CHAPTER 1

THE STRUCTURE OF
MALAYSIAN FINANCIAL
SYSTEM
PART 1

PREPARED BY : NURUL FATHIYAH BT KAMARUL BAHRIN

SURIANOR KAMARALZAMAN@ UITM SHAH ALAM 1

Learning Outcomes:
At the end of the lesson, students should be able to:
Identify the components of the Malaysian Financal System.
Distinguish the Malaysian Banking System, the Non Bank
Financial Intermediaries and the Financial markets.

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THE STRUCTURE OF MALAYSIAN FINANCIAL
SYSTEM

The Malaysian Financial System can be divided into three; the banking
system, the non-bank financial intermediaries and the financial markets.
These can be elaborated further by using a chart :

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 The
The Malaysian
Malaysian
Financial
Financial system
system

Financial
Financial Financial
Financial
Institutions
Institutions Markets
Markets

Banking
Banking Non-bank
Non-bankFinancial
Financial
System
System Intermediaries
Intermediaries

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THE MALAYSIAN BANKING SYSTEM

The Malaysian Banking System consists of:

I. Central Bank (Bank Negara Malaysia- BNM)
II. Banking Institutions- Commercial banks, Islamic banks and Investment
Banks.
III. Other banking institutions- the representatives offices of foreign banks
and the offshore banks in the Labuan IBFC.
 The Banking System in Malaysia is under the control and supervision
of the Bank Negara Malaysia.
 It is can be shown in the chart below:

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 THE STRUCTURE OF MALAYSIAN
BANKING SYSTEM

The
The Malaysian
Malaysian
Banking
Banking System
System

BANK NEGARA
MALAYSIA

Commercial Islamic Bank Investment

Banks Banks

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BANK NEGARA MALAYSIA (BNM)
The Central Bank of Malaysia was established on 26 January 1959.
At the same time, the Banking Ordinance, 1958, which provided for the licensing and
regulation of the business of banking in the Federation of Malaya also came into force.
The banking ordinance has been replaced by the Central Bank of Malaysia Act 2009 which
become affective on 25 November 2009
CB’S OBJECTIVES
•To issue currency & keep reserves safeguarding the value of the currency
•To act as a banker & financial adviser / agent to the government;
•To promote monetary stability & a sound financial structure; and
•To influence the credit situation to the advantage of the country.
•To be responsible for the supervision , regulation and development of the insurance industry
•To be directly responsible to the government on exchange control matters, administers the
Exchange Control Act 1953 (amended 1989)

SURIANOR KAMARALZAMAN@ UITM SHAH ALAM 8

FUNCTIONS OF BNM
• The banker for currency issue
• To hold /keep the country’s official external reserves & safeguarding the
value of the ringgit.
• The banker & financial adviser to the government
• The banker to the banks
• To promote monetary policy & sound financial structure
• To influence the credit situation to the advantage of the country.
1. Bank for Currency Issue
• Arrange for the printing of currency notes and minting of coins
• Issue, re-issue & exchange notes and coins
• Arrange for the sale custody of unissued stock of currency
• Every Central Banks in the world is known as the bank of issue.
2. Keeper of International Reserves & Safeguarding the
Value of the RM
BNM is the main keeper of the country’s official external /
international reserves.
International reserves – gold, reserves position in IMF, Special
Drawing Right & diversified portfolio of Forex assets denominated in
foreign currencies ( bank balances , treasury bills & long term
securities )
3. Government’s Banker & Financial Advisor

 As a banker, fiscal agent & financial advisor to Federal & State Government and Statutory
Authority.
 As a fiscal agent & financial advisor – manage national debt and the raising of government loan
thru well managed loan programmes.
 Government banker : Manages government accounts. – BNM provide cheque facilities, accept
funds and make payments on behalf of the government and undertake forex business of the
government.
 Source of fund to the government: Provides temporary advances & finances governments
investment in Treasury Bills & Other Government securities. BNM can determine the interest
rate to be charged on its own.
 Financial advisor: represents in government bodies or committees as nation’s policy maker.
4. Banker to a Banks
• The financial institution maintain various types of account with BNM.
• Eg. SRR and clearing accounts
• To distribute currency when receive order from commercial banks & charge to their clearing
account.
• Lender of last resort – by extending credit to ensure confidence in orderly operations of the
banking system.
• Provide licensing of banks and non-banks institutions
• Inspection and investigation of banks and non-bank institutions
5. Promote monetary stability & a sound financial structure.
To regulate the volume of money & generation of credit thru wide range of monetary
instruments (qualitative and quantitative measure)
By ensuring price stability – which means ensuring that inflation rate is stable remains low.
BNM still requires approval from MOF even though it is empowered autonomously in
implementation of monetary policies measures
6. To influence the credit situation to
the advantage of the country
BNM has to ensure that money supply in the country is flexible and sufficient
to sustain the economic growth
By imposing statutory reserve requirements, interest rates regulation.
MONETARY POLICY INSTRUMENTS
Monetary Policy Instrument is defined as an effective tools for monetary management in Malaysia
where it enables BNM to control the volume of liquidity in the banking system and, hence credit
creation in the economy.
The instrument of monetary policy instruments are :
1. Statutory Reserve Requirement (SRR)
•Banking institution are required to maintain a certain percentage of their reserve / eligible
liabilities (EL) with BNM.
•Eligible liabilities comprised of total deposit, net amounts due to other financial institutions,
NCD.
•Purpose – BNM to control the volume of liquidity (to increase or decrease) – the capacity of the
commercial banks to generate loans & advances. Higher ratio means more money is t o be
locked with BNM
•It’s one of the most effective instrument of monetary & credit control
•SRR is very powerful instruments because it affects not only capacity of bank to give credit &
accept deposits but also the cost of its funds
•Earn no interest. As such cost will be passed on to the customer by increasing interest rate
2. Statutory Liquidity Requirement (SLR)
• Financial institution are required to maintain a minimum level of liquid assets
against the eligible liabilities.
• The funds are immobilized in the banks themselves. It will still yield a return
• SLR is designed to protect depositors and as a means of influencing the credit.
• Primary reason for the commercial banks to have a reservoir of liquidity to
meet unusual deposit withdrawals
• Excess liquid reserves / assets are maintained voluntarily for the purposes of
meeting day-to day contingencies.
3. Centralization of Government and EPF Deposits with
BNM
EPF account in BNM was introduced to enable BNM to reduce liquidity at source and provide
greater flexibility in its monetary management.
Interest is paid on these accounts based on market rates.
4. Open Market Operations
Involved the purchase & sale of Government Securities by BNM.
MMO influences the liquidity situation in the banking system though the selling and
repurchasing or government papers
Malaysian Government Securities (MGS)
Treasury Bills
Repurchase Agreement (REPOs)
Government Investment Certificates
Cagarmas Bond etc
It is intended directly affect the reserves of the banks when they either purchase or sell
the securities and hence the volume of money in the banking system
When the BNM sells instruments it absorbs money from the system.
When BNM buys instruments, it injects money into the system.
5. Discount Operations
The financial institutions may have temporary access to the BNM credit facilities, through the
rediscounting of eligible short term assets.
Financial institution may borrow from BNM by rediscounting of eligible bills or seek an advance
secured by collateral accepted to BNM such as Government Securities.
BNM act as a lender of last resort to the financial institutions to meet unexpected withdrawals
(liquidity stress)
6. Credit Control and Guidelines on Lending
Some of the guidelines:
Extending of a certain percentage of their loan portfolio as credits to the Bumiputra
community, small scale enterprises, agricultural food productions, manufacturing & loan to
individuals for housing
These guidelines are continously reviewed from time to time to meet the need and aspiration
of the country as well as for economic justification
7. Moral Suasion
• Traditional effort by BNM to induce the banking and other financial sectors to its
policy initiatives through a voluntary reaction
• Some of these include
– Financial institutions were discouraged from lending excessively for speculation
activity
– Financial institutions were encouraged to extend more longer-term financing
loans, to be granted on the basis of viability of projects rather than depending
purely on collateral
• Commercial banks were encouraged to step up their lending to priority areas e.g Bumiputra
community and small borrowers.
• Banking institutions were also urged to limit lending secured by shares to protect the over exposure
to the volatility of the stock market.
 SOURCES & USES OF FUNDS OF BNM
I. SOURCES (LIABILITIES AND CAPITAL)
1. Currency in circulation
2. Deposits by:
 Financial Institutions
 Federal Government
 Others

3. Bank Negara Papers

4. Allocation of Special Drawing Rights
5. Other Liabilities
1. USES (ASSETS)
1. Gold and Foreign Exchange
2. International Monetory Fund Reserve Position
3. Holdings of Special Drawing Rights
4. Malaysian Government Papers
5. Deposits with Financial Institution
6. Loans and Advance
7. Other Assets
 GUIDELINES OF BNM
Six principles under BNM / Garis Paduan (GP7) in relation to the code of conduct for bankers.
I. Avoid conflict of interest
II. Avoid misuse of position
III. Prevent misuse of information gained through the financial institution’s operations.
IV. Ensure completeness and accuracy of relevant records
V. Ensure confidentiality of communications and transactions between the financial institution
and its customer
VI. Ensure fair and equitable treatment for all customers
Anti-Money Laundering and Anti- Terrorism
Financing Act 2001 (AMLATFA)
The guidelines are established and formulated to address the requirements that must be
complied with by the reporting financial institutions under the AMLATFA to effectively combat
money laundering and financing if terrorism.
Money Laundering
Process by which proceeds derived from criminal or illegal activities are
converted to legitimate funds
It embodies all transactions which disguise, conceal or impede the
establishment of the illegal origins location or ownership of the funds.
COMMON SOURCES OF MONEY LAUNDERING
• Corruption Proceeds
• Drugs proceeds • Banks become the
• Cheating, fraud and scams MAJOR TARGET in
• Extortion and ransom money money laundering
activities.
• Smuggling • Because banks provide
variety of products that
• Copyright infringement and pirated goods can be used to conceal the
• Human trafficking source of money.
STAGES OF MONEY LAUNDERING
• Physical disposal
of cash proceeds
derived from
illegal activities LAYERING • The turning of criminally
derived wealth into legitimate
• Obj: to get the funds.
• Obj: to place that laundered
illicit cash into the • Separate illicit proceeds from funds back into the economy so
their source through that they re-enter the financial
financial system. transactions that disguise audit system appearing as a legitimate
trail and provide anonymity. funds.
• Obj: to make detection as hard
as possible by breaking the
proceeds into several parts.
PLACEMENT INTEGRATION

CLEAN MONEY
DIRTY MONEY
 Financing of Terrorism
I. Refers to carrying out transactions involving funds that may or may not be owned by
terrorist, or that have been, or are intended to be , used to assist the commission of
terrorism.
II. Offences under AMLATFA 2001
Defined under Section 4 as the
act of any person who:
Engages directly or indirectly, in a
transaction that involves the • Fine not exceeding RM5,000,000
process of any unlawful activity; or imprisonment for a term not
Acquires, receives, possesses, exceeding 5 years or both, upon
disguises, transfers, converts, conviction.
exchanges, carries, disposes,
uses, removes from or bring into
Malaysia proceeds of any
unlawful activity;
 Favours
Laundering Funds
Motivation is formal MONEY
of dirty derived from
profit financial LAUNDERING
money crime
system

Funds derived
from Favours
Clean money
Motivation is donation, informal TERRORISM
may be
ideological business and financial FINANCING
involved sponsorship system
crime
 Prevention measures:
1. Develop a customer acceptance policy and procedures to address the establishment of business of
business relationship with the customer.
2. Conduct customer due diligence (reasonable care) and obtain satisfactorily evidence in its records, the
identity and legal evidence there on
3. Keep all records and documents of transactions, in particular, those obtained during customer due
diligence procedures, for at least 6 years and to ensure the retained documents are able to create an audit
trail.
4. Shall conduct on-going customer due diligence to examine and clarify the economic background and
purpose of any transaction.
5. Promptly submit a suspicious report to the Financial Intelligence Unit in Bank Negara Malaysia when any
of its employees involves proceeds from an unlawful activity.
6. Appoint one or more officers at the senior management level to be the compliance officer responsible for
the submission of suspicious transaction reports to the Financial Intelligence Unit in Bank Negara
Malaysia.
7. Provides training and guidance to staff in the operation of procedures and controls relating to anti-money
laundering.
TUTORIAL QUESTIONS
1. Briefly explain the function of BNM.
2. Describe the stages of money laundering.
3. Elaborate qualitative tools that use in the monetary policy instruments.
4. Elaborate three quantitative tools that use in the monetary policy instruments.
5. Discuss how to prevent measures for money laundering.
THANK YOU