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?
To ensure 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
 M
o
n
Financial System
e
y

&
Financial
Institutions F Financial Market
o
r
e D
i e
Non- g r
Banking Bank Capital i
n
System Financia Market v
l 1. Equity
1. Bank Negara Interme E a
diaries x Market t
Malaysia
1. Provident and c 2. Bond Market i
2. Banking v
Pension Funds h
Institutions e
2. Insurance Companies a Public
Commercial Banks (including Takaful) n Debt s
Finance 3. Development Finance g Securities
Companies Institutions e M
Private a
4. Savings Institutions
Merchant Banks Debt r
National Savings Bank M
Islamic Banks a Securities k
Co-operative Societies
3. Others 5. Others r e
k t
Unit Trusts
Pilgrims Fund Board
e
Discount Houses t 1. Commodity Futures
Housing Credit
Representative Institutions 2. KLSE CI Futures
Offices of Foreign Cagamas Berhad 1. Money 3. KLIBOR Futures
Bank s Credit Guarantee
Corporation
Market
2. Foreign
Leasing Companies Exchange
Factoring Companies Market 1. Labuan
Venture Capital
Companies International
Offshore
Financial Center
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?

3. The financial system and the banks in it play a crucial role in

the economy's use of currency.
4. Banks run the payment systems that enable local markets to
operate and individuals and companies to travel to distant
places and act there.
5. 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, Need an intermediary;
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

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

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

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.
Bank Islam Malaysia Bhd. 2014
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;
Enablefinancial 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.
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
Thank you