CENTRAL BANK

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Central bank system, objective and role
Financial system control and monetary policy
Functions and roles of the Central Bank of
Malaysia
Financial policy execution in Malaysia
BAFIA 1989
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Students will be able to:
Discuss the objective and role of Central Bank in
general
Discuss the objective and role of the Central Bank
of Malaysia
Explain how the Central Bank conduct monetary
policy and the necessary tools to control the
financial system in Malaysia
Explain about BAFIA 1989
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The most important players in the financial
market
The government authority in charge of
monetary policy
Central banks actions affect interest rate, the
amount of credit and the money supply which
have direct impacts on aggregate output and
inflation

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The Central Bank of Malaysia was established
on 26 January 1959.
The Central Bank of Malaya Ordinance 1958
(CBO)
The CBO was revised in 1994 and is now the
Central Bank of Malaysia Act 1958 (CBA).
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Objectives:
To promote monetary stability and a sound
financial structure
To act as a banker and financial adviser to the
Government
To issue currency and keep reserves safeguarding
the value of currency
To influence the credit situation to the advantage of
the country
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Three pillars of central banking
To promote Monetary stability
To promote Financial stability
To facilitate Payments system
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Refers to the stability of the value of the
Malaysian currency
Ensure price stability
Inflation remains low and stable
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Why is it important to have monetary stability?
Monetary instability would result in distortions and
undermine of the long-term economic growth
prospects of the country
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Inflation is too high
Reduction in purchasing power
Would result in a greater demand for real assets
and less interest to invest in productive capacity of
the economy
Exports more expensive to foreigners
As a result, high inflation would reduce the growth
potential of the economy

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Inflation is negative
Prices are falling, profits for businesses are
shrinking
They would cut costs and reduce expenditure
Falling prices contracting demand contraction in
the level of overall economic activity

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Price stability
The future value of savings and the future returns
on investments are preserved
Increase in productive capacity which leads to the
creation of new jobs
Allows the economy to expand close to its potential

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How does Bank Negara conduct monetary policy?
The purpose is to influence the level of interest rates

Monetary instruments that influence the money
supply which then will influence the interest
rates:
The purchase and sale of Bank Negara Malaysia and
Malaysian Government Papers
Statutory reserve requirement (SRR)
Direct lending and borrowing in the interbank market
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Refers to an environment where institutions
in a financial system are strong and can
continue to meet their contractual obligations
without interruption or without any external
assistance

Market participant can also confidently enter
into transactions at prices that do not change
substantially over short periods
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Why is financial stability important?

It creates a conducive environment for businesses
to undertake their activities and for savers and
investors to enter into short term or long term
contracts

Has a central role in promoting economic growth
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How is it achieved?
Through the formulation of strong legal,
regulatory and supervisory framework, and
also through the development and
strengthening of new institutions and system
infrastructure
Develop a sound banking system
Regulate and develop the insurance sector

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It provides a means of transferring funds
between parties and for commercial
transactions to be conducted effectively and
efficiently
BNM is entrusted with the role of ensuring
that the payments system of the country is
stable and operates smoothly
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Why is the smooth functioning of the
payments system is important?
Any failure of a financial institutions to settle
its obligations in a timely manner would
result in spillover effects, resulting in other
financial institutions not being able to settle
their financial obligations
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The role of BNM in ensuring the safety and
efficiency of the payments system:
Oversees the payments system involves
formulating policies and guideline
Operates the payments system Real time gross
settlement system (RENTAS) and the cheque
clearing system (eSPICK)
Facilitates further development of the payments
system
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Economic and financial adviser to the
Government and participates in
international meetings

Role of economic adviser
Analyze and assess the developments in the
international and domestic economy and
highlights the areas that need to be addressed
Presents policy recommendations to the Minister
of Finance as well as at various economic policy
making forums

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Role of financial adviser
Does not provide financing to the Government
Gives regular advice to the Government on the
management of its domestic and external
debts and the terms and timing of Government
loan programmes
Act as the agent for the Government in
negotiations and concluding of loan
agreements
Responsible for trading, registering,
settlement and redemption of Government
securities through its computerized systems
(RENTAS, FAST, BIDS)
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International Relations
Participates in a number of international
meetings, eg. ASEAN
To strengthen co-operation with the
international and financial community in key
areas such as surveillance, macroeconomic
management and measures to enhance financial
stability
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1. Banking and Financial Institutions Act 1989
(BAFIA) was introduced on 1 October 1989
Replaced the Banking Act 1973 and the Finance
Companies Act 1969
Is a comprehensive act and extends comprehensive
powers to BNM to supervise a larger spectrum of
financial institutions, with the direct responsibilities
to regulate and supervise all licensed institutions and
also regulate scheduled and non-scheduled
institutions
Licensed institutions commercial banks, merchant
banks, finance companies, discount houses, money
brokers and foreign exchange broker
Scheduled institutions issuers of charge/credit cards
and travellers cheques, operations of cash dispensing
machines, development finance institutions, building
societies and housing credit institutions, factoring
companies and leasing companies, and representative
offices of foreign banks or foreign institutions which
carry out the business or activities similar to the
scheduled institutions
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Non-scheduled institutions all other statutory bodies
and institutions involved in the provision of finance
and credit

The Act also enable BNM to regulate the following:
Control of establishment or acquisition of subsidiaries
or opening of offices in Malaysia by a local or foreign
licensed institutions
Maintenance of reserve fund, capital, net working
funds, liquid assets by the financial institutions
Appointment of auditors, submission of financial
statement, exhibition of financial statements,
submission of statistics to BNM
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2. Insurance Act 1996
BNM retains a substantial degree of regulatory
control over the management, control of licensees
and the critical aspects of insurance operations.
Areas that need the approval from BNM are:
The appointment of directors and chief executive
officers
The acquisition or disposal of substantial interests in
shares of a licensee
The establishment of offices and subsidiaries
Appointment of auditors and actuaries
Outsourcing of core insurance activities

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3. Anti-Money Laundering Act 2001
AMLA provides comprehensive new laws for the
prevention, detection and prosecution of money
laundering, the forfeiture of property derived
from, or involvement in money laundering and the
requirements for record keeping and reporting of
suspicious transactions for reporting institutions
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