Asian Financial Institutions Term Paper FINA0501 Asian Financial Institutions Term Paper Name: Li Cheuk Ying Cherry UID: 2010078197 Name: Li Cheuk Ying Cherry UID: 2010078197 Overview of Malaysia’s Banking Sector Overview of Malaysia’s Banking Sector Contents Introduction| P. 3| Overview of Malaysia’s Financial System| P. 4| Central Bank of Malaysia| P. 5| Commercial Banking System| P. 7| Islam Banking System| P. 9| Investment Banking System| P. 11| Development Financial Institutions| P. 12| Conclusion and Outlook| P. 13| References| P. 14| Introduction
The financial crisis in Asia has shown that a robust financial system is one of the key components of economic progress.
Without it, misallocation of investments could seriously disrupt development. For Malaysia, the banking sector is sound compared to the Asian crisis and well capitalized to withstand any deterioration in asset quality. From 2001 to 2010, the central bank of Malaysia, Bank Negara Malaysia (BNM), carried out the Financial Master Sector Plan (FSMP), which objective is to evolve a “competitive, resilient and dynamic financial system” (Bank Negara Malaysia, 2011).
Under FSMP, there were restructuring of financial systems, aiding the industry to become more competitive in the international arena after post-liberization.
The outcome was positive – having resulted in more resilient financial institutions in the country and being able to survive the 2008 financial turmoil. In 2011, it contributed to almost 12% of the GDP of Malaysia (Bank Negara Malaysia Annual Report, 2011).
This paper aims to examine the key of success behind Malaysia’s financial banking sector, focusing on the banking system made up of monetary institutions, including central bank, commercial banks, and Islamic banks, and the non-monetary institutions like investment banks and development financial institutions. Overview of Malaysia’s financial system Structure The financial system of Malaysia is diversified, comprising of banking and non-bank institutions, aiming to serve the intricate needs of the domestic economy. The banking system, includes the central bank, commercial banks, investment banks, and Islamic banks.
They are the main mobiliser of funds and the main source of financing which supports economic activities in Malaysia. The banking system is the largest component, accounting for about 70% of the total assets of the Malaysian financial system (Bank Negara Malaysia, 1999) The non-bank financial institutions are development financial institutions, insurance companies and takaful operators, complement the banking institutions in mobilizing savings and meeting the financial needs of the economy (Malaysian Investment Development Authority, 2012).
In this paper, I will focus on the banking system and the development financial institutions of the non-bank financial institutions. Changes to Financial Sector Malaysia underwent changes to its banking sectors in 2009, shortly after the financial crisis in 2008. The liberalisation measures were carried out by BNM in order to put Malaysia back on the global competitiveness map. Central Bank of Malaysia Background Bank Negara Malaysia (BNM) is the Central Bank of Malaysia. It was established on 26th January, 1959, and was under the Central Bank of Malaya Ordinance (CBO) 1958 at that time.
In 1994, CBO was revised into the present Central Bank of Malaysia Act 1958 (CBA). BNM acts as the monetary authority of Malaysia, which it oversees Malaysia’s financial system and economy. Wholly owned by the Government of Malaysia, it is a statutory body which reports to the Minister of Finance, Malaysia. It keeps the Minister informed of matters relating to monetary and financial sector policies (Bank Negara Malaysia, 2012). Being the central bank, it carries out monetary policies which affect the economy and inflation.
With its monetary operations, it affects bank reserves which in turn lead to changes in the money supply, interest rates and exchange rate. This will adjust the consumer and business spending, resulting in economic growth and inflation (Bank Negara Malaysia, 2012). Objectives As outlined in Central Bank of Malaysia Act 2009, BNM’s functions are as follows: a) to promote monetary stability and a sound ? nancial structure b) to act as a banker and ? nancial adviser to the Government c) to issue currency and keep reserves safeguarding the value of the currency; and d) to in? ence the credit situation to the advantage of the country. (Bank Negara Malaysia, 2012) In essence, the objectives of BNM is to capture the significance of stimulating economic progress while keeping stability of price while keeping the monetary and financial sector stable. This is the reason for BNM, at present, focusing on the three elements that contribute to central banking, namely monetary stability, ? nancial stability and the payments system. In order to attain its objectives listed above, Bank Negara Malaysia is only concerned with the economic interest of the country, instead of being profit-making.
Bank Negara Malaysia aims at encouraging economic growth and reaching a high employment rate, while at the same time, maintaining price consistency and a comprehensive stability in the country’s international payments position. Also, it targets at eliminating poverty and transforming the society by controlling the country’s foreign exchange control policies. Acting as the lender of last resort to the banking system is also one of its duties to stabilize the economy. Adoption of Liberalization Measures
Liberalization measures were announced and adopted in 2009, which were under the objective obligated in FSMP. They were intended to nurture inflow of foreign funds and investments, reinforce the local stock market and support further growth and development of the tertiary sector, especially the capital market. They were expected to increase competition and stimulate domestic lenders to improve services (Bank Negara Malaysia, 2011). Commercial Banking System Background Malaysian commercial banks are the largest and are the most influential in providing funds in the banking system.
There are currently 25 commercial banks of which 8 are locally incorporated foreign banks, and the rest of them are foreign-controlled institutions (Bank Negara Malaysia, 2012). Roles Commercial banks in Malaysia play a significant role in the banking system. Among all types of banks, commercial banks are solely the ones which are allowed to take demand deposits from the public or engage in foreign exchange operations. Issuing negotiable instruments of deposit (NIDs) up to 5 times of their capital funds and engaging in equity derivatives, securities borrowing and lending activities are also some of their roles.
Regarding expanding of operations, they can choose to set up branch offices, representative offices, subsidiaries, or by engaging jointly with other institutions. Adoption of Liberalization Measures Liberalization has taken place in commercial banking too. In June 2010, BNM granted commercial banking licenses to five foreign banks, namely France’s BNP Paribas SA, Japan’s Mizuho Corporate Bank and Sumitomo Mitsui Banking Corp, Indonesia’s PT Bank Mandiri and the United Arab Emirates’ (UAE) National Bank of Abu Dhabi.
With these changes, the financial sectors in Malaysia became more well-developed and strengthened with foreign investment (Business Times, 2010). Islamic Banking System Background The first Islamic bank established was Bank Islam Malaysia Berhad, which commenced operations on 1 July 1983. However, Islamic banks are not the only banks which can carry out such type of banking. In Malaysia, Islamic banking can also be found in other financial institutions. The banking activities of Islamic banks are based on Shariah principles (the Islamic principles).
Islamic Law principles has highlighted that payment and receive of interest, together with promotion of profit sharing in the banking sector is harmful and unlawful, and must also avoid activities such as riba or gharar (excessive uncertainty). There are altogether 16 Islamic banks in Malaysia currently, with 10 locally incorporated and the remaining otherwise. The Islamic Banking Act 1983 authorizes the BNM to regulate and supervise Islamic Banks in Malaysia. Role and Functions The Islamic financial system comprises four main components, namely Islamic banking, takaful and retakaful, Islamic interbank money market and Islamic capital market.
In terms of products, all Islamic banking entities are offering more than 100 banking products based on the Islamic principles. Through the use of various Islamic finance concepts such as hibah (gift), mudharabah (profit sharing), qard (free-interest loan). Since there are Islamic Laws governing Islamic Banks, they have a high degree of autonomy and flexibility in coming up with different products and also when selling them. The comprehensive financial system of Islamic banking has led to dynamic growth of Islamic finance in Malaysia. Islamic financial assets of the banking sector, Bahrain and Malaysia, 1998-2006.
Source: Bank Negara Malaysia | Adoption of Liberalization Measures Rapid liberalization in the Islamic finance industry, together with the assistance of the business environment, has encouraged more and more foreign financial institutions to choose to conduct Islamic banking business in Malaysia. This has cultivated a diverse community of local and international financial institutions. With the objective of further developing of the banking system, in 2004, the central bank of Malaysia granted 3 new licenses for foreign banks to authorize their right to participate in Islamic Banking (Caplen, 2004).
Investment Banking System Background Merchant banks emerged in the Malaysian banking sector in the 1970s. This has marked an important milestone in the financial system of Malaysia. Currently, there are 15 merchant banks in Malaysia. Role and Functions Merchant banks specialize in the short-term money market and capital raising activities, like by corporate financing, managing investment portfolios and listing shares. Moreover, other financial products like bonds and securities and mergers and acquisitions are issued and managed by them respectively.
The advance of merchant banks has increased the capacity of the banking sector since additional choices are available for investors, apart from services provided by commercial banks and Islamic banks. Adoption of Liberalization measures BNM has approved for the merchant banks to enter into foreign strategic partnerships with higher flexibility, as a method to heighten the global position of Malaysia’s financial sector. Hence, increasing funds are being injected into the financial market of Malaysia (Liberalization of the financial sectors). Development Financial Institutions (DFIs)
Background Development Financial Institutions (DFIs) are established by the Government, with the aim of promoting the development of particular priority sectors and sub-sectors of the economy, for instance, agriculture, infrastructure development and international trade. They generally specialise in the provision of medium and long term financing of projects that tend to carry higher credit or market risk. DFIs include agriculture, small and medium enterprises, infrastructure, maritime, export-oriented sector along with capital-intensive and high-technology industries.
Roles and Functions As specialised institutions, DFIs provide a particular range of financial products and services, in order to meet the needs of the targeted strategic sectors. Supplementary services, which are consultation and advisory services, are also provided by DFIs to cultivate and foster the identified sectors. DFIs therefore pair up with the banking institutions, and act as a strategic channel to help connect the supply of financial products and services to the classified strategic areas in order to support long-term economic development.
The DFIs have made a huge contribution to the development and growth of the targeted sectors (Ministry of International Trade and Industry, 2008). Development Financial Institutions Act (DFIA) The DFIA came into force on 15th February 2002, and was aimed at concentrating on promoting the development of effective and efficient development financial institutions (DFIs). It was established to verify that the roles, objectives and activities of the DFIs were consistent with the Government policies.
In addition, it also made sure that the authorized roles were effectively and efficiently implemented (Malaysian Investment Development Authority, 2012). Conclusion and Outlook The Malaysian financial system comprises of a diversified range of institutions to meet the wide-ranging and complicated needs of the economy. The financial system consists of the central bank, commercial banking, Islamic banking, merchant banking and Development Financial Institutions, and can be categorized into banking and non-banking system.
In 2009, Liberalization Measures were announced to restructure and improve the banking sector so as to avoid another financial crisis in the future. It aimed at strengthening Malaysia’s financial position in the world. With the reformation of the banking system, Malaysia has successfully remained strong and well-capitalized, despite the occurrences of turmoil in the global financial markets. The banking system of Malaysia, with the measures mentioned above, is becoming increasingly robust, and is on its way to become more sustainable and influential to the economy.
Hence, there is an optimistic and positive outlook of the Malaysian banking sector. References Bank Negara Malaysia – Annual Report 2011 http://www. bnm. gov. my/files/publication/ar/en/2011/ar2011_book. pdf Business Times –Heat on as New Banks Enter http://www. btimes. com. my/Current_News/BTIMES/articles/BANCOM/Article/index_html Bank Negara Malaysia – The Financial Sector Masterplan http://www. bnm. gov. my/? ch=20&pg=32&ac=24 Caplen, B. (2004) Steady as she goes. The Banker. Vol. 154, Iss. 41, p. 92-93. London: Jul 2004. Financial System of Malaysia http://www. kpmg. com. my/kpmg/publications/tax/I_M/Chapter5. pdf Liberalisation of the Financial Sector http://buzzley. wordpress. com/2009/04/29/liberalisation-of-the-financial-sector/ Malaysian Investment Development Authority – Facts & Figures http://www. mida. gov. my/env3/index. php? page=key-economic-indicators Malaysian Investment Development Authority – Invest in Malaysia http://www. mida. gov. my/env3/index. php? page=banking-system
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