Financial Sector Talent Enrichment Programme

The Malaysian Financial System

Jessica Chew
Assistant Governor
Bank Negara Malaysia
21 April 2011
1

Lets discuss the role of

the financial system

bank negara malaysia

YOU

Landscape of the Malaysian financial system

payment &
settlement
systems

markets

institutions

BANK NEGARA MALAYSIA

SECURITIES COMMISSION
stock
broking
companies

commercial
banks

Islamic banks

(re)insurance
companies

(re)takaful
operators

insurance
brokers/
adjustors

venture
capital/private
equity

asset/fund
management
companies

offshore
insurance

international
Islamic banks

international
takaful
operators

financial
advisors

financial
planners

dealers/ brokers

offshore fund
management
companies

money brokers

development
finance
institutions

factoring &
leasing
companies

money market

investment banks

foreign exchange market

unit trust
companies

LABUAN
FSA

other offshore
financial
institutions
debt securities
market

derivatives
market

equity market

payment system
operators

payment system issuers

clearing systems for

securities / funds / cheques / derivatives

offshore
banking

non-bank
financial
intermediaries

provident &
pension funds

Cagam as

cooperatives

Credit
Guarantee
Corporation

m oney lenders

housing credit
institutions

A snapshot of the financial sector

Diversified financial system

Strong financials
Contributes almost 12% of GDP
Workforce of 150,000
Regional presence
Global leader and centre for Islamic finance
Largest bond market in South East Asia

The financial sector and the economy

macroeconomy

household
sector

financial
sector

corporate
sector

financial & property markets

Financial instability can cause serious breakdown in market

functioning, with adverse implications for the broader economy
Consequences of financial instability
Disruption in financial intermediation
Credit crunch or lack of financing for new
investments and consumption activities
Settlement risk in payment systems
Financial market dislocations

Widespread unemployment
Social repercussions

Weakened local and foreign investor

confidence in financial sector

Asian financial crisis Malaysias experience

Extreme volatility in financial
markets
Downgrading of sovereign rating
from A+ to BBB- (S&P)

Fall in currency value

Ringgit depreciated by 40% against USD
Fall in stock market value
Declined by over 70% (Aug 98)

Corporate sector health

Household wealth
Investment & consumption

Declined economic
activities
GDP contracted 7.5%
Weak regional export
demand

VICIOUS CRISIS
CYCLE

Inefficiency in
intermediation process
Tight liquidity
Sharp loan growth moderation

Pressure on
Banking system
NPLs (2.2% 7.7%)
Capital erosion
Over-concentration of
risk

Putting the cost of a financial crisis into perspective

60

Public costs of financial restructuring (% of GDP)

51

50
40
25

30

13

20

10
0
Indonesia
Recapitalization

Thailand
Purchase of NPLs

S. Korea
Interest Costs

MALAYSIA
Liquidity Support

Asian Financial Crisis 1997

1600
1400
1200
1000
800
600
400
200
0

Losses in USD billions

US savings & Japan banking Asia financial

loan crisis (1986-crisis (1990-99) crisis (1998-99)
95)

Bank losses

Other financials

40
35
30
25
20
15
10
5
0
US subprime
crisis (2007present)

% of GDP (RHS)

Comparison of Financial Crises

the total cost of the Asian Financial Crisis

amounted to USD400 billion!!!
What can USD400 billion buy?
11.4 billion
bananas

1.3 billion
movie tickets

20 million
iPhones

250,000
Chanel bags

How long would it take to count to 400 billion?

If you count one number a second without stopping
until you reach a billion, that task would take you 31
years, 259 days, 1 hours, 46 minutes, and 40
seconds.
Multiply that by 400.

Cost of the global financial crisis.?

Review of Banking Licence Fees

How a financial crisis can occur

Rapid credit
expansion

Liberalisation and
deregulation

Weak credit assessments

Speculative activities
High leverage

Economic shocks
from greater market
volatility

Confidence crisis

interest/exchange
rates
asset prices

Financial crisis

liquidity
Weakened banking system
Reduced credit availability
Economic slow down

and be avoided

Rapid credit
expansion

Liberalisation of
financial system

Sound risk management

Strong financial condition

Protection of
consumers

Economic shocks
from greater market
volatility

Preserve market
confidence

interest rates
asset prices

Effective
regulation/
supervision & crisis
management

Financial stability

Able to absorb shocks

Continued performance of efficient intermediation function
(of mobilising savings, diversifying risks and allocating resources)

Role of Bank Negara Malaysia within the financial system

Principal objects
Promote monetary stability and financial stability conducive to
the sustainable growth of the Malaysian economy

What is financial stability?

...a condition in which the financial system
comprising financial intermediaries, markets &
market infrastructures is capable of
withstanding shocks...
In a broad sense think of financial stability in
terms of maintaining confidence in the financial
system

Primary functions
Regulate and supervise financial
institutions
Promote sound, progressive and
inclusive financial system
Provide oversight over the money
and foreign exchange market
Exercise oversight over payment
system

Financial stability encompasses both efficiency and

resilience of the financial system

financial resources are

allocated smoothly and

efficiently

financial
stability

financial
system
smoothly absorbs
financial and real
economic shocks

financial risks are

assessed, managed and

priced reasonably

Source: Schinasi (2006)

13

Changing landscape brings new challenges

Structural
transformations

Globalisation

More contestable
markets

Advances in
financial
engineering

Financial conglomeration

Larger and more complex financial institutions

New business models

Breakdown of geographical barriers

Increased cross-border flows & linkages

Dismantling of traditional boundaries between

intermediaries

Emergence of structured products

Increasing importance of pooled funds (pensions, life

insurance, mutual funds, investment trusts) as
channel of savings

Securitisation

Credit derivatives
14

A comprehensive framework is essential to support financial

stability

efficient
safety nets

Strong corporate governance

effective
regulatory
framework

robust
financial
infrastructure

comprehensive
surveillance
framework

Sound risk management

Effective legal framework
And prudential standards

sound
supervisory
framework

Market transparency
Responsibility to consumers

15

Financial sector development complements the regulation and

supervision of financial institutions

Development of
financial markets

Consumer protection
arrangements

Institutional and
capacity building

Human capital
development

Promoting balanced & equitable through financial

inclusion
ensure all econom ic sectors, regions and the population at large
have access to a broad range of financial products and services

nation
building

access to financial information

political
stability

growth with
balanced
distribution

access to financial assistance

financial
inclusion
social
harmony

access to financial services

access to financing

peoples
confidence

17

The five pillars in building an inclusive financial sector in Malaysia

Conducive environment for greater financial inclusion

1

Create a
diverse range
of financial

service
providers that
thrives and
competes

Enhance

distribution
channels to
ensure
widespread
access to
financial
services

Ensure a
minimum level
of banking

products and
services are
provided at
reasonable
costs

Improve

Strengthen
the
supporting
financial

financial
literacy,
advisory,
awareness
and
consumer
education

infrastructure
and enabling
environment

Comprehensive blueprints to develop and strengthen the financial

system

financial sector masterplan

PHASE I
2001

9.7%

capital markets masterplan

PHASE II

build capacity & capability

level playing field

enhance infrastructure

intensify competition

PHASE III

assimilate into
global arena

2010

introduce new foreign

competition

greater financial sector contribution to GDP

11.7%

stronger financial institutions arising from capacity building m easures

dom estic financial institutions w ith presence abroad
M alaysia I nternational I slam ic Financial Centre
19

The Malaysian financial sector moving forward

greater role as an enabler, catalyst and driver of growth

Reinforce Malaysias position as an international hub for Islamic services

through accelerated development and promotion of Islamic finance

Foster increased international linkages and regional integration

through enhanced presence of Malaysian financial institutions & development of
the domestic and regional financial markets

ENABLER

CATALYST

DRIVER

Facilitate transformation
into a high income, high
value-added economy

Accelerate growth of
supporting and ancillary
services sectors

Generate higher
contribution to gross
domestic product

PROMOTE SOCIO-ECONOMIC DEVELOPMENT OF MALAYSIA

PRESERVE FINANCIAL SOUNDNESS & STABILITY

20

Realignment of regulatory and supervisory functions to further

enhance effectiveness
REGULATION SECTOR

Financial
Surveillance

Payment
Systems
Policy

Prudential
Financial
Policy

Financial
Sector
Development

Consumer
and Market
Conduct

Islamic
Banking and
Takaful
Development

BEFORE
REALIGNMENT

BANKING

INSURANCE

ISLAMIC
BANKING &
TAKAFUL

Development Financial
Enterprises
Payment System Policy

SUPERVISION
SECTOR
Financial
Conglomerates
Supervision

Banking
Supervision

PAYMENT
SYSTEMS

From sectoral to
functional organisation

Provide more
comprehensive view and
cohesive approach to
development of financial
system

Ensure clear distinction

between prudential
regulation &
developmental
objectives

Sharpen focus on risk

management with
greater consistency in
management of similar
risks

Insurance and
Takaful
Supervision

Supervisory
Practices unit
DFE

Complementary external framework further reinforces

sound financial sector
Malaysia Deposit
Insurance
Corporation

Malaysian Accounting
Standards Board

Industry associations

Professional bodies

Administers statutory deposit insurance system

Differential premium contributions to deposit

insurance fund based on risk profile of individual
institutions

Responsible for financial reporting standards

Promotes convergence with international reporting

standards

Establishes industry rules on market practices and

conduct of market intermediaries

Accounting, actuarial, legal and financial analysts

Establishes codes of conduct and good practice

Provides guidance to members in specific areas

relating to professions discharge of roles &
responsibilities

Your role in the Malaysian financial system

MALAYSIAN ECONOMY
financial system
financial institutions
bank negara
malaysia

YOU

consumer

leader
employee

23

Useful links
Bank Negara Malaysia
http://www.bnm.gov.my
Malaysian Deposit Insurance Corporation
http://www.pidm.gov.my
Information portals
http://www.bankinginfo.com.my
http://www.insuranceinfo.com.my
http://www.smeinfo.com.my
Centres for education and development
http://www.iclif.org
http://www.inceif.org
http://www.seacen.org/
http://www.ifsb.org/
http://www.insurance.com.my/
Other regulators
http://www.sc.com.my
http://www.lofsa.gov.my

Institutes / Associations of Industries

http://www.ibbm.org.my
http://www.aibim.com/
http://www.liam.org.my/
http://www.piam.org.my/
Financial Mediation Bureau
http://www.fmb.org.my/
Credit Counselling and Debt Management Agency
http://www.akpk.org.my
Credit Guarantee Corporation Malaysia Berhad
http://www.cgc.gov.my/
Malaysia International Islamic Financial Centre
http://www.mifc.com/
Cagamas Berhad
http://www.cagamas.com.my/
Small and Medium Industries Development
Corporation
http://www.smidec.gov.my/
Bursa Malaysia
http://www.bursamalaysia.com/
24

THANK YOU
Questions?

25

Business of Commercial banks

Wide range of corporate and retail services

Acceptance of deposits : savings, time and demand
Extension of loans : term, revolving, trade finance, credit cards, overdrafts
Treasury services : foreign currency dealings, derivative instruments
Payments services : cheque clearing, remittances
Custodial services
Wealth management services

Largest mobiliser and provider of funds

Specialise in retail & consumer banking

Acceptance of deposits : savings, time
Loans : Hire purchase for cars, leasing, housing loan, secured personal
loans and secured guarantees

26

Islamic banking activities

Islamic banks carry out almost similar activities in nature as commercial banks
but based on Shariah principles

Islamic banking services available via:

Domestic-owned Islamic banks
Conventional commercial banks which offer Islamic banking services
through Islamic windows or full fledged Islamic subsidiaries
Foreign Islamic banks

Islamic Interbank Money Market established since 1994

Facilitates interbank acceptance and investment
Trading of Islamic instruments
Facilitates better asset liability management

27

Investment bank framework

Holds 2 licenses
Merchant bank (under Banking & Financial Institutions Act 1989)
Capital market services license (under Capital Market Services Act
2007)
Jointly regulated by BNM and SC
Entities

Formula for IBs formation

Within banking
groups

Merchant bank + Stockbroking company

Universal brokers

Universal Brokers + Discount House

Minimum Capital
Requirement
RM2 billion
(on Group basis)
RM500 million

Discount houses

2 Discount Houses + Stockbroking company

28

Business of investment banks

Wholesale banking business
Focus on serving the corporate sector, specialising in corporate advisory and
finance, arranging for issue and listing of shares, and investment portfolio
management
Activities undertaken
Underwriter or agent for corporations issuing securities
Offer advisory services to investors

Facilitate mergers and acquisitions, securities offerings and corporate restructuring

Act as a broker for institutional clients

Permitted to accept deposit from any persons

Deposit must with a minimum amount of RM500,000

29

Comparing CBs and IBs

Commercial Banks

Investment Banks

Regulatory body

BNM

BNM + SC

Min capital funds

RM2 b (banking group)

RM2 b (banking group)

RM300m for stand alone

Islamic banks & foreign
banks

RM500m for stand alone

banks

Products and services

i)

Loans

All types

Usually ancillary to fee

based activities

i)

Deposits

All types

Corporate and interbank

(RM500k min)

Not allowed to deal in

equities

Stockbroking
Advisory services

ii) Other activities

30

Development Financial Institutions

Owned or largely
funded by the
Government

DFIs

Functions
To develop and promote certain
strategic sectors of the economy
(specialised institutions)
To achieve socio-economic goals
To complement the role of the
banking institutions

Regulated by BNM:
Bank Pembangunan
SME Bank
EXIM Bank
Bank Simpanan Nasional
Bank Kerjasama Rakyat
Agrobank

31

Insurance & Takaful Industry

Insurers/Takaful Operators

Intermediaries
Insurance / Takaful
brokers
Loss adjusters
Financial advisors

Life / Family takaful

General
Composite
Reinsurers / Retakaful
Type of Insurance

Mobilises long-term savings to

support economic growth
Risk management & financial
planning solutions for
businesses & individuals
Activities

Life Insurance / Family

Takaful Operators

Insurance business concerned with life policies and those incidental to life
insurers business. Takaful business for the benefit of individual & family

General Insurance / General

Takaful Operator

All insurance business which is not life business (eg. property and liability)
All takaful business which is not family takaful business

Composite Insurance

Combination of life and general insurance by a single entity

Reinsurance Company /
Retakaful Operator

Insurance of risks assumed by the insurer under the policies it has issued.
Offers coverage for takaful companies against risks, loss or dilution of its
capital and reserves resulting from high-claim exposure.

Insurance / Takaful brokers

Solicit, negotiate or procure a policy from an insurer / takaful operator

Insurance / Takaful adjusters

Ascertaining cause, circumstance & quantum of loss

Financial advisors

Financial planning advise relating to insurance products

32

Money Brokers

Arrange deals between interbank institutions in fixed income, money

market instruments, forex, cash & unlisted derivatives products in the
wholesale markets

Money brokers may also arrange deals between banking institutions and
foreign counterparties in the international money market

6 money brokers:
1)

Affin Moneybrokers Sdn Bhd

2)

Amanah Butler Malaysia Sdn Bhd

3)

First TAZ Tradition Sdn Bhd

4)

Forex Enterprise Sdn Bhd

5)

Harlow's & MGI Sdn Bhd

6)

KAF-Astley & Pearce Sdn Bhd

As financial intermediaries, money brokers

play important role in facilitating interbank
trades, but pose minimal impact on financial
system stability

Money brokers do not pose

systemic risk:
Only provide service and
act as middle person for
market participants - do
not take position
Not custodian of public
funds

Financial Markets
Money Market

Market for ST funds (maturities <12 mths)

Interbank borrowing & placement, repo and SBL transactions
Purchase & sale of ST papers

Forex Market

Market for buying and selling of one currency against RM or against other foreign currencies
Dealings in forex market through spot, forward or swap market
Under the Exchange Control Act 1953, FX transactions have to be undertaken through authorised
dealers (CBs & designated IBs)

Capital Market
Equity Market

Market for LT funds for conventional & Islamic financial assets

Avenue for corporations to raise funds by issuing stocks & shares
Secondary market trading in stocks and shares is conducted through stockbrokers on Bursa Malaysia,
inclusive of ACE Market

Bond Market

Avenue for issuers to raise funds via debentures

Comprises public and private debt securities and sukuk market
OTC secondary market

Derivatives
Market

Markets for trading instruments that provide contingent claims on underlying assets
Main use - to hedge against volatility in the price of the underlying assets
Examples - forwards, futures, options, swaps, and credit derivatives
Instruments traded - stock index, interest rate & commodity futures

34