Banking System in Malaysia

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FINA0501
Asian Financial Institution
Term Paper

An Overview of the banking sector of Malaysia

Introduction
When we first think of Malaysia, we will probably think of its tourist attractions which it is quite prominent around the world. But in fact, besides its attractiveness on the scenic spots, Malaysia is also a good place for foreign investment. The banking sector of Malaysia is actually quite robust, leading to high ranking among the Asian countries. Moreover, the economy of Malaysia is thriving, which is indicated by its 7% GDP growth in 2004 and 5% in 2005. There is low inflation in Malaysia with a healthy foreign exchange reserves. Also, there is only a small amount of external debt. These all prevent Malaysia from experiencing a financial crisis like that of 1997.

Banking system
The Banking system of Malaysia comprises the central bank of Malaysia, Bank Negara Malaysia, 33 licensed commercial banks, 2 Islamic banks, 23 finance companies, 7 Discount Houses, and 12 merchant banks.

The banking system of Malaysia is divided into monetary and non-monetary institutions. For the monetary institution, it includes the central bank, commercial banks and the Islamic banks. Other banks are considered as the non- monetary institutions. So, in the following paragraphs, I will further introduce different kinds of banks of Malaysia.

Bank Negara Malaysia
The central bank of Malaysia is the Bank Negara Malaysia where the banking system in Malaysia is supervised by it. Bank Negara Malaysia was indeed established in 1959, under the Central Bank of Malaya Ordinance 1958. The four main objectives of Bank Negara Malaysia include: 1. Issuing Malaysian currency so as to maintain appropriate currency reserves 2. Acting as a the Government’s banker and financial advisor 3. Ensuring monetary stability and a sound financial structure 4. Influencing the credit situation so as to better the Malaysian economy.

The central bank also administers the foreign exchange control regulations and acts as the lender of the last resort to baking system of Malaysia. Bank Negara Malaysia is a non profit-making institution. In order to meet the above objectives, the Bank act only in the economic interest of the country. Moreover, the bank aims at fostering economic growth, high employment level, maintaining the stability of price and a reasonable balance in the international payments position of Malaysia. Finally, it aims at alleviating poverty and restructuring the society.

Commercial banks
Commercial bank is a type of financial intermediary which is essential for maintaining financial connections with other countries in the world. It raises funds by collecting deposits from the public and makes loans to the investors and businessmen. There are 33 licensed commercial banks in Malaysia with approximately 1767 branches within the country. There are representative offices in Malaysia which are established by 36 foreign banks. Without being allowed to run normal banking business, there are 12 merchant banks with 22 branches supplement their services.

Islamic banks
The banking activity of the Islamic banks should comply with the Islamic principles and is guided by Islamic economics. It aims at offering conventional banking services. According to the Islamic law, it forbids interest collection and payment, trading in financial risk and investing in businesses. In Malaysia, Islamic banking is provided by Bank Islam Malaysia with 120 branches and the Bank Muamalat Malaysia Berhad are under its operation. The first Islamic bank established in Malaysia is the Bank Islam Malaysia in 1983. Its aim is to cater to the financial needs of the Muslims and to extend the services to the entire population in Malaysia.

Finance Companies
There are 23 finance companies consists of 960 branches in Malaysia which are governed by the Banking and Financial Institutions Act 1989. They are actually known as borrowing companies since 1979. These finance...
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