Overview of Malaysian Financial Institutions

The University of Hong Kong

Faculty of Business and Economics

FINA0501

Asian Financial Institutions

Term Paper

Overview of Malaysian Financial Institutions

(Banking Sector)

Submitted by:

Chan Siu Hon, Mark

BSC I

U. No.: 2006221486

Introduction

Over the previous decades, Malaysia has enjoyed rapid growth, dropping unemployment, stable inflation and fiscal surplus. Nowadays, the development of Malaysian banking system has a closed relation with the economic growth of Malaysia. Referring to the latest economic growth of Malaysia, the overall balance of payments in the first three quarters of 2006 achieved a surplus of RM 27.9 billion, a 44.0 percent decline from the same period in 2005. Net international reserves at end-2006 reached RM 290.4 billion, up by 9.5 percent from 2005. At the same time, the external debt dropped by 8.3 percent from 2005. It is mainly attributed to a significant decrease in banking sector debt and debt repayment by the public sector. (East Asia Update, April 2007) Therefore, it is evident that the banking sector plays an indispensable role in determining a country's economy. In this paper, the overview of the banking sector of Malaysia will be explored in details.

Overview of the framework of Malaysian banking sector

The current banking system in Malaysia consists of monetary and non-monetary institutions. The monetary institutions are the central bank, which is Bank Negara Malaysia (BNM), and commercial banks.

The non-monetary institutions are divided into two groups. The first group is monitored by BNM including finance companies, merchant banks, discount houses, foreign banks representative offices, and offshore banks in the International Offshore Financial Centre in Labuan. The second group supervised by various government departments and agencies includes development finance institutions, savings institutions, provident and pension funds, insurance companies, and other financial intermediaries. (Towards a Sustainable Banking Sector--Malaysia)

The central Bank

Bank Negara Malaysia (BNM) is the central bank of Malaysia, which was established on Jan 26, 1959, under the Central Bank of Malaya Ordinance (CBO), 1958 which provided for the licensing and regulation of the business of banking in the Federation of Malaya. CBO has control over the interest rates payable to or by persons other than banks "carrying on business in relation to the receipt of money on deposit from members of the public. (Money and Banking in Malaya and Singapore) Also, it is responsible for developing the institutions and infrastructure that are the foundations of a modern and solid financial system.

BNM is committed in maintaining the stability of monetary and financial system and keeping a progressive and sane financial sector in order to promote the economic development. Also, it supervises the banking system and the insurance industry. Moreover, BNM is endowed at law with powers of issuing the Malaysian currency, the Ringgit. It acts as a banker and economic and financial adviser to the Government, administers the country's foreign exchange control regulations, and acts as lender of last resort to the banking system. (The Malaysian Banking) (PriceWaterHouseCoopers - Malaysia - 2007)

Objectives of BNM include:

- To issue currency and keep reserves safeguarding 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;

- To promote the reliable, efficient and smooth operation of national payment and settlement systems and to ensure that the national payment and settlement systems policy is directed to the advantage of Malaysia; and

- To influence the credit situation to the advantage of the country.

Today, Bank Negara Malaysia concentrates on the three areas of central banking, namely, monetary stability, financial stability and the payments system. Also, It is entrusted with the role of economic development.

Functions of Bank Negara Malaysia:

a) Financial Stability

Bank Negara Malaysia provides an environment in which institutions are strong enough to continue in meeting their contractual obligations without interruption or without any external assistance. Therefore, if there is no change in the market fundamentals, prices of transactions will not vary too much over short periods.

b) Monetary Stability

In order to maintain the stability of the value of the Ringgit, the Malaysian currency, Bank Negara Malaysia implements different monetary policies to keep inflation low and prevent the purchasing power of the Ringgit from weakening. For example, it can carry out several monetary instruments, including the purchase and sale of Bank Negara Malaysia and Malaysian Government papers, to change the interest rates in the financial system.

c) Development Role

In order to boost the economy, Bank Negara Malaysia shoulders the responsibilities to develop the necessary institutions and market infrastructure for the growth of a modern and strong financial system. Besides, through the construction of a strong payment system which is regularly "upgraded", the financial market infrastructure is enhanced. In promoting a good credit culture amongst banking institutions, Bank Negara Malaysia also activates the Central Credit Reference Information System which collects and circulates credit information on all borrowers. This allows banking institutions to make informed decisions on loan applications.

d) Payment System

It is important for a financial system to have payment system. It facilitates efficient funds transferring between parties and for commercial transactions. So, Bank Negara Malaysia is responsible for ensuring stable and efficient payments system for Malaysia.

e) Others

Bank Negara Malaysia acts as the economic and financial adviser to the Government,