The Malaysian Banking

System and Bank Negara

Malaysia.
TOPIC 2
Learning outcome

Upon completing this chapter students should be able to;

Describe the Banking system of Malaysia
Explain the establishment of BNM
Discuss the Roles of BNM
Maintain Financial Stability
Payment System
As Government Banker
Discuss the achievement of BNM
 Financial System

Financial Institutions Financial Market

Banking System Non-Bank Financial Money &

Intermediaries Foreign
1. Bank Negara 1. Provident and Pension Exchange Capital Market
Malaysia Funds Market 1. Equity Market
2. Banking Institutions 2. Insurance Companies 2. Bond Market
(including Takaful) 1. Money
Commercial Banks Market Derivatives Market
3. Development Finance Public Debt
Finance Institutions 2. Foreign 1. Commodity Futures
Securities
Companies 4. Savings Institutions Exchange
Market Private Debt 2. KLSE CI Futures
Merchant Banks National Savings Bank Securities
Co-operative Societies
3. KLIBOR Futures
Islamic Banks
5. Others
3. Others Unit Trusts Offshore Market
Pilgrims Fund Board 1. Labuan
Discount Houses Housing Credit International Offshore
Institutions
Representative Financial Center
Cagamas Berhad
Offices of Foreign (IOFC)
Credit Guarantee
Bank s Corporation
Leasing Companies
Factoring Companies
Venture Capital
Companies
Banking System

The banking system consists of;

Bank Negara Malaysia (Central Bank of Malaysia),
Banking institutions (commercial banks, finance
companies, merchant banks and Islamic banks) and
a miscellaneous group (discount houses and
representative offices of foreign banks).
The banking system is the largest component of the
financial system, accounting for about 67% of the
total assets of the financial system.
 When

Formation Why
How
Issue Currency
Govt. Banker
Role
Monetary & Fin. Stability
Credit situation
BNM

Provided support Eco & Fin

Dev the Fin System
Ensured liquidity
Pres. Fin Stability
Achievement
Fin Inclusion agenda
Dev Fin Market
Reg Integ &Coop
Expanding Opportunities
 Banking System: Statement of Assets

Malaysian Securities
Amount Due from Designated Financial Institutions
Assets (RM
Million) 2nd
Quarter 2016

Residents

Balances in
Other Statutory
Cash and Current Negotiable
Deposits Deposits Property,
Cash Account Non- Instrument Governmen Other Loans and Other
Placed and with Bank Bank Commercia Investment Other Treasury Bills Plant and Total Assets
Equivalen with Bank Islamic Residents Deposits t Securities Securities Advances Assets
Reverse Negara Negara l Banks Banks Banking Equipment
ts Negara Banks Held
Repos Malaysia Malaysia Institutions
Malaysia

Commercial 26,729.1 632.0 26,788.3 29,780.6 79,215.2 23,366.1 15,659.2 6,138.2 720.0 92,601.1 45,835.8 3,145.2 47,605.8 185,963.6 1,033,734.4 5,041.3 183,827.9 1,806,783.9
Banks

Islamic Banks 2,174.2 287.6 2.9 11,373.9 36,956.1 4,462.0 3,077.5 17.5 1,586.6 2,496.7 8,035.4 383.2 122.3 58,553.7 387,859.2 505.2 9,702.1 527,595.9

Investment 775.6 1.3 1,399.3 741.4 2,701.7 1,666.7 174.1 154.1 0.0 328.9 2,259.0 0.0 1,127.3 19,687.0 6,640.8 272.1 13,665.4 51,594.7
Banks

Total 29,678.9 920.9 28,190.4 41,896.0 118,873.0 29,494.8 18,910.8 6,309.8 2,306.6 95,426.7 56,130.2 3,528.4 48,855.4 264,204.3 1,428,234.4 5,818.6 207,195.4 2,385,974.5
 BANK NEGARA
MALAYSIA

INVESTMENT
COMMERCIAL BANKS FOREIGN BANKS OFFSHORE
BANKS (MERCHANT REPRESENTATIVES BANKS
BANKS)

CREDIT GUARANTEE
CORPORATION (CGC)
Bank Negara Malaysia (BNM)

FORMATION OF BANK NEGARA MALAYSIA

The Central Bank of Malaya Ordinance 1958 (CBO) was
enacted on 23 October 1958, while the Central Bank of
Malaysia was established on 24 January 1959.
At the same time, the Banking Ordinance, 1958, which
provided for the licensing and regulation of the business
of banking in the Federation of Malaya also came into
force.
The CBO was revised in 1994 and is now the Central
Bank of Malaysia Act 1958 (CBA).
Bank Negara Malaysia (BNM): Objectives of BNM

The objectives of BNM are as follows:

To issue currency and keep reserves to safeguard the value of the
currency;
To act as a banker and financial adviser to the Government;
To promote monetary stability and a sound financial structure; and
To influence the credit situation to the advantage of Malaysia.
Bank Negara Malaysia (BNM): Monetary Stability

MONETARY STABILITY
Bank Negara Malaysia is responsible to maintain monetary stability.
Monetary stability refers to the stability of the value of the Malaysian
currency, the ringgit.
The best way to ensure that the value of the ringgit is preserved is by
ensuring price stability, that is, to ensure that inflation in the country
remains low and stable.
By maintaining monetary stability through appropriate changes in
monetary policy, Bank Negara Malaysia ensures that inflation is kept low
and that the purchasing power of the ringgit is not diminished.
 Bank Negara Malaysia (BNM): Monetary Stability

Why is monetary stability so important?

It is important because when there is monetary instability, prices are
either rising (inflation) or falling (deflation) and this can result in distortions
and undermine the long-term economic growth prospects of the
country.
If inflation is too high, people will be concerned about the purchasing
power of their money balances. This would result in a greater demand
for real assets like houses and properties, which are thought to be more
"inflation-proof". There would be less interest to invest in productive
capacity of the economy.
 Bank Negara Malaysia (BNM): Monetary Stability

When the rate of inflation is negative, prices are falling and businesses find
their profits shrinking. They may reduce their costs by cutting expenditure and
laying off staff. Workers in turn would have less money to spend and thus
reduce spending, resulting in a further reduction in the demand for goods
and services, resulting in a contraction in the level of overall economic
activity.
When there is price stability, the future value of savings and the future returns
on investments are preserved. This gives savers the incentive to save while
investors have greater confidence to undertake productive activities. It
creates a conducive environment that allows the economy to expand in a
sustainable manner.
Bank Negara Malaysia (BNM): Monetary Stability

Bank Negara Malaysia conducts its monetary policy by influencing the level
of interest rates.
When the economy is overheating and the threat of inflation is high,
monetary policy will be tightened by withdrawing funds from the banking
system and raising interest rates.
The higher interest rates will encourage people to save more and spend
less. This will cause consumption and investment to slow down to a level
that is more sustainable and reduce the prospect for high inflation.
When economic conditions are weak, funds will be injected into the
banking system to reduce interest rates.
With lower interest rates, spending and borrowing would increase. The
resulting increase in consumption and investment would stimulate further
economic activity, leading to higher income, employment and economic
growth.
Bank Negara Malaysia (BNM): Monetary Stability
Bank Negara Malaysia (BNM): Monetary Stability
Bank Negara Malaysia (BNM): Forex

Bank Negara Malaysia also manages the foreign

exchange reserves of the country to ensure that Malaysia
is able to meet its international obligations, thereby
cushioning any temporary shifts in inflows and outflows in
Malaysia's balance of payments and thus promote a
stable and fundamentally sound ringgit exchange rate.
Learning outcome

Describe how BNM maintain Financial stability

Explain the Payment system
Explain the BNMs Role as government Banker
Discuss the BNMs Achievements
Bank Negara Malaysia (BNM): Financial Stability

FINANCIAL STABILITY
Financial stability refers to an environment where institutions in a financial
system are strong.
Characteristics: Market participants can confidently enter into transactions at
prices that do not change substantially over short periods when there has not
been any changes in market fundamentals.
Advantage: Financial stability creates a conducive environment for
businesses to undertake their activities and for savers and investors to enter
into short-term or long term contracts.
How to achieve: Financial stability has been achieved through the
formulation of strong legal, regulatory and supervisory framework, the
development and strengthening of new institutions and system infrastructure.
Bank Negara Malaysia (BNM): Institutions and Infrastructures

Developing the Institutions and market infrastructure

Regulatory rules have been continuously enhanced with the adoption of
international standards to instil appropriate risk management system to
enable financial institutions to undertake their intermediation function
effectively.
Banking and Financial Institutions Act in 1989 and the Insurance Act in 1996
has enhanced Bank Negara Malaysia's regulatory authority over the
financial system.
Islamic Banking Act in 1983 has given Bank Negara Malaysia additional
mandate to supervise new types of institutions,
Bank Negara Malaysia also extends the lender of last resort to assist
banking institutions in dealing with short-term liquidity problems
Bank Negara Malaysia (BNM): Institutions and Infrastructures

In 1988 the insurance industry was brought under the

supervision of Bank Negara Malaysia.
With the enactment of the Development Financial
Institutions Act in 2001, this regulatory oversight was
further extended to six development financial
institutions.
The Anti-Money Laundering Act (AMLA) came into force
in January 2002 and Bank Negara Malaysia was
appointed as the authority to implement the national
anti-money laundering programme.
Bank Negara Malaysia (BNM): Institutions and Infrastructures

What is 'Money Laundering'

Money laundering is the process of creating the appearance that
large amounts of money obtained from serious crimes, such as
drug trafficking or terrorist activity, originated from a legitimate
source.
There are three steps involved; placement, layering, and
integration.
Placement refers to the act of introducing "dirty money" into the
financial system;
"layering" is the act of concealing the source of that money; and
integration refers to the act of acquiring that money in purportedly
legitimate means.
Bank Negara Malaysia (BNM): Institutions and Infrastructures

DEVELOPMENTAL ROLE
Bank Negara Malaysia has an important developmental
role.;
developing the necessary institutions and market infrastructure for
the development of a modern and strong financial system.
In strengthening the financial market infrastructure, Bank
Negara Malaysia has built a strong payment systems.
To promote a good credit culture among banking
institutions, Bank Negara Malaysia also operates the
Central Credit Reference Information System.
Central Credit Reference Information System (CCRIS)

The database system contains credit information of about 9 million borrowers

in Malaysia.
CCRIS automatically processes the credit-related data received from the
participating financial institutions and synthesises the information into credit
reports, which is made available to the financial institutions and the borrowers,
upon request.
Credit reporting agencies (CRA) can access the credit information of individual
borrowers in CCRIS, To date, three CRAs have obtained such approval i.e.
Credit Bureau Malaysia Sdn Bhd, RAM Credit Information Sdn Bhd and CTOS
Data Systems Sdn Bhd.
Participating financial institutions may request for credit reports directly from
the CCRIS to facilitate their lending decisions.
Bank Negara Malaysia (BNM): Institutions and Infrastructures

1. On the institutional front, set up Specialized institutions to fill gaps in

the financial system;
1. Credit Guarantee Corporation Malaysia Berhad (CGC)
2. National Savings Bank
3. Bank Industri dan Teknologi Malaysia Berhad (to provide financing for
capital goods exports and development of the shipping industry).
2. In developing the capital market, Bank Negara Malaysia;
1. nurtured the group of brokers into the National Malayan Stock Exchange and
later the Kuala Lumpur Stock Exchange.
2. Deepening the capital market through the setting up of the National Mortgage
Corporation (Cagamas),
3. Securities Commission to regulate capital market activities.
Bank Negara Malaysia (BNM): Institutions and Infrastructures

Played an instrumental role in setting up the Labuan Offshore

Financial Services Authority (LOFSA) to supervise the offshore financial
sector.
Played an active role in designing the mechanism to deal with the
impact of the Asian financial crisis in 1997-98 involving the setting up
of;
Pengurusan Danaharta Nasional Berhad to purchase bad loans
from financial institutions,
Danamodal Nasional Berhad to recapitalise banking institutions,
and
Corporate Debt Restructuring Committee to restructure large
corporate debts.
Offshore Financial Centers

CHARACTERISTICS of Offshore Financial Centers

Primarily orientation of business toward nonresidents
Favorable regulatory environment
Low-or zero-taxation scheme
Dealings in currencies that are not the currency of the
country where the center is located
essentially entrept business
Centers separated from major regulating units (states)
 Bank Negara Malaysia (BNM): Payment System

Thepayments system - means of transferring funds

between parties and for commercial transactions.
BNM ensures the safety and efficiency of the payments
system.
Oversees the payments system.
Operates the payments system.
operates the real time gross settlement system (RENTAS) and
cheque clearing system (SPICK)
 Bank Negara Malaysia (BNM): Government Banker

as the Governments banker,

Keeping the banking accounts of the Government, It provides cheque facilities, accepts
funds and makes payments on behalf of the Government, and undertakes the foreign
exchange business of the Government.
The limitation are:

a) The advances should not exceed 12.5% of the budget revenue of the Government
b) The advance be repaid as soon as possible and not later than 3 months after the
end of the Government financial year in which it is granted
c) Additional funds cannot be made available to the Government unless the previous
advances have been repaid
d) The Central Bank has the discretion to determine the rate of interest to be charged
for its advances.
Bank Negara Malaysia (BNM): Achievements

1. Has provided support to the economic restructuring

and financial sector reforms undertaken during this recent
decade. These initiatives have well positioned Malaysia to
manage the external challenges experienced during the
year. The economic restructuring has been supported by
a more well-developed, resilient and inclusive financial
system that has been able to effectively meet the
changing requirements of the economy.
Bank Negara Malaysia (BNM): Achievements

2. Has developed the financial system that is supported

by a resilient banking system and a more developed
financial markets. These efforts have contributed towards
the creation of a more competitive economic
environment that is also driven by the diversification into
higher value-added activities.
Bank Negara Malaysia (BNM): Achievements

3. Has ensured ample domestic liquidity conditions in facilitating the

financing of domestic economic activity. These have reduced excessive
reliance on external funding.
4. Successfully preserved financial stability, avoiding any disruptions to the
intermediation process.
5. The financial inclusion agenda has also advanced during the year,
providing all segments of society, particularly small businesses and low
income households, access to financial services and thus, enhancing
their participation in the economy.
Bank Negara Malaysia (BNM): Achievements

6. Created the more developed financial markets which have better

intermediated the large and volatile capital flows. In particular, orderly
conditions in the foreign exchange market are important to facilitate
international trade and foreign investment flows.
7. Significant achievements were made in the area of regional financial
integration and cooperation. Most notably were the efforts to enhance
the effectiveness of financial intermediation in the region with the
finalization of the ASEAN Banking Integration Framework (ABIF).
8. Progress made in expanding opportunities for higher value activities
within the financial system, notably in developing the enabling
environment in the Islamic Finance Marketplace and in the strengthening
of the eco-system for multi-currency trading.
Thank you