
Remuneration committee
The remuneration committee is responsible for, inter alia, recommending a
framework of remuneration for directors, CEOs and key senior management
officers for the full boards approval. The role of the remuneration committee
is set out in more detail in section 5.6 below.
Risk management committee
The role of the risk management committee is to: (i) oversee senior
managements activities in managing credit, market, liquidity, operational,
legal and other risks; (ii) ensure that the risk management process is in place
and functioning; (iii) review and recommend risk management strategies,
policies and risk tolerance for the boards approval; and (iv) review and assess
the adequacy of the banks risk management policies and framework in
identifying, measuring, monitoring and controlling risks.
Audit committee
The role of an audit committee is to: (i) provide an independent oversight of
the licensed institutions financial reporting and internal control system; (ii)
ensure checks and balances within the licensed institution; and (iii) review all
related party transactions.
Syariah committee
Islamic banks and international Islamic banks are separately required to form
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a Syariah committee to ensure compliance with Islamic financial and banking

laws.
Internal audit function
Additionally, banks are required to set up an effective internal audit function
that provides an independent evaluation on the adequacy of, and compliance
with, established policies and procedures. In this regard, BNM has issued
Guidelines on Minimum Audit Standards for Internal Auditor of Financial
Institutions.

5.3 Auditors and other experts

A bank is required under the CA, and the FSA or the IFSA (as applicable) to
appoint an approved company auditor as its auditor. In addition, BNM has
issued External Auditor guidelines. Under these guidelines, the engagement
partner of an auditing firm may not serve for a continuous period of more
than five years with the same banking institution. Other experts may be
appointed if specialised skill or expertise is required to obtain sufficient audit
evidence to support the audit. The appointment of other experts, however,
does not diminish the auditors responsibility for audit reports.

5.4 Risk management

The board of directors of a licensed bank is tasked with the responsibility
of ensuring that the bank establishes comprehensive risk management
policies, processes and infrastructure, and manages the various types of risks.
The board should approve and periodically review the risk management
capabilities of the bank to ensure that they are able to support the banks
business expansion as well as to ensure that there are reliable and adequate
management information systems that cover the full range of the banks
activities. As explained in section 5.2 above, a bank is required to set up a risk
management committee.
BNM has issued various guidelines on risk management such as risk
governance and credit risk management.

5.5 Supervision of management

Malaysia adopts a one-tier board system and the board remains ultimately
responsible for providing effective oversight of management. Senior
management on the other hand is responsible for establishing a management
structure that promotes accountability and oversight of line managers and
officers carrying out their functions in specific areas consistent with the
policies and procedures laid down by the board.
BNM closely supervises and regulates bank management. Appointment
of bank directors, CEOs and chairmen requires the prior written consent of
BNM. BNMs guidelines stipulate various requirements relating to directors
and board composition, so as to ensure effective oversight of management.
As examples: (i) at least a third of the board must be independent directors
(although, in cases where BNM has concerns as to the effective functioning
of the board, a higher proportion of independent directors may be specified
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by BNM); (ii) there should be not more than one executive director on the
board only in exceptional circumstances, will BNM allow up to a maximum
of two executive directors; and (iii) there should be a clear separation between
the roles of chairman, who should be a non-executive director, and CEO, to
ensure supervision and accountability of management.
The various committees described in section 5.2 also play a role in
the supervision of management. The audit committee, risk management
committee, nominating committee and remuneration committee are to be
chaired by independent directors. In terms of composition: (i) the majority
of the nominating committee should be non-executive directors; (ii) the
remuneration committee is to comprise only non-executive directors; (iii) the
risk management committee should comprise only non-executive directors;
and (iv) the audit committee is to comprise only non-executive directors
with at least three members, of which the majority should be independent
directors.

5.6 Compensation
BNMs guidelines stipulate that banks should provide for a formal and
transparent procedure for fixing the remuneration packages of board
members, CEOs and senior management. In this regard, the remuneration
committee is responsible for developing a clear policy and framework on
the remuneration of directors, CEO and senior management. In setting the
remuneration packages, the committee should ensure that the remuneration
policy supports the banks objectives, culture and strategy, remuneration and
employment conditions of the industry, the banks relative performance, and
that the performance-related elements of remuneration form a significant
proportion of the total remuneration package of executive directors. BNM
may require banks to submit the detailed formulae and details of the
remuneration packages of directors and CEOs together with the banks annual
financial reports.

5.7 Special rules for SIFIs

BNM has issued a set of guidelines and circulars governing DFIs. These
guidelines prescribe the requirements in relation to capital framework,
financial reporting, anti-money laundering and prudential limits and
standards for DFIs.

6. LIQUIDITY AND CAPITAL ADEQUACY

6.1 Role of international standards (Basel II and III, Financial Stability

Board (FSB), etc)
BNM implements the Basel Accords developed by the Basel Committee on
Banking Supervision through its guidelines. At present, all major elements of
the Basel II capital framework including the Internal Ratings-Based approach
for credit risk as well as the Pillar 2 and Pillar 3 components have been put
in place. BNM has announced a gradual phase-in of the standards under Basel
III for implementation in Malaysia. Such implementation commenced in
2013 and will be completed in 2019.
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On the Islamic banking front, Malaysia is host to the Islamic Financial

Services Board (IFSB), an international prudential standard-setting body for
Islamic finance to ensure the soundness and stability of the Islamic financial
services industry. As such, the Islamic financial services industry, which
includes Islamic banking institutions, is robustly guided by the standards
published by the IFSB.

6.2 Liquidity requirements

The FSA and the IFSA both provide that BNM may impose prudential
standards on a bank relating to, amongst other things, liquidity, for the
purposes of promoting the safety and soundness of the bank or the integrity,
professionalism and expertise in the conduct of the business, affairs and
activities of the bank. BNM has issued guidelines known as the Liquidity
Framework and Statutory Reserve Requirement, which contain the liquidity
requirements applicable to banks. Islamic banks are subject to a similar set of
guidelines.
The Liquidity Framework sets out a standard measurement approach
that focuses on the ability of a banking institution to manage its liquidity
mismatches through the projection of a maturity profile of its assets, liabilities
and off-balance sheet commitments over a one-year span. Based on these
projections, banking institutions are expected to maintain adequate liquidity
buffers composed primarily of high-quality marketable securities to cushion
the impact of liquidity shocks that may transpire from a banking institutionspecific crisis, or a market-wide stress scenario. There are three levels of
liquidity measurement: the first level assesses the sufficiency of a banks
liquidity in the normal course of its business over the next few months; the
second level assesses whether or not the bank has the capacity to withstand
liquidity withdrawal shocks; and the third level assesses the banks general
funding structure, in particular the degree of dependency on certain known
volatile markets.
The Liquidity Framework does not emphasise rigid compliance with a
particular ratio. As a minimum standard, banks are required to maintain
sufficient cash flows to cope with events of unusually heavy withdrawals. The
available cumulative mismatch to accommodate liquidity shocks should not
be less than the compliance requirement as agreed with BNM.
The Liquidity Framework also states that the net compliance surplus should
be positive for two maturity buckets; in the case of commercial banks/Islamic
banks: (i) up to one week; and (ii) one week to one month, and in the case of
investment banks: (i) up to three days; and (ii) four days to one month.
In terms of the statutory reserve requirement, banks must maintain
balances in their statutory reserve accounts that are at least equal to the
prescribed ratio. The ratio is currently set at 4.0 per cent of total eligible
liabilities.

6.3 Capital adequacy framework

In Malaysia, the minimum capital funds that have to be maintained by
commercial banks and investment banks are as follows:
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for a domestic bank (by itself or in aggregation with its related

corporation that is a licensed investment bank) - RM 2 billion;
for a locally incorporated foreign bank - RM 300 million;
for a stand-alone investment bank - RM500 million.
In addition, each banking institution within the banking group must
comply with the minimum regulatory capital requirement imposed under
guidelines known as the Capital Adequacy Framework (Capital Components)
and Capital Adequacy Framework for Islamic Banks (Capital Components)
issued by BNM, which are generally based on the Basel III capital adequacy
requirements.
Under these requirements, all banking institutions are required to maintain
a minimum risk-weighted total capital ratio of 8 per cent at all times at the
entity, global and consolidated levels.

6.4 Special requirements for SIFIs

DFIs which are regulated by BNM are required to maintain an absolute

minimum capital of RM 300 million at all times. BNM has similarly
prescribed a Capital Adequacy Framework for DFIs, under which DFIs are
required to maintain a risk-weighted capital ratio of 8 per cent at all times.

7. CONSOLIDATED SUPERVISION
7.1 Role of consolidated supervision

Malaysia recognises the importance of international co-ordination and cooperation among regulators to ensure consolidated supervision of financial
institutions, particularly in todays environment. Many financial groups have
subsidiaries and operations in more than one jurisdiction. BNM continues to
pursue close co-operation and co-ordination with international supervisors to
support BNMs supervisory activities..

7.2 Requirements
Under the FSA and the IFSA, an overseas supervisory authority may, with
the approval of BNM, examine the books, accounts and transactions of:
(i) a representative office in Malaysia of a foreign institution; (ii) a bank or
financial holding company in Malaysia which is a subsidiary of a foreign
institution; or (iii) a bank which is a branch of a foreign institution. BNM
may also upon request by the relevant supervisory authority of a country,
territory or place outside of Malaysia, provide to the authority documents
or information on matters relating to: (i) the affairs of a bank or financial
holding company which is a subsidiary or associate of a foreign institution;
(ii) any office of a bank or financial holding company; (iii) any bank
or financial holding company for the purposes of assessing a proposed
establishment of any office by the bank or financial holding company.
Further, in assessing the merits of the applications by foreign banking
institutions for a licence, BNM takes into consideration the extent to which
the applicant is regulated and supervised by a competent home regulatory
authority, and if the applicants home country legislation allows for the
gathering and exchanging of information for cross-border establishments.
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As part of the application process, BNM will require that the home
supervisor provide a letter of no objection, and confirmation that it performs
consolidated supervision over the applicant and its affiliates, including the
Malaysian subsidiary.
In addition, it is a requirement that a licensed bank obtain BNMs prior
written approval before it (i) establishes or relocates an office; (ii) establishes
or acquires a subsidiary; or (iii) acquires or holds any material interest in any
corporation, whether in or outside Malaysia.
In line with the Basel Committees recommendations to improve
the supervision of financial groups globally, the FSA and the IFSA have
introduced the concept of financial holding companies. A financial holding
company is one which holds an aggregate of more than 50 per cent of
interest in shares of a licensed person, or has an aggregate interest in shares
of 50 per cent or less but has control over a licensed person, and has obtained
the approval of BNM to be a financial holding company of such licensed
person. Prudential requirements that apply to a licensed bank will also apply
to a financial holding company and its subsidiaries. BNM is empowered to
exercise oversight over financial groups for the purposes of promoting the
safety and soundness of a licensed person, and to impose requirements as to
group capital adequacy, liquidity, corporate governance, risk management
and related party transactions.

7.3 International coordination and cooperation among regulators

BNM is active in enhancing bilateral relationships and international
co-ordination and co-operation. BNM has entered into memoranda of
understanding (MoUs) with central banks and regulators in major countries
of the world to promote the establishment of co-operation mechanisms
between BNM and its overseas counterparts, help to promptly identify
problems and unhealthy trends in the financial sector, provide bilateral risk
early-warning functions, ensure the enforcement of due penalties on rulebreaking activities, and thereby promote the safe and sound development of
financial institutions.
BNM also takes into account developments in international standards
and guidance issued by international standard-setting bodies such as BIS,
the IFSB, the International Association of Insurance Supervisors (IAIS), the
International Organisation of Securities Commissions (IOSCO), and the
international accounting standard-setting entities, that all have as their aim
the promulgation of best practices in the financial industry.

8. SHAREHOLDERS, ACQUISITIONS OF BANKS

8.1 Reporting of significant shareholdings

As Malaysian commercial, investment and Islamic banks are public

companies incorporated under the CA, the reporting obligations for
substantial shareholders under the CA and the Securities Industry (Reporting
of Substantial Shareholding) Regulations 1998 apply to substantial
shareholders of Malaysian banks. A substantial shareholder is a person who
has an interest in no less than 5 per cent of the interests in the voting shares
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of the company. Notice of the acquisition of a substantial shareholding

must be given to the company and the SC within seven days from the date
a person becomes a substantial shareholder. A substantial shareholder is also
required to file a notice of change in their interests or notice of cessation of a
substantial shareholding within seven days from the date of a change or date
of cessation, as the case may be.
Where the bank is listed on Bursa Malaysia Securities Berhad, the bank
will, upon receipt of the notice of substantial shareholding, or change in
substantial shareholding or cessation of substantial shareholding, make an
immediate announcement to the stock exchange.
Both the FSA and the IFSA impose strict requirements on substantial
shareholders. Invariably, the approvals and/or recommendations of the
Minister and BNM are required for any significant acquisition or holding of
shares. These requirements are discussed in sections 8.2 and 8.4 below.

8.2 Approval requirements

There is a limit on the number of shares a person may hold in a bank. An
individual may not hold more than 10 per cent of the shares of a bank.
Further, no person may acquire control over a bank unless such person has
obtained the prior written approval of the Minister, on the recommendation
of BNM. A person will be presumed to have control over a bank if, inter alia
such person has an interest of more than 50 per cent of the shares in the
bank or if the person has the power to make or cause to be made decisions
in respect of the business or administration of the bank, and to give effect to
such decisions.

8.3 Foreign investments

Foreign shareholdings of up to 70 per cent are allowed for domestic Islamic
banks which have a paid-up capital of at least $1 billion, and up to 70
per cent for investment banks. The permissible foreign shareholding for
commercial banks is 30 per cent. These limits do not apply to international
Islamic banks, grandfathered banks, pre-existing foreign-owned banks and
those which were granted licences immediately following the liberalisation of
the financial sector in 2009.

8.4 Acquisition of banks

The acquisition of banks is closely regulated by, and requires the prior written
approval of, BNM or the Minister. The acquisition of a bank may be effected
via a purchase of shares or the business and assets of the bank.
Insofar as shares are concerned, an acquirer may not enter into an
agreement or arrangement to acquire shares of a bank which may result
in the shareholdings of that person, when aggregated with any interest
in shares already held by him, being 5 per cent or more in the shares
of the bank, without obtaining the prior written approval of BNM. Any
further acquisition of shares by the acquirer, which would result in the
acquirer holding an aggregate interest in shares of or exceeding: (i) any
multiple of 5 per cent; or (ii) the percentage holding for a mandatory offer
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under the Malaysian Code on Take-Overs and Mergers, will also require
the prior written approval of BNM. From the sellers perspective, a seller
may not enter into any agreement or arrangement to dispose of shares
without obtaining the prior written approval of the Minister (acting on
the recommendation of BNM) where the seller has an aggregate interest in
shares of the bank of: (i) more than 50 per cent; or (ii) 50 per cent or less but
has control over the bank, if such disposal would result in the seller holding
an interest in shares of less than 50 per cent or ceasing to have control over
the bank.
Approval is a two-step process. Approval is required at first instance to
commence negotiations, and again, prior to the execution of the sale and
purchase agreement. It should be noted that approval is required for both
direct and indirect acquisition of the shares in a bank.
An acquirer who holds an aggregate interest in shares of more than 50
per cent in a bank must also be approved by BNM as a financial holding
company. Unless BNM otherwise approves, a financial holding company of
a bank is not permitted to carry on any business, other than the business of
holding investments directly or indirectly in corporations which are primarily
engaged in financial services.
The prior approval of the Minister, acting on the recommendation of
BNM, is required for any agreement or arrangement for the reconstruction
or amalgamation of a bank. The prior written approval of BNM is required
for any agreement or arrangement for a scheme to transfer the whole or
part of the business of a bank. In the premises, if the acquisition of a bank
is to be effected by way of an acquisition of business and assets, the prior
approval of the Minister or BNM (as the case may be) must be sought and
obtained.
The IFSA contains corresponding provisions in relation to Islamic banks.

9. RESOLUTION

9.1 Liquidation legal framework

The liquidation of a bank which is a company incorporated in Malaysia is
governed by the CA. In addition, banks and Islamic banks are subject to
additional requirements set out in the FSA and the IFSA respectively, which
are intended to safeguard the interests of depositors, creditors and the public
in general. The Malaysia Deposit Insurance Corporation Act 2011 (MDICA)
contains extensive provisions relating to the winding up of banks.

9.2 Resolution regime

Any licensed institution which considers that it is insolvent, or is likely to
become unable to meet all or any of its obligations, or that it is about to
suspend payment to any extent must immediately inform BNM of that fact.
BNM has wide powers in relation to a bank that is insolvent or is likely to
become unable to meet all or any of its obligations. BNM may, inter alia,
with the concurrence of the Minister, prohibit a bank from further extending
any credit facility, remove from office any officer or director of the licensed
institution, and appoint certain persons as directors or advisors.
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Further, the Minister may, on recommendation of BNM,: (i) provide for

BNM to, or for BNM to appoint any person to, assume control of the whole
or a part of the property, business and affairs of the licensed institution; (ii)
authorise an application to be made by BNM to the High Court of Malaya or
of Sabah and Sarawak (HC), as applicable, to appoint a receiver or manager
to manage the whole or a part of the business, affairs and property of the
licensed institution that might in the opinion of BNM be necessary or
expedient; or (iii) authorise BNM to present a petition to the relevant HC for
the winding up of the bank.
Where a licensed institution becomes unable to meet all or any of its
obligations, suspends payment to any extent or is wound up, there is a
statutory priority conferred under each of the FSA and the IFSA that the
properties of the relevant bank or Islamic bank in Malaysia will be available to
meet all liabilities of that bank in respect of all deposits in Malaysia in priority
over all other unsecured liabilities of that bank or Islamic bank in Malaysia.

9.3 Bail-in/bail-out
The Malaysia Deposit Insurance Corporation (MDIC) was established in 2005
under the Malaysia Deposit Insurance Corporation Act 2005 (which has
since been replaced by the MDICA). Banks licensed under FSA and IFSA are
member institutions of MDIC (together with insurance companies and takaful
operators). A deposit insurance system was established under the MDICA to
protect depositors against loss of their deposits in the event of a failure of their
bank and to preserve confidence in the financial system. Deposits covered by
the deposit insurance system include RM denominated deposits in current and
savings deposit accounts, fixed deposits, cheques and bank drafts, and foreign
currency denominated deposits. Deposits not payable in Malaysia, money
market deposits, negotiable instruments of deposit, other bearer deposits,
repurchase agreements and any other liability or financial instrument as
may be specified by MDIC are not protected by MDIC. Presently, the deposit
insurance limit is RM 250,000 per depositor per member bank.
Under the MDICA, BNM may notify MDIC in writing where BNM is of
the opinion that a member institution has ceased to be viable or is likely to
cease to be viable, whereupon MDIC has the powers to, inter alia: (i) require
the member institution to take any step or action or refrain from any act
or thing, in relation to itself, its businesses or its officers, to cease soliciting,
taking or repaying deposits or carry on its business or such part of its business
as MDIC may direct or to restructure the whole or part of its business as may
be specified by MDIC; (ii) acquire or subscribe to the shares of the member
institution; (iii) assume control over the member institution, carry on the
whole or part of its businesses and manage the whole or part of its assets,
liabilities and affairs including disposal of its assets or businesses or any part
thereof, or appoint any person to do so on behalf of MDIC; (iv) apply to
the relevant HC to appoint a receiver, manager or receiver and manager to
manage the whole or part of the assets, liabilities, businesses and affairs of
the member institution; (v) subject to the approval of the Minister, present a
petition to the relevant HC for the winding up of the member institution; (vi)
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with the approval of the Minister, designate one of its subsidiaries as a bridge
institution; or (vii) transfer such assets and liabilities of the non-viable
member institution to the bridge institution on terms as MDIC determines.
Where MDIC has assumed control or appointed a person to do so on
its behalf, MDIC or the appointed person may carry out any resolution
comprising a transaction or series of transactions that involves the sale or
restructuring of all or a part of the assets of the bank.
Where a subsidiary of MDIC has been designated as a bridge institution,
the designation will expire two years after it is made unless extended or earlier
terminated in accordance with the provisions of the MDICA. The bridge
institution is authorised to carry on business as a bank of the non-viable bank
during the designated period.
Further, the MDICA contains additional provisions, and powers of
MDIC, for the winding up of banks. In fact, the MDICA purports to make
it mandatory for the relevant HC to make a winding up order in respect of
a member institution upon presentation of a winding up petition by MDIC
(although the constitutionality of this provision has not yet been tested).
Any liquidator appointed must carry out his functions under the direction
and supervision of MDIC. The deposit liabilities are to be paid in priority to
all other unsecured liabilities. The costs and expenses of the liquidator, the
preferential debts to employees as set out in the CA and debts due to the
Government under section 10 of the Government Proceedings Act 1956 must,
however, be paid in priority to the deposit liabilities.

10. REGULATORY DEVELOPMENTS AND TOPICAL TRENDS

The Blueprint and the focus areas of the Blueprint will continue to underpin
regulatory reforms in Malaysia. There are comprehensive recommendations
made for each focus area. It is not possible to set out all the recommendations
in this chapter. Amongst the recommendations that are still being
implemented under the Blueprint are the following:
Strengthening the institutional structure of financial institutions to
provide adequate safeguards for depositors against contagion risks and
excessive leverage by ensuring that retail deposits are not excessively
leveraged by banking institutions in high-risk and complex activities.
Promoting the long-term sustainability and enhanced capacity of DFIs in
support of their mandates, which will include enhancing the risk-sharing
and accountability arrangements between DFIs and the Government, and
strengthening the corporate governance and risk management of DFIs so
as to secure their self-sufficiency in funding and capital.
Implementation of the Basel III reform package to strengthen the capital
and liquidity buffers held by banking institutions.
Strengthening the regulatory and supervisory framework of the Labuan
IBFC in line with international standards and best practices.
Developing a framework for monitoring and managing risks arising from
non-regulated entities and activities.
Enhancing the framework for financial crime prevention and
investigation.
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