Introduction to Malaysian

Financial System
TOPIC 1
Introduction

What is a financial system?

Something that been establish to manage cash flow.
Where does a financial system exist?
In various places; home, organization and
state/nation and region.
Why does it exist?
Toensure the smooth running of transaction involving
money,
Learning outcome

Upon completing this chapter students should be able to;

Define Financial System
Explain the needs for financial system
Describe the history of the Malaysian Financial System
Identify the institutions included in the Malaysian
Banking System
Discuss the distinctive role of various banking units
Definition of Financial System

What is a Financial System

A financial system can be defined at the global, regional or firm specific
level. The firm's financial system is the set of implemented procedures that
track the financial activities of the company. On a regional scale, the
financial system is the system that enables lenders and borrowers to
exchange funds. The global financial system is basically a broader
regional system that encompasses all financial institutions, borrowers and
lenders within the global economy.

http://www.investopedia.com/terms/f/financial-system.asp
Definition of Financial System

There are multiple components making up the financial

system of different levels.
Regional financial systems would include banks and other
financial institutions, financial markets, financial services
In a global view, financial systems would include the
International Monetary Fund, central banks, World Bank and
major banks that practice overseas lending.

http://www.investopedia.com/terms/f/financial-system.asp
What Purpose does Financial System serve?

1. Financial systems, channel funds from those who

have savings to those who have more productive
uses for them.
2. They perform two main types of financial service;
provision of liquidity and the transformation of the risk
characteristics of assets, that reduce the costs of
moving funds between borrowers an lenders, leading
to a more efficient allocation of resources and faster
economic growth.
What Purpose does Financial System serve?

The financial system and the banks in it play a crucial role in the
economy's use of currency.
Banks run the payment systems that enable local markets to
operate and individuals and companies to travel to distant places
and act there.
Banks are also essential as financial intermediaries. In other words,
they take the savings of people with surplus resources and make
them available to others who need them.
Introduction of Money

History
Central to evolution of the financial system is trade.
Started with barter trade system; inability to strike right exchangeability
between two sets of goods
Surplus good could not be stored
Good medium of exchange was needed
Money (notes and coins) good medium of exchange
Detail history of Banks in Malaysia can be read from the following link;
http://ecmalaysian.blogspot.my/2013/03/a-brief-history-of-banks-in-straits.html
Money

With advent of money, two groups of people develop in

the economy,
Surplus unit and deficit unit
Direct borrowing and lending; with problems
encountered;
Meeting the partner
Amount
Tenor (Time)
Default risk; no guarantee of payment
Money

To overcome the problems/disadvantages of direct

borrowings, an intermediary is needed;
Development of financial institutions
Started with exchange banks (commercial banks)
Early Banks

Branch banks
The Chartered Mercantile Bank of India, London and China in
Penang 1859.
Chartered Bank in 1875
Singapore-incorporated banks 1917 in Malacca and Muar
Domestic banks
Kwong Yik Banking Corporation 1913
Currency Board and Bank Negara Malaysia

Currency Board was established in 1907

To issue money
The World Bank Mission in 1955 recommended the formation of
Central Bank
Central Bank of Malaya Ordinance 1958
Establishment of Bank Negara Malaysia in 1959
Currency issuing authority handed to BNM
CBO 1958 and Bank Negara Malaysia
Law, Institutions and Malaysian Economic Development
edited by Jomo Kwame Sundaram, Sau Ngan Wong
Central Bank of Malaysia Ordinance 1958 (CBO)

The Central Bank of Malaysia Ordinance 1958 (CBO) provides for the
Central Bank to be the sole currency issuing authority in the country.
The Central Bank commenced to issue its own currency on June 12, 1967,
thereby replacing the Currency Board as the sole currency issuing
authority in Malaysia.
Institution Building Program by Bank Negara Malaysia
Law, Institutions and Malaysian Economic Development
edited by Jomo Kwame Sundaram, Sau Ngan Wong
Banking Act 1973
Law, Institutions and Malaysian Economic Development
edited by Jomo Kwame Sundaram, Sau Ngan Wong
Regulatory process

Financial institutions become intermediary between

surplus and deficit units.
It must be closely regulated to safeguard stakeholders
interest
Banking and Financial Institutions ACT (BAFIA) was
legislated in 1989
BAFIA 1989

The financial system in Malaysia has changed dramatically with the

rapid development of ancillary financial institutions such as;
institutions of development finance,
dedicated credit institutions,
credit firms and
co-operatives (especially deposits taking co-operatives).
Although their operation is small as
BAFIA 1989 What does it provide?

Due to rapid growth and stiff competition in the banking system, there
were no longer clear lines between the businesses of commercial
banks, finance companies and merchant banks
These three groups of institutions were regulated separately by Bank
Negara Malaysia (BNM) in accordance with the old acts (Banking
Act, 1973 and Finance Companies Act, 1969)
The control over the three groups became more and more joint over
time.
BAFIA, 1989 enables BNM to supervise and control all financial
institutions, including those controlled by way of administration, under
one regime.
BAFIA 1989

After the economic recession in the late 1980s, a number of financial control
measures were introduced by the government.
The rules were written into the Banking and Financial Institutions Act (BAFIA),
1989,
The new act combined most of the provisions already existing in the two old
acts (Banking Act, 1973 and Finance Companies Act, 1969) plus new laws on
several matters.
BAFIA, 1989 was introduced to provide;
An integrated regulation system for the financial system in Malaysia,
To modernise and coordinate laws related to banking and other financial
institutions.
BAFIA 1989

To preserve the soundness and stability of the banking and financial

system in the country.
BAFIA repealed Finance Companies Act 1969 and the Banking Act
1973
Under BAFIA, financial institutions were segregated into 3 groups;
Licensed institutions (commercial banks, finance companies,
merchant banks, discount houses and money broker)
Scheduled institutions (building societies, factoring and leasing
companies, development financial institutions)
Non-scheduled institutions ( statutory bodies,
Shall not apply to Islamic Banks
BAFIA 1989

BAFIA, 1989 was introduced also because of the financial

crisis related to cooperative societies and problems
associated with illegal deposits taking by institutions.
The lack of power of BNM to act swiftly and effectively to
resolve the issues became apparent
BAFIA, 1989 provides that BNM has the power to
investigate and prosecute immediately in the event of
any illegal activity.
BAFIA 1989

Get rich schemes or deposit taking cooperatives have

proven to give a bad impression towards the operation of
financial institutions and weaken the faith of the public
towards the strength of the financial system.
BAFIA,1989 enables BNM to oversee, supervise and control
activities as well as the operation of financial institutions to
safeguard the stability of the nation financial structure.
BAFIA 1989

NEW PROVISIONS UNDER BAFIA, 1989

The matters, relating to the management of commercial banks and other banking
institutions, include the following:
Licensing and regulation
Management of licensed institutions
Ownership and control of licensed financial institutions
Supervision and control of licensed financial institutions
Power to investigate, search and seize
Power and duties of auditors
Deposits taking and definition of deposits
Secrecy
Electronic funds transfer
Penalty
Consolidation of the Banking Sector

The thrust of the consolidation in the banking sector is to create a core

group of strong and well capitalized banking institutions to achieve a more
effective and competitive banking system.
Consistent with the objective of the consolidation exercise, ten banking
groups applied and were granted anchor bank status, having met all the
set criteria.
To ensure the banking institutions are well capitalized, the Central Bank
had imposed 31 December 2001 as the deadline for the banking sector to
increase capital to the minimum requirement of RM2 billion for domestic
banking groups.
The merger process has been a market driven process.
Consolidation of the Banking Sector

Bank Negara (the National Bank of Malaysia) had given August 31, 2000 as the deadline for the many Malaysian
banks to consolidate and merge into 10 groups of their choice. The 10 anchor banking groupsthat managed to ink
their sale and purchase agreements by that deadline are:

1. Maybank group

Malayan Banking, Mayban Finance, Aseambankers, PhileoAllied Bank, Pacific Bank, Sime Finance, Kewangan
Bersatu.

2. Bumiputra Commerce group

Bumiputra Commerce Bank, Bumiputra Commerce Finance, Commerce International Merchant Bankers.

3. RHB Bank

RHB Bank, RHB Sakura Merchant Bank, Sime Bank, Delta Finance, Interfinance.

4. AMMB

Arab-Malaysian Bank, Arab-Malaysian Finance, Arab-Malaysian Merchant Bank, Bank Utama Malaysia, Utama
Merchant Bankers.

5. Hong Leong Bank

Hong Leong Bank, Hong Leong Finance, Wah Tat Bank, Credit Corp Malaysia.
Consolidation of the Banking Sector

6. Perwira Affin Bank

Perwira Affin Bank, Affin Finance, Perwira Affin Merchant Bankers, BSN Commercial, BSN Finance, BSN
Merchant Bank.

7. Multi-Purpose Bank

MPB, International Bank Malaysia, Sabah Bank, MBf Finance, Bolton Finance, Sabah Finance, Bumiputra
Merchant Bankers, Amanah Merchant Bank.

8. Southern Bank

Southern Bank, Ban Hin Lee Bank, Cempaka Finance, United Merchant Finance, Perdana Merchant
Finance.

9. EON Bank

EON Bank, EON Finance, Oriental Bank, City Finance, Perkasa Finance, Malaysian International Merchant
Bankers.

10. Public Bank group

Public Bank, Hock Hua Bank.

Financial Sector Master Plan 2004

Financial industry consolidation

Commercial banks merging with finance companies
Purpose;
Enable financial institution to become one-stop
centres , more competitive, better prepared for the
impending liberalization of financial service sector to
begin in 2007
Financial Sector Master Plan 2004

1. Launched in March 2001

2. Sets out the broad strategies for the development of the financial sector
over a ten year period.
3. The objective is to evolve the financial system into one which is
competitive, resilient and dynamic.
Strategies;
Enhancing the capacity and capability of domestic financial institutions
Strengthening the regulatory and supervisory framework,
Promoting a safe and efficient payments system
Developing the framework on consumer education and protection.
CENTRAL BANK ACT 2009

1. Central bank for Malaysia

The Bank shall be the central bank for Malaysia.
2. Principal objects and functions of the Bank
(i) The principal objects of the Bank shall be to promote monetary stability
and financial stability conducive to the sustainable growth of the
Malaysian economy.
(ii) The primary functions of the Bank are as follows:
(a) to formulate and conduct monetary policy in Malaysia;
(b) to issue currency in Malaysia;
(c) to regulate and supervise financial institutions which are subject to the
laws enforced by the Bank; (d) to provide oversight over money and
foreign exchange markets;
 CENTRAL BANK ACT 2009

(iii) to exercise oversight over payment systems;

(iv) to promote a sound, progressive and inclusive financial
system;
(v) to hold and manage the foreign reserves of Malaysia;
(vi) to promote an exchange rate regime consistent with the
fundamentals of the economy; and
(vii) to act as financial adviser, banker and financial agent of the
Government.
(3) The Bank shall have all the powers necessary, incidental or ancillary to give
effect to its objects and carry out its functions.
(4) The Bank in giving effect to its objects and carrying out its functions under this
Act shall have regard to the national interest.
Development of Malaysian Financial System

From the previous slides the development of Financial System Malaysia can be summarized as
follows;
The establishment of banks; Foreign branches starting from 1859, establishment of domestic bank in 1913.
The establishment of the Currency Board in 1907
Establishment f BNM in 1959
Finance Companies Act 1969
The Banking Act 1973
The Banking and Financial Institutions Act 1989
Consolidation of the Banking Sector 1999-2002
Financial Sector Master Plan 2004
Central Bank of Malaysia Act 2009
Financial Sector Blue print 2011-2020 10-year Blueprint of the financial system
 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
Financial Sector Blue print 2011-2020
Financial Sector Blue print 2011-2020