BANK NEGARA MALAYSIA & FINANCIAL SYSTEM

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OUTLINES:

• The roles of BNM• Monetary Instruments tools• Financial System

INTRODUCTION• Was established on Jan 26, 1959.

• Was set up due to the need for the management of the country’s money and credit situation.

• BNM also as the controller and supervisor of the institutions under the banking system

OBJECTIVES of BNM• The objectives of the central bank are defined as:

1. To issue current and keep reserves in safeguarding the value of money.

• Sole right to issue currency – started on june 12, 1967 (unit: m’sian dollar)

• Holds & manages international currency reserves (gold, forex – major

components). Ringgit is to be fully backed by external reserves.

• Since sept 1975 the external value of the ringgit has been determined in terms

of a composite basket comprising the currencies of major trading partners of

m’sian.

2. To act as a banker and fin advisor/agent to government

• Provides banking services & management of government accounts

– check facilities, accepts funds, make payments, foreign exchange

business.

• Source of funds to government.

- Temporary advances to cover deficit in the budget.

- Legal limitations to the amount and duration of the loans.

• Management of national debt

- Advises about the term & timing of loans & issue of new types of

securities.

3. To promote monetary stability and sound financial structure.

Formulates & implements monetary policies.

Management of the banking system

• Lender of last resort to banks.

• Rules for sound practices : CBO 1958, BAFIA 1989, Islamic banking act 1983.

• Licensing of banks and non-banks

• Provides facilities for settling indebtedness among commercial banks and

provides for the transfer of funds between centers.

• Currency distribution

• Investigation and inspection.

4. To influence the credit situation to the advantage of the country. Regulates and allocates credit in accordance with what it perceives to be the

requirements of the economy.

5. To promote the reliable, efficient and smooth operation of national

payment and settlement systems. Oversees the payment system – includes formulating policies and guidelines to regulate

the payment system.

Operates the payments system

Facilitates further development of the payments system-BNM encourages the payments

industry to adopt best practices, international standards and cutting edge technologies in

enhancing the payment system

FUNCTIONS OF CENTRAL BANK OF MALAYSIA

FUNCTIONS OF BNM

Banker for Currency issue

Keeper of international ReservesGovernment banker and advisor

Responsibility for monetary policy

Banker to the banks

POWERS OF CENTRAL BANKS• Provides for the administration & specify objectives of BNM• Enumerates the powers & duties of the BNM

CENTRAL BANK ORDINANCE (CBO)1959

• Provides for licensing & regulation of Islamic banking business• Has provisions on financial requirements & duties of an Islamic Bank

ISLAMIC BANKING ACT 1983

• Provide for licensing & regulation of financial institutions that conduct the banking & financial business

BANKING & FINANCIAL INSTITUTIONS ACT

(BAFIA)1989

• Gives BNM powers to investigate the affairs of any person it suspects or has reason to believe is a deposit-taker

• Empowers BNM to freeze the properties

ESSENTIAL (PROTECTION OF DEPOSITORS) REGULATIONS

1986

• Deal with the licensing of insurers, ins brokers, adjusters .• Provides matters relating to policies, insurance guarantee scheme

fund, enforcement powers of BNM, offences & other general provisions

INSURANCE ACT 1997

• Provides for registration & regulation of takaful business in Malaysia TAKAFUL ACT 1984

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The Central Bank of Malaysia Act 1958 (revised 1994)

• Provides for the administration and specify the objectives of the Central

Bank.

• Specifies the powers and duties of the CB in relation to:

▫ The issuance of currency

▫ Maintenance of external reserve

▫ Authorized business of the bank

▫ Specific powers to deal with ailing institutions

▫ General provisions on the Bank’s accounts, powers to compound etc

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Islamic Banking Act 1983

• To provide for the licensing and regulation of Islamic Banking business.

• Provision on:

▫ The requirements and duties of an Islamic Bank

▫ Ownership, control and management of Islamic banks

▫ Restriction on its business

▫ Power of supervision and control over Islamic bank

▫ Other general provisions such as penalties etc.

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Takaful Act 1984• Takaful:

▫ Insurance in Islam.

▫ To reduce risk of loss due to misfortune.

▫ Resources are pooled to help the needy & should not contradict Syariah.

▫ In line with the principal of compensation and shared responsibility among

the community.

▫ A scheme based on brotherhood, solidarity & mutual assistance which

provides for mutual financial aid assistance to the participants in case of need.

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Takaful Act 1984• To provide for:

▫The registration and regulation of takaful business in Malaysia

▫For the purposes relating to or connected with takaful

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Insurance Act 1963• Provision of act deal with the licensing of:

▫ Insurers,

▫ Insurance brokers

▫ Adjusters

▫ Reinsurers

• Provide for the matters relating to policies, insurance guarantee scheme

fund, enforcement powers of the BNM, offences and other general

provisions.

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Insurance Act 1963• Deals with:

▫ Setting up of subsidiary& offices

▫ Establishment of insurance fund

▫ Direction and control of defaulting insurers

▫ The control on management of licensee

▫ Accounts of licensee

▫ Examination and investigation powers of the BNM

▫ Winding up

▫ The appointment of directors and CEO

▫ Outsourcing of core insurance activities

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The Offshore Banking Act 1990

• Stated the functions, powers and duties of the bank.

• Provision on:

▫ Licensing of Offshore Banks

Offshore banking business to be carried on only under license

Submission of application for license to bank

Grant or refusal of license by Minister

Revocation of license or surrender of license

Minimum amount of capital funds

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Duties of Licensed Offshore Banks

• Offices and subsidiaries

• Prohibition of certain accounts

• Appointment and duties of auditor

• Financial statements to be submitted to bank

• License fees

• Transactions in Malaysia currency is prohibited

MONETARY POLICY

MONETARY POLICY

• Management of money supply.

• Substantial changes in money supply will give impact to the

economic conditions.

• In order to promote monetary stability, BNM will influence

the money supply level through the employment of monetary

tools.

MONETARY POLICY• Central Bank of Malaysia ordinance (CBO) 1958: BNM is empowered to

regulate the supply of money & credit creation through:

▫ Qualitative measures Interest rate Ceiling Selected Credit Control Moral Suasion

▫ Quantitative measures Statutory reserved requirement (SRQ) Minimum Liquidity Requirement (MLR) Money Market Operation (MMO)

QUALITATIVE MEASURES

QualitativeMeasures

Interest Rate Ceiling

Eg. Involved in setting the minimum lending rates for bank loans.

Selected Credit Control

These measure are used in regulating the volume and direction

of credit

Moral Suasion

Inducing a voluntary response from the

financial system to its policy initiatives

• Qualitative Measures

1) Interest Rate Ceiling

Prior to 1978, CB involved in setting the minimum lending rates for bank loans & ceiling on

interest rates offered for deposits

Since 1971, steps to deregulate interest rates was taken

Encourage a market-oriented system of interest rate

Reflect the true cost of funds

October 1978, CB allowed commercial banks to determine the deposit and lending rates

Among the most effective measures available to CB in regulating volume & direction of

credit

To ensure the economic & social objectives are met, consistent with the national objectives

Done by holding down demand for credit without limiting the available supply; do not raise

interest rates

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2) Selected Credit Control

Among the most effective measures available to CB in regulating

volume & direction of credit

To ensure the economic & social objectives are met, consistent with

the national objectives

Done by holding down demand for credit without limiting the

available supply; do not raise interest rates

Examples:

Guidelines on Hire-Purchase Loans for buying private motor vehicles

Guidelines on Credit Card Operations

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3) Moral Suasion

Refers to a traditional central bank technique of informally inducing a

voluntary response from the financial system to its policy initiatives

Examples:

Discourage financial institutions to lend excessively for speculation

activity

Encourage to extend more longer-term financing loans

Encourage to step up lending to priority areas such as Bumiputera

community & small borrowers

Urged to limit lending secured by shares

QUANTITATIVE MEASURES

QuanitativeMeasures

Liquidity Requirement

The banking institutions required

to observed min liquidity ratio.

Monetary Market Operations

Influence the liquidity situation in a system Discount Operation

Centralization of Gov & EPF Deposit with The Central Banks

Statutory Reserve Requirement (SSR)

SSR = Eligible liabilities which comprise REPO’s +

NCD’s + Interbank borrowing

•Quantitative measures

1) Statutory Reserve Requirements (SRR) Sec 37 (1)(c) of CBO

All banking institutions required to place certain % of EL as cash reserves

with BNM

Bank’s eligible liabilities (EL): deposits & net interbank borrowings

Powerful monetary instrument; affects level of deposits & loans of a bank

Higher % of SRR, reduce amount of deposits & loans

SRR immobilized in CB & do not earn interest; cost passed on to

customers thru higher lending rate

2) Minimum Liquidity Requirements (MLR) Sec 38 (1) BAFIA 1989

Banking institutions required to observe a minimum liquidity ratio

As % of EL; operates the same manner as SRR

MLR immobilized in the bank & do yield a return

Reasons for imposition of MLR:

To ensure the banking institutions are liquid at all times

To encourage direct credit to desired areas

To ensure continuous & ready financing of Government’s development

projects

To influence the liquidity situation in the banking system

3) Money Market Operations (MMO)

Operations conducted by CB to influence the liquidity situation in the system

Can be conducted by:

Open market operations (OMO)

Involves purchase & sale of Government papers by CB in open organized markets.

Affect directly reserves of banks & thereby flow of bank credit and money.

Initiative taken solely by CB

Borrowing or lending

In situation CB face limited access to OMO due to shortage of papers. More widely

used; smoothen seasonal fluctuation in liquidity. Normally undertaken in short-

term maturity periods of one to three months. Advantage is flexibility; (maturity,

rate of interest structure & amount) can be varied