Financial System in Malaysia

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Chapter 5
Financial System of Malaysia

5.1

Financial System Structure in Malaysia

The Malaysian financial system is structured into two major categories, Financial Institutions and Financial Market. The Financial Institutions comprise Banking System and Non-bank Financial Intermediaries. The Financial Market in Malaysia comprises four major markets namely: Money & Foreign Exchange Market, Capital Market, Derivatives Market, and Offshore Market. Chart 1: The Financial System Structure in Malaysia

Financial System

Financial Institutions

Financial Market

Banking System
1. Bank Negara Malaysia 2. Banking Institutions • Commercial Banks • Finance Companies • Merchant Banks • Islamic Banks 3. Others • Discount Houses • Representative Offices of Foreign Banks

Non-Bank Financial Intermediaries
1. Provident and Pension Funds 2. Insurance Companies (including Takaful) 3. Development Finance Institutions 4. Savings Institutions • National Savings Bank • Co-operative Societies 5. Others • Unit Trusts • Pilgrims Fund Board • Housing Credit Institutions • Cagamas Berhad • Credit Guarantee Corporation • Leasing Companies • Factoring Companies • Venture Capital Companies

Money & Foreign Exchange Market
1. Money Market 2. Foreign Exchange Market

Capital Market
1. Equity Market 2. Bond Market • Public Debt Securities • Private Debt Securities

Derivatives Market
1. 2. 3. Commodity Futures KLSE CI Futures KLIBOR Futures

Offshore Market
1. Labuan International Offshore Financial Center (IOFC)

5.2

Banking System

The banking system consists of Bank Negara Malaysia (Central Bank of Malaysia), banking institutions (commercial banks, finance companies, merchant banks and Islamic banks) and a miscellaneous group (discount houses and representative offices of foreign banks). The banking system is the largest component of the financial system, accounting for about 67% of the total assets of the financial system. The summary background information and functions of the institutions mentioned above are set out as follows:5.2.1 Bank Negara Malaysia (BNM)

Bank Negara Malaysia (the Central Bank of Malaysia) was established on 26 January 1959, under the Central Bank of Malaya Ordinance 1958. The objectives of BNM are as follows: • • • • To issue currency and keep reserves to safeguard 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; and To influence the credit situation to the advantage of Malaysia.

The objectives of BNM, in essence, encapsulate the importance of promoting economic growth with price stability and maintaining monetary and financial stability. The introduction of the Banking and Financial Institutions Act 1989 (BAFIA) on 1 October 1989 extended BNM’s powers for the supervision and regulation of financial institutions and deposittaking institutions who are also engaged in the provision of finance and credit. 5.2.2 Commercial Banks

The commercial banks are the largest and most significant providers of funds in the banking system. There are currently 24 commercial banks (excluding Islamic banks) of which 13 are locally incorporated foreign banks. The main functions of commercial banks are to provide: • Retail banking services such as the acceptance of deposit, granting of loans and advances, and financial guarantees; • Trade financing facilities such as letters of credit, discounting of trade bills, shipping guarantees, trust receipts and Banker’s Acceptances; • Treasury services; • Cross border payment services; and • Custody services such as safe deposits and share custody. Commercial banks are also authorised to deal in foreign exchange and are the only financial institutions allowed to provide current account facilities.

5.2.3

Finance Companies

Finance companies form the second largest group of deposit-taking institutions in Malaysia. Finance companies were initially...
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