Topic 7

Financial legal framework

MFK FIN536 Topic 7 1

At the end of the lessons, students should be able to:-

 Identify the various financial regulations.

 To understand the objectives of BNM as define by the Central Bank

Acts 1958.

 Identify the various legislations Administered and enforced by BNM.

 Identify various legislation pertaining to Labuan as an International

Offshore Financial Centre(IOFC).

MFK FIN536 Topic 7 2

 Banking is the most highly regulated industries.

 Justifications >>> Crucial role in the economy.

 Necessary to ensure the fulfillment of Bank Negara Malaysia (BNM).

 BNM should act in the interest of the nation and without regard to
profit as a primary consideration.

MFK FIN536 Topic 7 3

MFK FIN536 Topic 7 4
Central Bank of Malaysia
Act, 1958

MFK FIN536 Topic 7 5

MFK FIN536 Topic 7 6
Establishment Capital and Administration of the Bank
 Bank is called Bank Negara Malaysia or Central Bank of Malaysia.

 Principal objective of BNM:-

i. to issue currency in Malaysia and to keep reserve safeguarding
the value of the currency.

ii. to act as a banker and a financial adviser to the Government.

iii. to promote monetary stability and a sound financial structure.

iv.to influence the credit situation to the advantage of Malaysia.

MFK FIN536 Topic 7 7

Establishment Capital and Administration of the
Bank
 BOD should comprise:-

i. the Governor
ii. not more than three Deputy Governors
iii. not less than five but not more than eight
directors.

MFK FIN536 Topic 7 8

Currency
 Ringgit.

MFK FIN536 Topic 7 9

Reserve of external assets
 Gold coin or bullion.

 Notes, coin, bank balances and money at call in such country or countries as
may been approved by the minister on the recommendations of board.

 Treasury bills.

 Bills of exchange.

MFK FIN536 Topic 7 10

Relations with the Government
 Banker and financial adviser to the Government.

 The boards shall keep the Minister informed of:

i. the monetary and banking policy.

ii. the policies in respect of institutions in relation to which the bank is

conferred with powers.

MFK FIN536 Topic 7 11

Relations with Banking and other financial institutions
 The policy on credit facilities.

 Rates of interest payable, rates of discount, rates of commission and other charges.

 Reserve to be held by each banking institutions.

 Any other matter relating to the supervision and regulation of banking institutions and other
financial institutions pursuant to Islamic Banking Act 1983, Insurance Act 1996, Takaful Act 1984.

MFK FIN536 Topic 7 12

BAFIA, 1989

MFK FIN536 Topic 7 13

 Laws for the licensing and regulation of the institutions carrying on banking, finance
companies, merchant banking, discount house and money-broking business.

 Integrated supervision of the Malaysian financial system.

MFK FIN536 Topic 7 14

Scope and ambit
 Came into force on 1 October 1989 supersede Finance Companies Act 1969 and
st

Banking Act 1973.

 Conflict with Companies Act, BAFIA prevail.

 Conflict with Exchange Control Act (ECA) 1953, ECA prevail.

 Section 124 provides that BAFIA shall not apply to an Islamic Bank.

MFK FIN536 Topic 7 15

Licensing
 All institutions are required to hold a valid incense granted by Minister.

 Clearly indicating the business for which it is licensed.

MFK FIN536 Topic 7 16

Licensing
 A licensed finance company is permited to carry out the business of:-
receiving deposits on deposit account, saving account or other similar account.
i. lending of money, leasing or hire purchase.

ii. including that which is subject to the Hire Purchase Act 1967.

iii. such other business as the Central Bank may prescribe.

MFK FIN536 Topic 7 17

Licensing
 Sec. 32 – prohibits license financial institutions to engage in wholesale or retail
except in connection with the realization of security.

 BNM is authorised to fixed minimum and maximum amounts and tenor of

deposits.

MFK FIN536 Topic 7 18

Receiving deposits
 Unsolicited calls – stem illegal deposit-taking activities.

 Priority of depositors – Sec. 81 provides that in the event where a license institution
is unable to meet any f its obligations, the properties of the institutions shall first be
used.

MFK FIN536 Topic 7 19

Marketing and advertising
 Sec. 28 states that it an offense to publish any statement which is misleading, false or
deceptive or to conceal any material fact in relation to deposit taking.

Financial requirements
 Every licensed institutions required to maintain general reserve, statutory reserve,
liquidity ratio, capital adequacy ratio and any amount or class of asset.

MFK FIN536 Topic 7 20

Ownership, control and management
 BAFIA limits the amount of shares a person may hold.

 No person shall be appointed as a CEO and directors without the prior written consent of the BNM.

Advances against own shares

 Sec. 59 prohibits the granting of any credit facilities against security of its own shares or the
shares of its holding company.

MFK FIN536 Topic 7 21

Restriction of credit to single customer
Sec. 61 provides that no licensed institutions shall grant to any single person any credit facility in excess of any amount prescribed by the guidelines issued by

the BNM.

Except for the following transactions:-


i. loans given to other licensed institutions.

ii. credit facility relating to export and import against letter of credit or bills of exchange.

iii. any transactions exempted by the BNM.

MFK FIN536 Topic 7 22

Prohibition of credit facilities to director and officer
 Sec. 62 (1) provides that unless exempted by the BNM in writing, no licensed institutions shall
grant any credit facility to the following:
i. any of is directors.

ii. estate agent, doctor and an other person receiving remuneration from it in respect of his
professional services.

 Except???

MFK FIN536 Topic 7 23

Duty of secrecy
 Sec. 97(1) provides that no directors or officer of any licensed institution, whether during his tenure of
office, or during his employment, or thereafter, disclose account of any customer.

 Excepts in the following situation:-

i. any person authorized by the BNM.

ii. customer has given written permission.

MFK FIN536 Topic 7 24

Duty of secrecy
 Excepts in the following situation:-

iii. customer declared bankrupt; corporation, winding up.

iv. civil proceedings.

v. garnishee order.

MFK FIN536 Topic 7 25

Offenses
 Fourth Schedule of BAFIA list down the penalties for the various offenses and non-compliance with BAFIA.

 Maximum; RM10 million and imprisonment of a term of 10 years.

 Offense not in list; RM500,000, continuing offense an additional of daily fine of RM1000.

MFK FIN536 Topic 7 26

Offenses
 False entry, conceals or destroys an entry – offense.

 Hamper, gifts, duit raya etc???

MFK FIN536 Topic 7 27

Classifications of loans as non-performing
 Loans in arrears for 6 months or more.

 In case of rescheduled credit facilities:-

i. before account classified as NPL
• the period of time the account is in arrears before rescheduling (if any) and after rescheduling
is 6 months or more.

ii. after account was classified as NPL

• the rescheduled account shall continue o be classified as non-performing.

MFK FIN536 Topic 7 28

Suspension of interest on non-performing loans
 All interest accrued (but uncollected) from the date of an account is classified as non-
performing will be suspended and credited to the “interest in suspense” account.

 Recognised as income as and when it is collected in cash by the financial institution.

 NPL account may reclassified as Performing A NPL upon the full settlement of all arrears in
interest and principal.

 Though, the funds for repayment should not be obtained from the same financial institutions.

 NPL and subsequently rescheduled will reclassified Performing only when the repayment term
has been complied with a continues period of 12 months.

MFK FIN536 Topic 7 29

Provision for bad & doubtful debts
 All financial institutions must maintain a general provision account of at least 1% of total
outstanding loans.

 Substandard – accounts which involve more than a normal risk of loss due to certain adverse
factors such as sporadic delays in debt servicing, unfavourable financial conditions, etc.

 Doubtful accounts – collection in full is unlikely and there is a high risk of ultimate default.

MFK FIN536 Topic 7 30

At the end of the lessons, students should be able to:-

 Identify the various financial regulations.

 To understand the objectives of BNM as define by the Central Bank

Acts 1958.

 Identify the various legislations Administered and enforced by BNM.

 Identify various legislation pertaining to Labuan as an International

Offshore Financial Centre(IOFC).

MFK FIN536 Topic 7 31

 Financial Islamic Banking Act 1983,
Insurance Act 1996, Takaful Act 1984 and
International Offshore Financial Centre.

 Financial institutions.

MFK FIN536 Topic 7 32

THANK
YOU…

MFK FIN536 Topic 7 33

Islamic Banking Act, 1983

MFK FIN536 Topic 7 34

 Licensing and regulation of Islamic Banking
business.

 Provision on:-
i. The requirements and duties of an Islamic Bank,

ii. Ownership, control & management of Islamic banks,

iii. Restrictions on its business,

iv. Power of supervision & control over Islamic bank and

v. Other general provisions such as penalties etc.

MFK FIN536 Topic 7 35

Insurance Act, 1996

MFK FIN536 Topic 7 36

 Provision of act deal with the licensing of:-
i. Insurers,

ii. Insurance brokers,

iii. Adjusters,

iv. Reinsurers.

 Provide for the matters relating to policies,

insurance guarantee scheme fund, enforcement
powers of the Central Bank, offences & other
general provisions.
MFK FIN536 Topic 7 37
 Deals with:-
i. Setting up of subsidiary & offices,

ii. Establishment of insurance fund,

iii. Direction and control of defaulting insurers,

iv. The control on management of licensee,

v. Accounts of licensee,

vi. Examination and investigation powers of the Central Bank,

vii. Winding up,

viii. The appointment of directors & chief executive officers,

ix. Outsourcing of core insurance activities.

x. Other general provisions such as penalties etc.

MFK FIN536 Topic 7 38
Takaful Act, 1984

MFK FIN536 Topic 7 39

 A scheme based on brotherhood, solidarity & mutual assistance
which provides for mutual financial aid assistance to the participants
in case of need.

 To reduce risk of loss due to misfortune.

 Resources are pooled to help the needy does not contradict Syariah.

 In line with principal of compensation & shared responsibility among

the community.

 Operations of Takaful business in Malaysia are governed by the

Takaful Act 1984.

MFK FIN536 Topic 7 40

 An Act to provide for the regulation of takaful business in Malaysia and for
other purposes relating to or connected with takaful:-

i. Conduct of takaful business,

ii. International takaful business,

iii. Returns, investigations, winding-up and transfer of business,

iv. Other general provisions such as advice of Shariah Advisory Council,

indemnity etc.

MFK FIN536 Topic 7 41

International Offshore
Financial Centre

MFK FIN536 Topic 7 42

 The act established the Labuan Offshore
Financial Services Authority (LOFSA) as a single
regulatory to promote and develop Labuan as
International Offshore Financial Centre.

MFK FIN536 Topic 7 43

At the end of the lessons, students should be able to:-

 Identify the various financial regulations.

 To understand the objectives of BNM as define by the Central Bank

Acts 1958.

 Identify the various legislations Administered and enforced by BNM.

 Identify various legislation pertaining to Labuan as an International

Offshore Financial Centre(IOFC).

MFK FIN536 Topic 4 46

 Financial institutions.

MFK FIN536 Topic 4 47

THANK
YOU…

MFK FIN536 Topic 4 48