1.

0 INTRODUCTION
The evolution of the Malaysian financial sector began after Malaysia's independence. At
first, the monetary authorities in the Federation of Malaya was the Board of
Commissioners Currency, Malaya and British Borneo. On January 24, 1959, Bank
Negara Malaysia was officially opened. The main objective of the bank was maintained a
strong ringgit, promote financial stability and foster growth of a sound financial structure.
The financial system was dominated by branches of British banks, designed to serve and
promote the welfare of the British.

Tun Ismail Mohamed Ali served as the second governor of the National Bank
from July 1962 to July 1980. He was trying to promote and strengthen local banks to
match all the branches of foreign banks in the country. In the 1960s, the attention of the
financial sector through Bank Negara has focused on building the financial infrastructure.
It shows the development of commercial banks in the country and widespread branch
banking services. Also established within the years, the Kuala Lumpur Stock Exchange
(KLSE), Discount Houses, Pilgrims Management and Fund Board (LUTH), PERNAS
(The country's investment and trading company), Agricultural Bank, Capital Issues
Committee and Malaysian Industrial Development Finance.

In the 1970s, the emphasis was placed on improving the integrity and
professionalism in the management of the bank. Credit Guarantee Corporation was
established to ensure that the borrower has access to bank credit at reasonable costs. Post
office savings bank has been introduced to encourage small savings. The foreign
exchange market was established to serve the international trade in this country and also
help to promote Kuala Lumpur as an international centre for trade in primary
commodities. Merchant banks and development banks were established. The Kuala
Lumpur Commodity Exchange (KLCE) was established and the market for long-term
government securities was encouraged.

In the 1980s, the monetary authorities implemented a stance that foster a greater
financial discipline among financial institutions, while ensuring that sufficient bank credit
provided to the private investor at a reasonable cost. Bank Islam was established in 1983
to promote Islamic banking. First mergers, United Asian Bank (UAB) joined the Bank of

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Commerce. Non-financial institutions have been reformed and strengthened to promote
the growth of small-scale industries. Those involved are Credit Guarantee Corporation
Malaysia Berhad (CGC), Bank Industry and Malaysia Export Credit Insurance Bhd.

In the 1990s, the most important scenario was a complete deregulation of interest
rate. In February 1991, Base Lending Rate (BLR) of banking institutions have been
completely independent from the administrative control of the Central Bank, the BLR
was allowed to be determined by the cost of each banking institution's own funds.
Starting from November 1995, all banks are allowed to state their own BLR at any phase,
subject to the ceiling rate of the industry. It allowed more flexibility for banking
institutions to respond more quickly to changes in market liquidity conditions and also
promote competition and efficiency in the banking industry.

The Securities Commission (SC) was established on March 1, 1993. It became an

observer of the securities, options and financial futures industry and capital market
instruments. SC absorb the functions of the Capital Issues Committee and the Panel on
Takeovers and Mergers. Future Industry Act 1992 came into force on 1 March 1993. This
act provides a regulatory framework of the financial system. International Offshore
Financial Centre (IOFC) was established in October 1990. It increases the financial
sector's contribution to economic growth. January 3, 1994, the Islamic interbank money
market was introduced, making Malaysia the first country with complete Islamic banking
system which fully functioning in parallel basis with the conventional system.

Nowadays, Malaysian financial system is divided into two main categories,

Financial Institutions and Financial Markets. Financial institutions comprising banking
system and non-bank financial intermediaries. The financial institutions acts as a
mechanism to transfer funds from the surplus funds to those in need of funds. In general,
the financial institutions facilitates financial transactions that generate economic growth.
Each component plays an important role for the success and stability of the financial
institutions. In the evolution of Malaysian financial institutions, various financial
intermediaries have been established and a wide range of financial instruments, which
have been introduced to facilitate the flow of funds between savings and investment. This

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financial intermediaries and financial instruments must be controlled to ensure that
economic growth every day.

2.0 THE ROLES AND IMPORTANT OF BANKING SYSTEM IN MALAYSIA

The history of Malaysia banking development dates back to more than 130 years ago
when the first commercial bank, which is the Chartered Mercantile Bank of India,
London and China was established in 1859. Soon after, in 1875 the Chartered Bank
opened its first branch in Penang, then in Kuala Lumpur in 1888 and followed by a
branch in Taiping. The early banking activities were in the finance of trade, working
capital and foreign exchange remittances with London, India and China and
predominantly relating to no-ferrous metals in particular tin. A rose in the international
trades in rubber and tin in the early 1900 saw the banking system continuing to develop
with more branches of foreign banks being opened and local bank being established by
independent traders.
As a result, today there are 27 commercial banks, 17 finance companies, 10
merchant banks, and 7 discount houses operating in the system together with other non-
bank institutions. (Bank Negara Malaysia). Today, the Malaysia financial system
comprises a diversified range of institutions that serve the varied and complex need of the
domestic economy. The banking industry can be divided into the conventional financial
and Islamic financial systems which are have their own role and important in the
economy.

2.1 BANK NEGARA MALAYSIA (CENTRAL BANK)

Bank Negara Malaysia (BNM) is a statutory body, which started operations on 26

January 1959. BNM is governed by the Central Bank of Malaysia Act 2009. The central
bank of Malaysia or Bank Negara is the heart of Malaysian banking. The principal
objective of the bank is to promote monetary and financial stability that is conducive to
the sustainable growth of the Malaysian economy.

The Role of Bank Negara Malaysia in:

i. Economics and Monetary policies.

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 Bank Negara Malaysia’s monetary policies stance is to maintain price
stability while remaining supportive of growth. BNM is mainly provides good
technical and research support on growth related issues to enhance formulation of
monetary and credit policies in promoting monetary stability and ensuring the
availability of enough credit to finance economic growth. BNM is also
responsible for financial system stability. This is too achieved by a developing a
sound, resilient, progressive and diversified financial sector which serves to
support the sector of the real economy.

ii. Organizational development.

Leading the Bank’s strategic management, organizational-performance
management and programme management functions to drive its performance
improvement processes and strengthening the capacity building of the Bank. It
also leads and drives human resources initiatives and other strategic activities to
ensure that the overall Human Capital Management framework implemented
effectively.

iii. Investment and Operations.

Bank Negara Malaysia manage domestic liquidity and exchange rates to
ensures that monetary policies target are achieved as well as managing external
reserves to safeguard its value and optimize its return. Besides that, it is also has
the responsibility of providing advice and assistance to the Government in the
area of debt and fund management and contribute to domestic financial market
development.

iv. Regulation.
BNM also promote financial sector stability through the progressive
development of sustainable, robust and sound financial institutions and financial
infrastructure, therefore enabling a competitive local financial industry to be
resilient against the changing future environment as well as leads initiatives to
enhance access to financing. It also formulates and implements policies and

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 strategies towards building and positioning Malaysia as a premier integrated
Islamic Financial Centre and enhance the financial capability of consumers.

v. Greater engagement with the public.

As part of the Bank’s emphasis on efficient work culture, effective and
efficient delivery of services to stakeholder, including the public, has always been
a top priority for the bank. In order to promote the public better understanding of
their right, responsibilities, the opportunity and the associated risks and costs
because of participation in the financial system, the bank’s effort has been
directed towards the following areas:

i. Educate the public.

Since the financial system becomes more developed, the BNM has
taken measures to raise the level of financial literacy among consumers.
Given today’s sophisticated financial markets, products and services, the
BNM has initiated its Consumer Education Programme nationwide to
achieve out to the masses. This comprises, namely banking info and
insurance info initiatives, inclusion of targeted school children in the
Bank’s outreach programme to enhance their financial education
roadshow to reach out to members of the public, including those in the
rural areas.

ii. Financial advice and counseling.

The BNM has also established the Agensi Kaunseling dan
Pengurusan Kredit (AKPK), with branches located across Malaysia to help
consumers manage their debts and become more self reliant in their
financial affairs and thereby preserve the resiliency of the household
sector in the economic growth process. Besides that, the Bank was also
instrumental in the setting up of the Financial Mediation Bureau (FMB),
an independent body providing consumers with objective and timely
solutions to disputes, claims and complaint arising from services provided
by financial institutions.
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2.2 BANKING INSTITUTION
The banking institution plays a very important role in the economic development of the
country. They provide an array of loan and credit facilities to all sectors of the economy.
In particular, commercial banks, merchant bank, finance companies, Islamic bank and
including others financial institutions such as discount houses and representative offices
of foreign have been active in the promotion saving. In Malaysia, BNM regulates and
control banking institutions. This will ensure that the economic development of the
country can be sustained.

2.2.1 COMMERCIAL BANKS

The commercial banks have played an important role in the banking system. They are the
largest and most significant providers of fund in the banking system. The role and the
important of commercial banks in Malaysia are:

i. Creating money
One of the key roles of commercial banks is their capability to create and
eliminate money through lending and investment activities with the cooperation
of the central bank. Commercial banks create money in the form of deposits.
Every bank creates deposits and a portion of the new deposits can be refinanced
to create more deposits. This process continues until the new deposits are a few
times more than the original amount. Commercial banks capability to create
credit is very important to a countries economy because such capability helps
build an elastic credit system for economic progress. Furthermore, without banks
credit, business are unable to grow and operate smoothly.

ii. Providing payment mechanism

One of the important roles of commercial banks is the provision of a
mechanism to pay or move funds. This function has become increasingly
important as the usage of cheques and credit card increases from time to time.
All the cheques in Malaysia are cleared through banking system using computer
technology that speeds up cheque clearance process, reduces clearing cost and
improves clearing accuracy.

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 iii. Collecting Savings
Commercial banks provide services, which are very important to all
economic sectors by making available the facility to collect savings that can be
used for economic and social purposes. The collected funds are then lent to
traders and consumers. That mean, commercial banks are important financial
intermediaries for our country’s economy.

iv. Providing Credit

Commercial banks also provide credit to qualified customers. Bank credit
helps elevate output level, further expand investment capital and improve the
living standard of the society. In other hand, bank credit is important to finance
agricultural, trade and industrial activities. Without sufficient bank credit,
economic activities will be stunted.

v. Financing International Trades

Normally international trades and domestic trades are similar. However, a
few differences made it necessary for banks to offer international banking
services. Such differences exist as financial system and economies differ across
the various countries. In addition, difficulty in securing payment guarantee
makes the special services provided by commercial bank crucial. Commercial
banks provide financing for import and export activities through various trades
finance facilities.

Table 1 shows the list of commercial banks in Malaysia. There are 23 commercial banks,
which are 10 locally owned and 13 are foreign owned.

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 Table 1: Commercial Banks in Malaysia

Source: Bank Negara Malaysia, 2015

2.2.2 FINANCE COMPANIES

Finance companies are the second largest financial institution in Malaysia in term of
deposits and total assets. Traditionally, finance companies specialize in consumption
credit, comprising mainly of hire purchase financing, leasing, housing loans, block
discounting and secured personal loans. The finance companies are allowed to accept
savings and fixed deposits from the public, but are prohibited from providing current
account facilities.

They are also not allowed to engage in foreign exchange transactions as do the
commercial banks. Most recent decade, the finance companies began to expand their
traditional role in retail financing to include wholesale banking as well. The example of
finance companies in Malaysia is EON Finance Bhd, Hong Leong Finance Bhd and
Arab-Malaysian Finance Bhd.

Finance companies roles also are defined below:

i. Accept deposits on deposit account, saving account or similar account

with it
ii. Loans
iii. Lease business or trade business

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 iv. Other business that arrange by Bank Negara Malaysia with the permission
from finance minister.

Table 4 shows the list of finance companies in Malaysia

Table 4: Finance Companies in Malaysia

Sources: Bank Negara Malaysia, 2015

2.2.3 ISLAMIC BANKING

Islamic banking refers to a system of banking that complies with Islamic law also known
as Shariah law. The underlying principles that govern Islamic banking are mutual risk
and profit sharing between parties, the assurance of fairness for all and that transactions
are based on an underlying business activities or asset. These principles are supported by
Islamic banking cores value whereby activities that cultivate entrepreneurship, trade and
commerce and bring societal development or benefit is encouraged. Activities that
involved interest also known as riba, maisir (gambling) and gharar (speculative trading)
are prohibited.

Using various Islamic finance concepts such as ijarah (leasing), mudharabah

(profit sharing), musyarakah (partnership), and financial institutions has a great deal of
flexibility, creativity and choice in the creation of Islamic finance products. Besides that,
by emphasizing the need for transaction to be a higher standard for investment and
promotes greater accountability and risk mitigation.

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 Malaysia Islamic finance industry has been in existence for over 30 years. The
enactment of the Islamic Banking Act 1983 enabled the country’s first Islamic Bank to be
established and thereafter, with the liberalization of the Islamic financial system, more
Islamic financial institution has been established. Malaysia long record of
accomplishment of building a successful domestic Islamic finance industry of over 30
years gives the country a solid foundation.

Malaysia Islamic finance continues to grow rapidly, supported by a conducive

environment that is renowned for continuous product innovation, a diversity of financial
institutions from across the world, a broad range of innovative Islamic investment
instruments, a comprehensive financial infrastructure and adopting global regulatory and
legal best practices. Malaysia has also placed a strong emphasis on human capital
development alongside the development of the Islamic financial industry to ensure the
availability of Islamic finance talent. All of these value propositions have transformed
Malaysia into one of the most developed Islamic banking markets in the world.

Presently, Malaysia has significant number of full-fledged Islamic banks

including several foreign owned entities, conventional institutions who have established
Islamic subsidiaries and entities who are conducting foreign currency business. All
financial institutions are given permission to conduct both ringgit and non-ringgit
businesses. Malaysia continues to progress and to build on the industry by inviting
foreign financial institutions to establish international Islamic banking business in
Malaysia to conduct foreign currency business.

Malaysia continues effort in strengthening the Islamic Financial system

domestically and internationally has gained acceptance and recognition by the
international financial fraternity. An important initiative that has been introduced is to
enhance the position of Malaysia as a leading international Islamic financial hub. The
introduction of Malaysia International Financial Centre (MIFC) as one of the key
intermediation linkages in the global market place and has an important in accelerating
the process bridging and strengthening the relationship between international Islamic
financial markets and thereby expand the investment and trade relations between the

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Middle East, West Asia and North Africa with East Asia. All of these, will increase the
economy in Malaysia.

Table 3 shows the list of Islamic Bank in Malaysia

Table 3: Islamic Bank in Malaysia

Source: Bank Negara Malaysia, 2015

2.2.4 MERCHANT BANK

Merchant banks begin to emerge in Malaysia banking system in 1970’s. Merchant banks
involved in the short-term money market and capital raising activities including
underwriting, loans syndication, corporate finance and management advisory services,
arranging for the issue and listing of shares, as well as investment portfolio management
(Fadzlan Sufian, 2007).

Merchant banks were established specially to meet the needs of corporate sector.
Hence, most of its operations depend on the consultant service and management offered
to the corporate bodies, in addition with giving loans and receives deposits in whole.

Table 2 shows the list of merchant banks in Malaysia.

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 Table 2: Merchant Bank in Malaysia

Source: Bank Negara Malaysia, 2015

2.2.5 DISCOUNT HOUSE

Discount houses are financial intermediaries dealing specifically in short term funds for
short-term investor and short-term borrower. Discount houses act as financial
intermediaries that move funds from other financial intermediaries, statutory bodies and
large corporations having large quantity of liquid funds in the form short term deposits
such as overnight money, call money and deposits of 3-month maturity or less.

Besides that, Bank Negara Malaysia regulations require every discount houses
need to invest at least 75% of their deposits fund in Treasury Bills, Cagamas Bonds and
other Government securities of less than 5-year maturity. The balance can be invested in
Bankers Acceptances (BA), Negotiable Certificates of Deposits (NCD), Floating Rate
Negotiable Certificates of Deposit (FRNCD), and Commercial Bills. Other financial
institutions such as commercial banks, finance companies and merchant banks always use
the service of discount houses to harmonies their respective liquidity positions.

Table 5 shows the list of Discount Houses in Malaysia.

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 Table 5: Discount Houses in Malaysia

Sources: Bank Negara Malaysia, 2015

3.0 NON-BANK FINANCIAL INTERMEDIARIES

As the financial banking institutions, non-bank financial intermediaries also play an
almost equal role as the parties who have surplus funds with the parties that lack of funds.
The difference is, the banking system is directly under the regulations of Bank Negara
Malaysia, while the non-banking financial intermediary system is under the direct control
of various government departments and agencies, and are not directly under the BNM
through periodic reports. Financial institutions in the system of non-bank financial
intermediaries are divided into 4 groups: Provident & Pension Funds, Insurance
Companies, Development Financial Institutions and Savings Institutions.

Generally, financial institutions in the non-bank financial intermediary system are

controlled by various government departments and agencies. For example, the Bank
Simpanan Nasional (savings institution) is under the control of the Ministry of Finance,
the Malaysian Industrial Development Finance Berhad (MIDF) is under the Ministry of
Plantation Industries and Commodities and deposit taking co-operatives is under the
Ministry of Entrepreneurial and Cooperative Development. Banking and Financial
Institutions Act (BAFIA) 1989 provides that financial institutions in the system of non-
bank financial intermediaries will also be regulated by Bank Negara Malaysia indirectly
through periodic reports.

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3.1 ROLE AND IMPORTANCE OF PROVIDENT & PENSION FUNDS
Provident and Pension Fund (PPF) is the group of financial schemes designed to provide
members and their dependents by social security measures in the form of retirement,
medical, death or disability benefits. Funds in Malaysia consists of the Employees
Provident Fund (EPF), the Social Security Organization (SOCSO), Armed Forces Fund
and the Teachers Provident Fund. The PPF funds serve as an important stimulators of
long-term savings in the economy for rechanneling into both public and private sectors to
finance long-term investments. This fund is the second largest group of financial
institutions in the country in terms of aggregate assets, after the banking institutions.

Below are some of the role and importance of Provident and Pension Fund (PPF):

1. Clearing and settling payments.

Pension funds have an important indirect role in increasing the efficiency
of the financial system, by affecting the structure of the securities market. By
demanding liquidity, pension funds helped to generate it, firstly by their own
activities in arbitrage, trade and diversification, secondly by the fact that liquidity
is a form of increasing returns to scale, because the larger markets in which
pension funds actively attract more trade, reduce costs and improve liquidity
further. The third effect arises from the fund adverse power as they push for
improvements in the structure of markets and regulation. These include
deregulation and the reduction in commissions, advanced communication and
information systems, reliable clearing and settlement systems, and efficient
trading systems, all of which will help to ensure that there is efficient arbitrage
between security and choice for variation.

2. Provision of a mechanism for pooling of funds and subdivision of shares.

Pension funds offer a lower cost of diversification by proportional
ownership. Pension funds can also offer the possibility of investing in large
denominations and assets can be divided as property that is not available to small
investors. Furthermore, pension funds reduce transaction costs by negotiating
lower transaction costs and protection fees. The direct participation costs for
households to obtain the information and knowledge needed to invest in various
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 assets, and in the undertaking complex risk trading and risk management are
reduced. The net effect is that individuals may turn to pension funds from direct
holdings of securities and bank deposits.

3. Provision of ways to transfer economic resources.

Pension funds act in a way that is unusual in this regard, as they can
increase the amount of savings in addition to the disposition of household funds.
At the micro level, companies or other pension funds are obliged to implement
enforced savings by delaying wages and salaries, thereby reducing the risk of low
replacement ratio. At the macro level, an increase in savings is not usually a one-
to-one, because the increase in contract savings through pension funds are usually
partly or wholly offset by a decline in discretionary savings. Pension funds
increase the supply of long-term funds to the capital market, and reduce bank
deposits, even abstracting from changes in aggregate savings, while households
do not increase the liquidity of the balance of their portfolios to fully offset the
growth in pension assets.

4. Provision of ways to manage uncertainty and control risk.

The pension fund provides risk control directly to households through a
form of retirement income insurance that they provide, the advantages of which
largely reflects extraordinary link to the employers' pension fund. To assist in
these efforts risk control function that they diversify assets as described above and
also acted in securities and derivatives markets to hedge and control risk.

5. Providing price information

Pension funds have information from the company directly, and press for a
market value-based accounting system. This is beneficial to all users of the
market, even though it disadvantages to the banks, which make loans tend to rely
on personal information not available to other investors.

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6. Providing ways to deal with incentive problems.
Dealing with the issue of financial incentives in equity is one of the most
important aspects in the activities of pension funds' as a financial intermediary.
The fundamental issue of corporate governance is simply stated. Since the divorce
of ownership and control in the modern enterprise, the principal-agent problem
arises, as shareholders cannot perfectly control the managers who act on their
behalf. Managers, who have important information about the firm and its
prospects, and at most a partial link their compensation to the profits of the firm,
can divert funds in various ways from those who immersed in the equity capital of
the firm, especially takeover or diversion to unattractive projects from the
shareholders' point of view.
Principal-agent problem in the equity financing implies the need for
shareholders such as pension funds to exert control over management, while also
remaining sufficiently distinct to let them buy and sell shares freely without
breaking the rules of insider trading. If the issue of corporate governance cannot
be resolved, the next market failure also have implications for corporate finance
in equity that would be expensive and often subject to quantitative restrictions.
The effectiveness of corporate governance generally enhanced by the presence of
large investors, such as pension funds. They will have the influence to force
managers to allocate profits to the providers of external finance, either directly or
through the threat to sell to takeover raiders.
They are needed because individual investors may find it difficult to
enforce their rights, owing to the difficulty to act in an integrated management
and associated free rider problem that makes it not worthwhile for an individual to
gather information and monitor the management. Due to the pension fund's
holdings are usually limited to 5% of the company, they also avoid the
"downside" to the dominant investor, who if they had most of the company can
override the interests of minority shareholders and may also reduce the
profitability measure.

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3.2 ROLE AND IMPORTANCE OF INSURANCES COMPANY
At present, the total number of licenses under the Insurance Act 1996 totaled 141,
comprising 64 insurers, 36 brokers and 41 adjusters. 64 insurance companies licensed
under the Act are categorized into the following groups:

i. 10 life and general insurance companies (include Motor Insurance)

ii. 7 life insurance companies
iii. 36 general insurance companies (include Motor Insurance)
iv. 1 life reinsurance company
v. 9 general reinsurance companies (include Motor Insurance)
vi. 1 composite reinsurance company

The following are the main Insurances Industry in Malaysia:

i. Life Insurance Industry.

The life insurance industry is classified into four categories: Lifetime;
endowments; temporary; and "other" category. The life insurance industry is
usually the most intense, from both financial and structural point of view.
Regulatory controls on them are always tight and only larger companies that are
better managed was allowed to have a license.
In recent years, investment-linked business, which is increasingly popular
in the local insurance market. In 2000, five insurers have been approved to
conduct investment-linked business under Section 7 of the Act. An increasing
number of players saw the establishment of 22 new investment-linked funds the
year, bringing the total of 42 funds offered to the public in late 2000.
Investment-linked products provide an alternative investment channel to
policyholders while maintaining the core elements of protection. This is a fund set
up to meet the investment objectives of policyholders, have attracted an
overwhelming response from the public, given the changes in consumer
preferences rather than policy-based protection to a variety of investment
products.

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ii. General Insurance Industry.
General insurance cover for motor, marine, aviation and transit insurance
(MAT), fire insurance and other insurance. Motor insurance can be divided into
"Act" and "non-Act". The former is a minimalist "third party" coverage required
under law for the vehicle to be legally that can be used on public roads. The latter
is a comprehensive motor insurance.

iii. Reinsurance.
A large part of insurance premiums collected is used to flow abroad
through international reinsurance. In order to increase the insurance premium
retention ratio, the Government has encouraged the establishment of local
reinsurance company. The business landscape has since then changed with the
establishment of the Malaysia Life Reinsurance Group Berhad and reinsurance
companies established in other countries.

iv. Insurance Intermediaries.

Apart from the companies engaged in life insurance, general insurance and
reinsurance, there are 37 insurance brokers and 42 insurance adjusters licensed to
operate in the insurance market in Malaysia. In order to improve the standard of
professionalism in the insurance broking sector, minimum standard qualifications
for workers involved in the work of brokers have been introduced as one of the
licensing conditions imposed by BNM.

a. Insurance Broker.
An insurance broker is a professional agency that is licensed by
BNM to act on behalf of purchasers of insurance to manage their
insurance with the insurance companies. Insurance brokers also provide
expert advice on all insurances matters and at the same time can make
suggestions regarding a comprehensive insurance program that fits each
customer's operation.

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 b. Insurance Adjuster.
An Insurance Adjuster’s role is assessing insurance losses for the
insurers as well as claimants, play an important part in ensuring that
claims are settled properly and serviced efficiently. Almost three-quarters
of the 42 adjusters are small players, handling mainly motor claims.

v. Takaful (Islamic Insurance)

Takaful can be defined as a pact to guarantee and help each other. In trade,
Takaful can operate in the concept of Mudharabah (Partnership) and Tabarru
(Donation). Approval of the contract ("Aqad") and sharing are all in line with
Syariah Law, which prohibits the taking of illegal property of others and any
business should be conducted with the consent of all parties concerned.
Under the Takaful Act 1984, two takaful operator registered under Section
8 of the Syarikat Takaful Malaysia Berhad (STMB) and Takaful Nasional Sdn
Bhd (TNSB). In Malaysia, the potential for Takaful business is enormous. This is
due to two main factors, namely, the low market penetration of 28.4% and 55% of
Malaysia's population are Muslims. Islamic insurance industry continued to
record double digit growth since it came into the business in the 80s.
In many Takaful products, particularly Family class, the contributions
made by participants are usually divided into two accounts for the purpose of
protection and savings. They are in the Participant's Account and the Participant
Special Account. The former account is for saving and the latter for protection or
a sum intended to cover the risk. The ratio of the split agreed at the time to apply
for participation in the specific takaful protection. The ratio may favor any party
except that it must be agreed before the end of the contract. As can be seen in
most of the General Takaful schemes the contributions are wholly for the Special
Account meant for the risks.

3.3 ROLE AND IMPORTANCE OF DEVELOPMENT FINANCE INSTITUTIONS

Development Finance Institutions (DFIs), established by the Government to promote the
development of certain identified priority sectors and sub-sectors of the economy such as
agriculture, infrastructure development and international trade. DFIs generally specialize

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in providing medium and long-term financing projects that could lead to higher credit or
market risk. It is expected that in the next decade, the DFIs will continue to prosper and
play a more important role in achieving the Government's policy for strategic
development, social and economic. Here are the major DFIs in Malaysia.

i. Bank Pertanian Malaysia

The main focus is to develop the agricultural sector in the country. It was
formed on 1 September 1969 under an Act of Parliament and is operational in
1970.

ii. Bank Industri & Technologi Malaysia

The main activity is to participate in the development and industrialization
of the country in selected strategic industries. The main areas of Bank Industri &
Teknologi involvement including ship financing, shipbuilding and marine-related
activities, high-tech manufacturing industry and technical consultancy services.

iii. Bank Pembangunan & Infrastructure Malaysia Berhad

The main activity of Bank Pembangunan & Infrastructure Malaysia
Berhad (Development & Infrastructure Bank of Malaysia) is to be the premier
financial institution in providing financial facilities to Bumiputras in the
manufacturing sector, services-related industries in the manufacturing sector and
financing the country’s main infrastructure projects.

iv. EXIM Bank

EXIM Bank was founded in August 1995 and commenced operations in
September 1995. The EXIM Bank was established with the objective of financing
and promoting international trade and facilitates the export of goods and services
from Malaysia via export credit, financing of capital investments and the
provision of information and business services.

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 v. Malaysian Industrial Development Finance (MIDF)
MIDF was set up in 1960 and is a semi-government institution providing
medium and long-term loans to manufacturing industries in Malaysia.

3.4 ROLE AND IMPORTANCE OF SAVING INSTITUTIONS

Even though commercial banks and finance companies are the two biggest groups of
deposit collecting institutions in Malaysia, there exists other savings institutions which
promote and mobilize savings of the middle and lower income groups, especially those
from the rural areas. These savings institutions depend mostly on the network of branches
and other offices as well as large potential customer base to collect huge amount of
savings. Savings institutions in Malaysia are:

i. Bank Simpanan Nasional

Bank Simpanan Nasional (BSN), established through reorganization of the
post office system, is the main savings institution in Malaysia. BSN was set up
mainly to promote the savings habit. The establishment of BSN was a strategy to
build up personal savings to finance the country’s economic development
programs. It functioned as a civil debt holder.
However, this function has weakened over time due to declining rate of
deposits growth at BSN, and competition from commercial banks and finance
companies. Savings deposited at BSN are guaranteed by the government. BSN
uses post office network, mobile vans and branches to provide services to
customers at places lacking in the services of commercial banks and finance
companies.

ii. Co-operative Societies

In Malaysia, a co-operative society is defined under Co-operative
Societies Ordinance 1948 as a society that aims to improve its member’s interests
through co-operative principles. In general, co-operative societies are not actual
financial intermediaries. Many co-operative societies in Malaysia provide
financial intermediary services. For example, they accumulate savings/ funds
through share investments and deposits, and channel the funds in the form of
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 loans to members. Credit cooperatives, like Bank Rakyat, mobilize large quantity
of funds not only from its members, but from the public too, to finance the bank’s
lending operation.

4.0 CONCLUSION
The Malaysia financial intermediaries have played an important role in facilitating the
economic transformation and growth of the Malaysian economy through the various
phases of economic development. It is important to analyze the important and roles of
financial institutions in Malaysia because of the stability of the financial services will
encourage economic growth and fast growing for a country development. As we know,
each financial institution have different structure and characteristic.

The strategic role of the Malaysia financial institutions will increase in

importance in the year ahead as Malaysia become more integrated with the international
financial system and the global economy. At the same time, a more integrated and
globalised environment, grater regionalization and the more sophiscated and diverse
investment and financing needs of the domestic economy will require a financial system
that is more progressive and dynamic to advance the nations vision towards the
attainment of a high value added and high income economy.

The role of financial intermediaries and its important will bring Malaysia
financial sector become more matures and advances to become more effective in
performing its intermediation function in tandem with Malaysia becoming a developed
country. Besides that, it also will give a benefit a high value added, high income economy
and generate Malaysia economy to gains a productivity and innovation that is inclusive,
balanced and sustainable while also having an increasingly important role in meeting the
growing financial need of emerging Asia.

22
REFERENCES

Almas Heshmati & Lee, D, J. (2008). Productivity, efficiency, and economic growth in
the Asia Pacific Region. EU: Springer Science & Business Media.

Bank Negara Malaysia. (2015). Malaysian Financial Sector. Retrieved from

http://www.bnm.gov.my/index.php?ch=fs_ovr&pg=fs_ovr_what&lang=en

Bank Negara Malaysia. (2015). Chapter Six: Development financial institutions.

Retrieved from
http://www.bnm.gov.my/files/publication/fsmp/en/fsmp_en_ch06.pdf

Fadzlan Sufian & Zulkhibri Majid. (2007). The efficiency of Merchant Banks and
Finance Companies in an emerging market: Determinant and Policy issues.
Retrieved from http://www.ccmf-
uwi.org/files/publications/journal/2007_1_2/174_204.pdf

Fadzlan Sufian. (2008). The efficiency of non-bank financial intermediaries: Emprical

evidence from Malaysia. Retrieved from
http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1007&context=ijbf

Homburger, R, B. (2014). Banking Regulation. Retrieved from

http://www.rahmatlim.com/Lists/PublishedArticle/Attachments/1/Banking%20Re
gulation%20-%20Malaysia.pdf

Islamic Bankers. (2015). Non-bank Islamic financial intermediaries: Malaysia. Retrieved

from http://www.islamicbanker.com/education/non-bank-islamic-financial-
intermediaries-malaysia

Muhamad Muda. (1996). Financial positioning of Commercial banks and its implication
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Malaymail Online. (2013). Banking now Malaysia’s dynamic financial service industry.
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Pozzobon, D. (2012). The financial system in Malaysia. Retrieved from

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PWC. (2012). Malaysia’s Financial Sector Blueprint. Retrieved from

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CONTENTS
1.0 INTRODUCTION ........................................................................................................ 1

2.0 THE ROLES AND IMPORTANT OF BANKING SYSTEM IN MALAYSIA ......... 3

2.1 BANK NEGARA MALAYSIA (CENTRAL BANK) ............................................. 3

2.2 BANKING INSTITUTION ...................................................................................... 6

2.2.1 COMMERCIAL BANKS................................................................................... 6

2.2.2 FINANCE COMPANIES ................................................................................... 8

2.2.3 ISLAMIC BANKING ........................................................................................ 9

2.2.4 MERCHANT BANK ....................................................................................... 11

2.2.5 DISCOUNT HOUSE ........................................................................................ 12

3.0 NON-BANK FINANCIAL INTERMEDIARIES ...................................................... 13

3.1 ROLE AND IMPORTANCE OF PROVIDENT & PENSION FUNDS ................ 14

3.2 ROLE AND IMPORTANCE OF INSURANCES COMPANY ............................ 17

3.3 ROLE AND IMPORTANCE OF DEVELOPMENT FINANCE INSTITUTIONS

....................................................................................................................................... 19

3.4 ROLE AND IMPORTANCE OF SAVING INSTITUTIONS ............................... 21

4.0 CONCLUSION ........................................................................................................... 22

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