a01 p1 statutory requirements - bank negara malaysia...seri dr. samsudin bin hitam resigned from the...

Statutory Requirements

In accordance with section 48 of the Central Bank of Malaysia Act 1958, Bank Negara Malaysiahereby publishes and has transmitted to the Minister of Finance a copy of this Annual Reporttogether with a copy of its Annual Accounts for the year ended 31 December 2004, which havebeen examined and certified by the Auditor-General. The Annual Accounts will also be publishedin the Gazette.

23 March 2005

Zeti Akhtar AzizChairman

Board of Directors

Board of Directors

Dr. Zeti Akhtar AzizD.K. (Johor), P.S.M., S.S.A.P., D.P.M.J.Governor and Chairman

Dato’ Ooi Sang KuangD.M.P.N.Deputy Governor

Datuk Zamani bin Abdul GhaniD.M.S.M., D.S.M., K.M.N.Deputy Governor

Dato’ Izzuddin bin DaliD.S.P.N., K.M.N.

Datuk Oh Siew NamP.J.N.

Tan Sri Datuk Amar Haji Bujang bin Mohd. NorP.S.M., D.A., P.N.B.S., J.S.M., J.B.S., A.M.N., P.B.J. P.P.D.(Emas)

Tan Sri Dato’ Seri Dr. Mohd. Noordin bin Md. SopieeP.S.M., D.G.P.N., D.I.M.P., D.M.S.M.

Dato’ N. SadasivanD.P.M.P., J.S.M., K.M.N.

Tan Sri Dato Sri Mohd Hassan MaricanP.S.M., S.P.M.T., D.S.M.T., P.N.B.S., A.M.K.

Datuk Zamani bin Abdul Ghani was appointed as Deputy Governor with effect from 16 May 2004. Dato’ MohdSalleh bin Hj. Harun retired on 15 May 2004 on completion of his term as Deputy Governor.

Dato’ Izzuddin bin Dali was appointed as a member of the Board with effect from 1 August 2004. Tan Sri Dato’Seri Dr. Samsudin bin Hitam resigned from the Board with effect from 31 July 2004 on completion of his term asSecretary General to the Treasury.

Tan Sri Dato Sri Mohd Hassan Marican was appointed as a member of the Board with effect from1 February 2005.

Governor Dr. Zeti Akhtar Aziz

Deputy Governor Dato’ Ooi Sang KuangDeputy Governor Datuk Zamani bin Abdul Ghani

Assistant Governor Dato’ Mohamad Daud bin Hj. Dol MoinAssistant Governor Dato’ Mohd Razif bin Abd. KadirAssistant Governor Muhammad bin IbrahimAssistant Governor Nor Shamsiah binti Mohd Yunus

Secretary to the Board Dato’ Mohd Nor bin Mashor

DirectorGovernor’s Office Ng Chow SoonCorporate Communications Abu Hassan Alshari bin YahayaInternal Audit Hor Weng KengLegal Gopala Krishnan SundaramSpecial Investigation Kamari Zaman bin JuhariFinancial Intelligence Koid Swee Lian

EconomicsMonetary Assessment and Strategy Dr. Sukhdave SinghEconomics V. VijayaledchumyInternational Ismail bin AlowiFinance Abdul Aziz bin Abdul Manaf

RegulationBank Regulation Dato’ Mohd Razif bin Abd. KadirInsurance Regulation Donald Joshua JaganathanIslamic Banking and Takaful Bakarudin bin IshakDFI Regulation Che Zakiah binti Che DinRisk Management Santhini a/p ChandrapalSmall and Medium Enterprise Marianus Vong Shin Tzoi @ Joseph Vong

SupervisionBank Supervision I Azizan bin Haji Abd RahmanBank Supervision II Chung Chee LeongInsurance Supervision Sani bin Ab. HamidInformation Systems Supervision Ramli bin SaadPayment Systems Ahmad Hizzad bin Baharuddin

Investment and OperationsInvestment Operations and Financial Market Wan Hanisah binti Wan IbrahimForeign Exchange Administration Mahdi bin Mohd. AriffinStatistical Services Chan Yan Kit

Organisational DevelopmentIT Services Hong Yang SingHuman Resource Management Mior Mohd Zain bin Mior Mohd TahirHuman Resource Development Centre Lim Lai HongStrategic Management Lim Foo ThaiCorporate Services Dato’ Mohd Nor bin MashorSecurity Ahmad bin MansurProperty and Services Zulkifli bin Abd RahmanCurrency Management and Operation Tengku Zaib Raja Ahmad

Chief RepresentativeLondon Representative Office Lillian Leong Bee LianNew York Representative Office Shamsuddin bin Mohd Mahayiddin

Branch ManagerPulau Pinang Raman a/l KrisnanJohor Bahru Ishak bin MusaKota Kinabalu Mohd Ramzi bin Mohd SharifKuching Nallathamby s/o NalliahKuala Terengganu Mokhtar bin Mohd NohShah Alam Mohd. Khir bin Hashim

Contents

Governor’s Statement

The Malaysian Economy in 2004Overview ................................................................................................................... 2

White Box: Potential Output in the Malaysian Economy .......................................... 7Sectoral Review ....................................................................................................... 11

White Box: Report on Small and MediumEnterprise Development Framework ................................................... 28

Domestic Demand Conditions .................................................................................. 33Prices and Employment ............................................................................................ 37External Sector ......................................................................................................... 42Flow of Funds .......................................................................................................... 57

Monetary and Fiscal DevelopmentsMonetary Policy in 2004 .......................................................................................... 62

White Box: New Interest Rate Framework ............................................................. 63Monetary Developments in 2004 ............................................................................. 67Exchange Rate Developments .................................................................................. 72Fiscal Policy and Operations ..................................................................................... 73

Outlook and PolicyThe International Economic Environment ................................................................. 82Malaysian Economy in 2005 .................................................................................... 87Monetary Policy in 2005 .......................................................................................... 93Fiscal Policy in 2005 ................................................................................................. 94Financial Sector Policy in 2005 ................................................................................. 95

White Box: Liberalisation of the Foreign ExchangeAdministration Rules .......................................................................... 98

The Financial SystemSources and Uses of Funds of the Financial System................................................. 102

The Banking SystemManagement of the Banking System...................................................................... 108

White Box: ICLIF Forging Ahead to Realise Its Vision ........................................... 110White Box: Banking Measures Introduced in 2004 .............................................. 120White Box: Financial Sector Masterplan .............................................................. 125White Box: Financial Services Liberalisation Measures Since 2000 ....................... 134

Supervision of the Banking System ......................................................................... 136White Box: Malaysia’s Anti-Money Laundering and Combating the

Financing of Terrorism (AML/CFT) Programme................................... 139Performance of The Banking System ...................................................................... 144

The Islamic Financial SystemOverview ............................................................................................................... 158Policy Direction in 2004 ......................................................................................... 160

White Box: Shariah Governance Framework for IslamicFinancial Insitutions .......................................................................... 163

Supervision of the Islamic Banking System.............................................................. 165Performance of the Islamic Banking System............................................................ 167

Development Financial InstitutionsOverview ............................................................................................................... 176Policies and Developments ..................................................................................... 176Performance of Development Financial Institutions ................................................. 179

Other Financial InstitutionsDiscount Houses .................................................................................................... 192Provident and Pension Funds .................................................................................. 192Venture Capital ...................................................................................................... 193Unit Trust Industry .................................................................................................. 196

Financial MarketsOverview ............................................................................................................... 200Money Market ....................................................................................................... 201Foreign Exchange Market ....................................................................................... 203Equity Market ........................................................................................................ 204

White Box: Key Capital Market Measures in 2004 .............................................. 207Bond Market ........................................................................................................ 209Exchange-traded Derivatives Market ...................................................................... 213

The Payment and Settlement SystemsIntroduction ........................................................................................................... 218Enhancing Efficiency .............................................................................................. 218Enhancing Payment Systems Safety ........................................................................ 220Migration to e-Payments ........................................................................................ 223

External RelationsEconomic Surveillance ............................................................................................ 226International Financial Architecture ........................................................................ 226External Relations with the IMF .............................................................................. 227Islamic Banking ...................................................................................................... 228Combating Money Laundering and Terrorism Financing ......................................... 228Financial Services Negotiations ............................................................................... 229Regional Co-operation ........................................................................................... 231Bilateral Co-operation ............................................................................................ 232Technical Assistance and Information Exchange...................................................... 233

Organisation and Human ResourceOrganisation Development .................................................................................... 236Risk Management in Bank Negara Malaysia ........................................................... 239Organisation Structure ........................................................................................... 243

Annual AccountsBalance Sheet as at 31 December 2004 ................................................................. 247

Annex .................................................................................................................. 253

Robust growth of the Malaysian economy was sustained in 2004. Economic resilience alsostrengthened as the economic structure became increasingly more diversified and as themacroeconomic fundamentals continued to remain strong. The economy benefited significantlyfrom the stronger domestic demand and high growth in external demand. Of significance wasthat growth was driven by private sector economic activity for the second consecutive year.Consumer and business confidence strengthened during the year to reinforce this trend.

Monetary policy continued to have a supportive role in the economy throughout 2004. Whileinflation edged up, it continued to remain within a tolerable range. Price increases havegenerally reflected one-off price adjustments that occurred during the year. The upward trendin prices has also been contained by the accelerated increase in private investment and theconsequent expansion of capacity. In addition, some absorption of the price increases byproducers mitigated the price increases. The focus of monetary policy has thus been tosupport the expansion in business investment activity to enhance the long-term growthpotential of the Malaysian economy.

During 2004, Bank Negara Malaysia implemented a new interest rate framework to enhance theoperational efficiency of monetary policy. Almost one year after its introduction, the new interestrate framework is operating well, with the overnight policy rate providing the signal to themarket on the stance of monetary policy. The deregulation of pricing under the new interest rateframework has also acted as a catalyst for more efficient pricing in the financial system.Combined with the quarterly issue of the Monetary Policy Statement, the market is providedwith regular information on the current and expected monetary conditions. The statementreflects the conclusion of the deliberations of the policy options considered by the MonetaryPolicy Committee in the Bank. Eight monetary policy meetings were held during the year.

Malaysia’s inter-linkages with the global economy and the international financial systemcontinued to strengthen in 2004. Trade with the rest of the world, and with the Asian regionin particular, continued to be robust. Trade increased by 23.2% during the year, with tradewith the Asian region now accounting for 60.2% of total trade. Malaysia has, for sevenconsecutive years now, recorded a significant current account surplus. This trend has beenreinforced by a steady inflow of foreign direct investment. The investment flows have becomeincreasingly more diversified, reflecting the new investment opportunities in the morediversified economy. The stronger position of Malaysian corporates has also resulted in higherMalaysian investments abroad. While portfolio flows were volatile during the year, overall,there was a net inflow. The cumulative inflows from trade, foreign direct investment andportfolio flows have contributed to a significant increase in the nation’s international reserves.

To ensure stable financial markets, Bank Negara Malaysia has undertaken sterilisationoperations to absorb the inflows to avoid conditions of excessive liquidity in the domesticfinancial system. The Central Bank continues to have at its disposal, instruments of monetarypolicy to undertake these sterilisation operations. While these operations entail a cost, thereturns from the management of the reserves have exceeded these costs. The Central Bank,therefore, continues to have the capacity to absorb these inflows, and thereby maintainstability in the domestic financial markets and stability of the overall financial system.

Governor’s Statement

Bank Negara Malaysia has taken the opportunity of this strengthened position to liberalisefurther the foreign exchange administration rules, effective April 2005. This is part of thecontinuous efforts to enhance the business environment and facilitate efficiency intransactions involving foreign exchange and to allow for better risk management ofinvestments. This liberalisation is part of the on-going initiatives to reduce the cost of doingbusiness and improve the efficiency of the regulatory delivery system. The changes allow forgreater flexibility in hedging against currency risks and in the limits on maintaining foreigncurrency accounts, on domestic credit facilities to non-resident controlled companies and oninvestments abroad.

The liberalisation in 2004 permitting Multilateral Development Banks, Multilateral FinancialInstitutions and corporations to raise ringgit-denominated bonds has also increased foreignparticipation in the domestic capital market. The market has responded positively to thesechanges. Two multilateral development agencies have taken advantage of this initiative in2004. The Asian Development Bank became the first foreign entity to issue ringgit-denominated bonds in November, followed by the International Finance Corporation, whichbecame the first foreign entity to raise ringgit-denominated Islamic bonds.

Significant performance and development has also occurred in the financial sector in Malaysia.All segments of the financial sector strengthened in terms of improved capitalisation, qualityof portfolios, profitability, soundness of financial positions and exposure to risks.Enhancements have also been made in the areas of corporate governance and riskmanagement standards. Large investments were also made to strengthen internal systems andprocesses, improve delivery channels and acquire talent. Cumulatively, these enhancementshave rendered the financial system to be more competitive. There has also been a narrowingin the gap in performance between domestic and foreign financial institutions.

For the banking system, the opportunity was taken to encourage expansion in activities in thedomestic economy, in particular in the new growth areas; and for those institutions with thecapacity, to venture beyond domestic borders. In the domestic economy, there has been asignificant shift in financing activities to small businesses, which now account for 40% ofloans to the business sector. Lending to the household sector also increased. A wider range ofproducts, including those delivered through electronic channels, also came on-stream.Attention continued to be focused on preserving financial stability including strengtheningprudential regulation and surveillance over financial conglomerates as well as operationsundertaken beyond domestic borders.

The year also saw further progress in streamlining the legal and regulatory infrastructure inIslamic finance. A more structured legal and Shariah governance framework and a moreconducive tax environment were introduced, resulting in neutrality of treatment betweenIslamic and conventional financial products. A further significant development is thetransformation of the `Islamic Window’ in conventional banks into Islamic subsidiaries. Thistransition will allow for the Islamic subsidiary to leverage on the group infrastructure,including the branch network and support functions, to maximise cost efficiency and to reapthe benefits of group synergies. Several domestic banking groups are in the midst of

strategically participating in this transformation process. The year also saw the liberalisation ofthe Islamic banking industry with the issue of new Islamic banking licences for three foreign-owned Islamic banks to operate in Malaysia. It is expected that this move will not only spurthe development of Islamic finance in Malaysia but would enhance Malaysia’s economic andfinancial linkages with the rest of the world. Cumulatively, these series of developments arealso expected to not only enhance the global integration of the domestic Islamic financialsystem but also increase Malaysia’s potential as an International Islamic financial centre.

The Malaysian economy enters the year 2005 from a position of strength. The economicprospects for 2005 will continue to be favourable. The underlying conditions of the domesticeconomy continue to remain strong, with robust private consumption and investment activity.While there are signs of slower global growth, there is uncertainty relating to the extent towhich specific developments may moderate growth. In particular, these include the impact ofhigher oil prices, the extent to which interest rates will be raised and the depth and durationof the electronic downturn. Despite these emerging trends, domestic economic growth in2005 is projected to be sustained at 5 – 6%. This growth forecast takes into account thepotential uncertainties related to the global developments. The more modest the impact ofthese developments on global growth, the more supportive will be external demand on thegrowth prospects of the domestic economy. While these uncertainties prevail in the externalenvironment, the strong domestic demand projected for the year enhances the underlyingpotential for the favourable growth prospects in 2005.

The favourable global environment in 2004 has, however, masked the risks to world growtharising from the structural imbalances prevailing. The stronger global growth performance in2004 has not provided a sense of urgency to address directly the risks associated with theseimbalances. In a less favourable environment, the risk of disruptions, disorderly adjustmentsand instability would be heightened. Moreover, such disorderly adjustments could also occur ifthere is over-dependence on exchange rate adjustments to address these imbalances.Exchange rates may be only part of the solution. The issue of competitiveness, however,requires more than just adjustments in exchange rates. Ultimately these structural imbalanceswould have to be addressed by the countries where these imbalances exist. The long-termsolution is for a rebalancing of demand across the world to eventually reduce the prevailingimbalances. With rising income levels across Asia, there is tremendous potential for this to bepart of the adjustment process.

The excessive focus on exchange rates as corrective mechanisms for these imbalances has ledto speculative capital inflows, particularly into the Asian economies. Exchange rate flexibility inresponse to these flows would result in significant exchange rate volatility and would notreflect the prevailing underlying fundamentals. Such adjustments also face the risk of shifts inthe opposite direction should a reversal in the flows occur. Malaysia has therefore consistentlymaintained that, in the present environment, the exchange rate regime in place best servesthe nation’s interests. Developments in the region and in the international environment willcontinue to be closely monitored, with assessments made on the implications on the efficientfunctioning of the mechanism in place. The basis for any change would therefore be made onlong-term structural considerations and not short-term movements in capital flows ortransient shifts in exchange rate expectations.

With the foundations for strong performance in the financial sector now being firmly achievedin the first phase of the Financial Sector Masterplan, the transition into the second phase ofthe Masterplan can now be made. In the year 2005, the focus of attention will continue to beto develop and strengthen the framework to enhance access to financing, particularly to meetthe new requirements of the economy; to enhance competition and hence efficiency; and tostrengthen the infrastructure for consumer protection. While the banking sector is encouragedto provide access to new areas of growth, non-banking institutions, including specialisedfinancial institutions and the cooperative sector, will be developed to have an increasinglymore important role.

It has been announced that a bank for small and medium enterprises (SMEs) will beestablished to complement the role of the banking sector in providing financial services to thissegment. The SME bank will also provide non-financial services to SMEs, including nurturingSMEs and creating an entrepreneurial community. Other activities envisaged for the SME bankinclude providing guarantees to loans granted by banking institutions, facilitatingsecuritisation, providing credit ratings and preparing business reports on SMEs. The role of thecooperative sector in providing financing to micro-enterprises will also be strengthened toenhance access to financing to this sector. A cooperative commission initiated by Bank NegaraMalaysia is being established to support this objective. The cooperative commission will havethe supervisory oversight of the cooperative sector including taking on a developmental role.

The second phase of the Masterplan will entail the further deregulation and liberalisation ofthe financial system in general and in the banking system in particular. As part of this processexisting foreign banks will be accorded greater operational flexibility so that they can betterserve the needs of the growing economy. With this move, foreign banks will, however, needto become more integrated with the domestic economy. A further development in 2005 willbe the establishment of a deposit insurance corporation as part of the efforts to strengthenthe consumer protection framework and to promote financial stability.

The Malaysian financial landscape will continue to be redefined with the setting up ofinvestment banks. This move essentially transforms merchant banks, stock broking companiesand discount houses within the same banking group into investment banks. This rationalisationwill contribute towards a more dynamic financial system, with a greater ability to competeeffectively in the domestic and international markets. Their integration will not only contribute toenhancing efficiency and effectiveness, but also strengthen the potential to capitalise onexpanded business opportunities. These new investment banks will be jointly regulated by BankNegara Malaysia and the Securities Commission. The permissible foreign equity participation forinvestment banks is also increased from 30% to 49%, as part of the effort to strengthen globallinkages and enhance the transfer of specialised skills and expertise.

A challenge towards increasing efficiency levels in the financial system is in improving the useof electronic payment delivery channels and settlement instruments. Bank Negara Malaysia’spolicies and initiatives in the payments systems in 2004 have essentially been aimed atcreating an enabling environment to promote the migration to electronic payments from a

predominantly paper-based system. There has been a general reduction in the ratio ofcurrency in circulation to GDP from 7.5% to 7.2% and the value of cheques to GDP from320% to 303% during the year. As part of the measures to enhance the efficiency and safetyof the payments systems, the banking industry in Malaysia has taken the lead in the Asia-Pacific region to combat card fraud by investing in a chip-based infrastructure for paymentcards. Moving forward, the focus will be on promoting greater efficiency and risk reductionimprovements in domestic and cross-border payments, as well as harmonising standards andthe functionalities of electronic payment channels across sectors, including the Governmentagencies. Emphasis will also be given on enhancing the consumer protection framework inpayment-related services so as to provide a conducive environment for the large-scaleadoption of electronic payment instruments by the general public.

Regional economic and financial co-operation strengthened during the year, with emphasis onpromoting greater intra-regional trade and investment. Initiatives were also taken in the areaof economic surveillance, the monitoring of cross-border linkages including capital flows,combating money laundering and terrorist financing and the building of stronger financialsystems and markets among the countries in the region. Steps have been taken to enhanceregional financing and swap arrangements. In addition to the liberalisation of the domesticbond market to allow for the issuance of papers denominated in domestic currency bymultilateral institutions, being part of the Asian Bond Market Initiative, a second Asian BondFund has also been launched. While the first Fund only invested in US dollar-denominatedbonds, the second Fund is for investment in domestic currency bonds issued by sovereign andquasi-sovereign entities in regional markets. This new initiative is also aimed at supporting theoverall efforts to develop domestic bond markets in the regional economies.

The world continues to change in economic, financial and geopolitical terms. It continues topresent increased uncertainties, greater interdependence, more intense competition, andcontinues to test our ability to rise to emerging challenges. Indeed, our ability to survive andsucceed in this environment very much depends on our level of tolerance, our ability to adjust,the extent to which we are able to effectively and efficiently manage our resources and theflexibility of policy to respond to these changing conditions. All this will also depend on thestrength and structure of our economy, the degree of mobility of our resources, and theefficiency and soundness of our financial system. Therefore, our policy initiatives are towardsmeeting these objectives.

Zeti Akhtar AzizGovernor

23 March 2005

2-11 Overview7 White Box: Potential Output in the

Malaysian Economy11-27 Sectoral Review

28 White Box: Report on Small and Medium Enterprise Development Framework

33-37 Domestic Demand Conditions37-42 Prices and Employment42-57 External Sector57-59 Flow of Funds

The Malaysian Economy in 2004

2

OVERVIEW

With the more robust growth in global trade anddomestic demand, the momentum of economicgrowth in Malaysia, which began in the second halfof 2003, gathered pace in 2004. Real gross domestic


product (GDP) increased by 7.1% in 2004 (2003:5.3%), the fastest growth since 2000. The economybenefited from the rapid growth of global trade inmanufactures and higher prices for primarycommodities. Although global growth moderatedsomewhat in the second half of the year, the

The Malaysian economy experienced its most rapid growth in fouryears, expanding by 7.1% in 2004 as a result of robust growth inboth global trade and domestic demand. Growth was led by theprivate sector, while the Government made further progress infiscal consolidation.

Supply of goods and services (RM520.8 billion)

Demand for goods and services (RM520.8 billion)

Trade, etc. 25.0%

Finance, etc. 26.2%

Government services 12.6%

Transport, etc. 15.2%

Utilities 7.3%

Others 13.7%

Graph 1.1The Economy in 2004 (at 1987 Prices)

Exports of goods 49.6%

Exports of services 6.6%

Private consumption 23.0%

Public consumption 7.0%Private investment

5.9%

Public investment 7.9%

Imports of services 8.5%

Agriculture 4.1% Mining

3.3%

Manufacturing 15.0%

Construction 1.4%

Services 23.8%

Imports of goods 43.9%

3


Malaysian economy remained resilient with strongerdomestic demand providing the impetus forsustained expansion. The private sector was themain force of economic expansion, while theGovernment continued with fiscal consolidation.

The improvement in the economy was reflected bypositive growth across all sectors exceptconstruction. The main drivers of growth were themanufacturing, services and primary commoditiessectors. Value added in the manufacturing sectorexpanded strongly by 9.8%, as output growth inboth export- and domestic-oriented industriesreflected stronger external and domestic demand formanufactured goods. In the export-orientedindustries, the strongest output expansion was seenin the electronics industry, benefiting from the

upturn in the global semiconductor cycle. However,the high production during the earlier part of theyear led to some inventory accumulation, which ledto more moderate expansion in the second half ofthe year. In addition to strong growth in theelectronics industry, growth was reinforced bysustained external demand for resource-basedproducts such as chemical, rubber and woodproducts. Growth in the domestic-oriented industrieswas supported by strong demand in the fabricatedmetal products industry and a turnaround in thetransport equipment industry. The favourableperformance of the manufacturing sector was alsoreflected in the stronger expansion in manufacturedexports (19.7%) and sustained high capacityutilisation level (79%), in spite of investments in newcapacity during the year.

Annual change (%) RM billion

Graph 1.2 Real GDP and Inflation Rate

0

2

4

6

8

10

2000 2001 2002 2003 20040

50

100

150

200

250

Real GDP value (RHS)

Real GDP growth (LHS)

CPI (LHS)

-5

0

5

10

15

20

-5

0

5

10

15

20

2000 2001 2002 2003 2004

Nominal GNP per capita (RHS)

Nominal GNP growth (LHS)

Real GNP growth (LHS)

Annual change (%) RM ('000)

Graph 1.3 GNP Growth and Nominal GNP per Capita

Annual change (%)

Graph 1.4 Real GDP and Aggregate Domestic Demand

Real GDP Aggregate domestic demand

-25

-30

-20

-15

-10

-5

0

5

10

15

20

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Percentage point

Annual change (%)

Graph 1.5 Contribution to Real GDP Growth

Domestic demand (LHS)

Net exports (LHS)

Change in stocks (LHS)

Real GDP growth (RHS)

-10

-5

0

5

10

15

2000 2001 2002 2003 2004 -10

-5

0

5

10

15

4

Table 1.1: Malaysia – Key Economic Indicators

2002 2003 2004p 2005f

Population (million persons) 24.5 25.0 25.6 26.1Labour force (million persons) 9.9 10.2 10.6 10.9Employment (million persons) 9.5 9.9 10.2 10.5Unemployment ( as % of labour force) 3.5 3.6 3.5 3.5Per Capita Income (RM) 13,722 14,838 16,538 16,987

(US$) 3,611 3,905 4,352 4,470

NATIONAL PRODUCT (% change)

Real GDP 4.1 5.3 7.1 5.0 ~ 6.0(RM billion) 220.0 231.7 248.0 260.3

Agriculture, forestry and fishery 2.6 5.7 5.0 3.3Mining and quarrying 4.0 5.9 4.1 5.0Manufacturing 4.1 8.3 9.8 4.5Construction 2.3 1.9 -1.9 -1.0Services 6.4 4.4 6.7 5.7

Nominal GNP 9.0 10.4 13.8 4.9(RM billion) 336.6 371.7 423.1 443.9

Real GNP 4.7 6.8 7.2 4.6(RM billion) 202.7 216.5 232.2 242.8

Real aggregate demand1 4.2 5.9 7.3 4.3

Private expenditure1 0.3 5.5 11.1 8.7Consumption 4.4 6.6 10.1 8.5Investment -15.1 0.4 15.8 9.6

Public expenditure1 11.5 6.6 1.0 -4.0Consumption 11.9 10.0 6.6 4.5Investment 11.2 3.9 -3.5 -11.6

Gross national savings (as % of GNP) 34.6 36.3 37.1 34.7

BALANCE OF PAYMENTS (RM billion)

Goods 72.1 97.7 104.5 114.8Exports (f.o.b.) 358.5 399.0 481.2 514.9Imports (f.o.b.) 286.4 301.3 376.8 400.1

Services balance -6.0 -15.0 -8.8 -8.0(as % of GNP) -1.8 -4.0 -2.1 -1.8

Income -25.1 -22.5 -24.5 -26.4(as % of GNP) -7.4 -6.1 -5.8 -5.9

Current transfers, net -10.6 -9.3 -14.6 -14.1Current account balance 30.5 50.8 56.6 66.3

(as % of GNP) 9.1 13.7 13.4 14.9Bank Negara Malaysia international reserves, net2 131.4 170.5 253.5 -

(in months of retained imports) 5.4 6.6 8.0 -

PRICES (% change)

CPI (2000=100) 1.8 1.2 1.4 2.5PPI (1989=100) 4.4 5.7 8.9 -

Real wage per employee in the manufacturing sector 3.2 2.8 1.8 -

Note: Figures may not necessarily add up due to rounding.1 Exclude stocks.2 All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance sheet date and the gain/loss has been reflected

accordingly in the Bank’s account.

p Preliminary

f Forecast

5


Table 1.2: Malaysia – Financial and Monetary Indicators

2002 2003 2004pFEDERAL GOVERNMENT FINANCE (RM billion)Revenue 83.5 92.6 99.4Operating expenditure 68.7 75.2 91.3Net development expenditure 35.1 38.3 27.5Overall balance -20.3 -20.9 -19.4Overall balance (% of GDP) -5.6 -5.3 -4.3Public sector net development expenditure 69.1 83.3 67.8Public sector overall balance (% of GDP) -0.7 -1.2 -0.3

EXTERNAL DEBTTotal debt (RM billion) 185.7 186.6 197.3

Medium- and long-term debt 153.2 152.9 154.3Short-term debt1 32.4 33.7 43.0

Debt service ratio (% of exports of goods and services)Total debt 6.6 6.2 4.3Medium- and long-term debt 6.4 6.0 4.2

Change in 2002 Change in 2003 Change in 2004RM billion % RM billion % RM billion %

MONEY AND BANKINGMoney Supply M1 8.3 10.3 13.0 14.6 12.2 11.9

M2 21.0 5.8 42.5 11.1 108.1 25.4M3 31.6 6.7 48.5 9.7 68.0 12.4

Banking system deposits 25.3 5.3 49.5 9.8 70.1 12.7Banking system loans2 19.8 4.6 21.6 4.8 40.2 8.5

Manufacturing -1.2 -2.0 -0.2 -0.3 2.0 3.2Broad property sector 10.8 6.6 14.6 8.4 19.8 10.5Finance, insurance and business services -2.5 -7.7 -0.6 -2.1 1.7 5.7

Loan-deposit ratio (end of year) 84.9% 80.9% 78.6%Financing-deposit ratio3 95.1% 91.7% 87.7%

2002 2003 2004% % %

INTEREST RATES (AVERAGE RATES AS AT END-YEAR)3-month interbank 3.13 2.87 2.80

Commercial banksFixed deposit 3-month 3.20 3.00 3.00

12-month 4.00 3.70 3.70Savings deposit 2.12 1.86 1.58Base lending rate (BLR) 6.39 6.00 5.98

Finance companiesFixed deposit 3-month 3.20 3.00 3.00

12-month 4.00 3.68 3.70Savings deposit 2.65 2.18 1.98Base lending rate (BLR) 7.45 6.90 6.90

Treasury bill (3-month) 2.82 2.77 1.96Government securities (1-year) 2.94 2.93 2.24Government securities (5-year) 3.15 4.28 3.64

2002 2003 2004% % %

EXCHANGE RATESMovement of Ringgit (end-period)

Change against SDR -7.3 -8.5 -4.3Change against US$4 0.0 0.0 0.0

1 Excludes currency and deposits held by non-residents with resident banking institutions.2 Includes loans sold to Cagamas.3 Adjusted to include holdings of private debt securities.4 Ringgit was pegged at RM3.80=US$1 on 2 September 1998.

p Preliminary

6

The services sector recorded a stronger expansion of6.7% in 2004. The growth was driven mainly byhigher consumer spending amidst rising disposableincomes, higher tourist arrivals and increasedtrade-related activities spurred by the buoyantexport performance. Growth in final services,particularly the wholesale and retail trade, hotelsand restaurants sub-sector, was due to higherconsumer spending and was reinforced by robusttourism activities. In the intermediate services, thetransport, storage and communication sub-sectorrecorded stronger growth, mainly on account ofincreased trade- and travel-related activities as wellas the strong expansion in the telecommunicationsindustry. The growth in the finance, insurance, realestate and business services sub-sector wasunderpinned by higher bank lending, strongerperformance in the insurance industry, greateractivity in the real estate market and higher turnoverin the capital market. Expansion in new growthareas, such as private education and privatehealthcare services, Islamic financial services as wellas the shared services industry, provided furthersupport to the services sector.

The agriculture sector expanded further by 5%,driven mainly by stronger production of crude palmoil and rubber amidst the favourable commodityprices. Other agriculture commodities, particularlyfood-related crops, also showed strong growth, inline with the Government’s concerted efforts inrevitalising the agriculture sector as an importantengine of growth. The mining sector grew by 4.1%,mainly on account of increased output of crude oiland natural gas, benefiting from higher domestic andexternal demand.

On the other hand, the construction sectorcontracted by 1.9% due to lower activity in the civilengineering sub-sector, which was partly mitigatedby expansion in both residential and non-residentialsub-sectors. Lower civil engineering activity wasmainly attributed to the completion of several largeinfrastructure projects in recent years and theconsequent reduction in public spending oninfrastructure projects in 2004. In contrast, theresidential sub-sector continued to grow due tosustained demand for residential property, whichwas supported by higher incomes as well asattractive housing mortgage financing packages.Expansion in the non-residential sub-sector was duemainly to improved business and investment activity,which supported the demand in the office and retailspace segments.

With policy orientation supportive of private sectoractivity and with the improved economicconditions, the private sector contributed 6.2percentage points to economic expansion. Privateconsumption expanded strongly by 10.1% in 2004as consumer confidence was restored following theevents of early 2003, including the Severe AcuteRespiratory Syndrome (SARS) outbreak. Despitesome moderation in activity towards the end of2004, sentiments remained strong. Both theConsumer Sentiment and Retail Trade Indices,compiled by the Malaysian Institute of EconomicResearch, remained above the 100-point markthroughout the year. In addition, various taxrebates to sustain consumption announced duringthe 2004 Budget and the prevailing supportiveinterest rate and credit environment furthersupported consumption spending.

The stronger growth of private consumption wasdriven mainly by higher disposable income in boththe household and the corporate sectors on accountof higher export earnings and favourableemployment conditions in the domestic economy.The findings of the Malaysian Employers Federation’sSalary and Fringe Benefits Survey for Executive andNon-Executive 2004 showed that a large majority ofcompanies (86%) continued to pay out bonuses totheir employees. The percentage of companiesgranting salary increases was also higher during theyear compared to 2003. Higher commodity prices,particularly prices for rubber and palm oil, providedthe impetus for rural income earners to increasetheir consumption. Meanwhile, sustained highprofits and cash flows of the corporate sectorcontinued to emanate from rising productivity andhigher export earnings. A sample of 350 listednon-financial companies, which represents almost75% of the total market capitalisation of BursaMalaysia, showed that most sectors recorded higherprofits in 2004. The annualised return on equity forcompanies in the sample rose to 9.1% in 2004(2003: 8.2%).

Growth in private investment, which had turnedaround in the second half of 2003, accelerated to15.8% in 2004 as business confidence strengthenedfurther. The stronger growth was due mainly to highcapacity utilisation arising from improved externaldemand and higher domestic consumption. This highlevel of capacity utilisation, together with improvingcorporate profitability and favourable financingconditions, has encouraged investment activity.Higher capital expenditure was evident in all sectors

7


Potential Output in the Malaysian Economy

Potential output is defined as the level of output that is consistent with the productive capacity of aneconomy. Conceptually, the level of potential output is determined by the growth of non-inflationarytrend levels of physical capital and the labour force as well as the rate of technological advancement.The output gap – the difference between actual output and the trend level of potential output – is ameasure of the cyclical deviation from the non-inflationary trend of output. Knowledge on potentialoutput and the output gap, together with other relevant information would help policymakers inmaking an assessment on the current position of an economy in the economic cycle, as well asindicating the latent growth path of the economy in the long term.

Potential output and the output gap are however not directly observable concepts. Nonetheless, byusing a production function approach and using information regarding the existing physical capitalstock and employment levels, estimates of potential output and the output gap for Malaysia can beobtained. It should be emphasised that these estimates alone do not provide an exhaustiveperspective of the state of an economy, such as the extent of inflationary pressure. This is especiallytrue for a structurally dynamic economy such as Malaysia.

The latest estimates indicate that the Malaysian economy in 2004 was operating slightly above potentialamidst the strong global economic growth, with the output gap estimated at 1.1% of potential output.A similar trend was observed during the previous global upswing in 2000. On the whole however, thedeviations of actual from potential output have been modest since 1998, as illustrated in Graph 1, withgrowth in the Malaysian economy remaining in line with the growth of its potential capacity.

Prior to 1997, potential output of Malaysia grew at a rapid rate, with an average of 8% annually for theperiod of 1994 to 1997. The pronounced downturn in 1998 and following structural adjustmentshowever altered the productive capacity of the economy. The potential growth path was affected andpotential output growth subsequently slowed down during the recovery period as spare capacity withinthe economy was used up. Since 2000 however, the potential growth path began to improve and by2004, potential output was growing at a rate of 5% annually, an almost fourfold increase compared tothe low of 1999, as shown in Table 1 and Graph 1.

Given that steps have been taken to improve the contribution of productivity to growth, the currentmomentum in the expansion of productive capacity is expected to persist, resulting in furtherenhancement in potential output growth. This suggests that the potential growth path of the Malaysiaeconomy is expected to continue to improve in the near future.

Table 1Actual GDP and Potential Output

ActualGDP

PotentialOutput

Investment LabourOutput

Gap

Period (% ofpotentialoutput)

(Annual change in %)

1994-1998 9.2 8.0 14.1 3.9 2.3

1998 -7.4 3.0 -43.0 -2.1 -6.3

1999 6.1 1.3 -6.5 3.7 -2.0

2000 8.9 4.5 25.7 4.3 2.2

2001 0.3 3.8 -2.8 1.3 -1.2

2002 4.1 3.5 0.3 1.9 -0.7

2003 5.3 5.5 2.7 3.6 -0.9

2004 7.1 5.0 3.1 3.4 1.1

Graph 1Actual and Potential Output

-10

-5

0

5

10

15

20

25

0

10

20

30

40

50

60

70

93 94 95 96 97 98 99 00 01 02 03 04

Potential output

Actual output (GDP)

Output gap (RHS)

RM billion% of potential

output

8

of the economy, with the manufacturing, services andmining sectors registering significant levels ofspending during the year. The increase in privateinvestment was also supported by foreign directinvestment (FDI), particularly in the services,manufacturing and oil and gas sectors.

Public sector expenditure was less expansionary ongrowth as the Federal Government continued with itspolicy of fiscal consolidation, lowering the fiscaldeficit to 4.3% of GDP in 2004 (2003: -5.3%). Effortsto reduce the fiscal deficit were balanced by the needfor the Government to provide for basic support andsocial services as well as spending to enhance thelong-term productivity of the economy. During theyear, the Federal Government’s expenditure onsupplies and services as well as emoluments washigher. As a result, public consumption increased by6.6% in 2004. On the other hand, public investmentdeclined by 3.5% in 2004 as a result of lower FederalGovernment development expenditure, which waspartially mitigated by the sustained high capitalexpenditure of the non-financial public enterprises(NFPEs). Notwithstanding the lower developmentexpenditure, spending in 2004 was channelled mainlyto smaller scale projects in economic and socialsectors that have significant multiplier effects onthe economy. The higher capital expenditure of theNFPEs was due mainly to upgrading and capacityexpansion programmes.

As a result of the stronger private sector activity, realaggregate domestic demand (excluding change instocks) expanded further by 7.3%. The strongergrowth of domestic demand, however, was achievedwithin the context of limited price pressures as newcapacity was put in place in sectors experiencing stronggrowth. This expansion in capacity ensured that GDPgrowth remained broadly in line with the potentialcapacity of the economy. Stable labour marketconditions, high labour productivity and increasedcompetition in the economy also contributed towardscontaining price pressures. As a result, the consumerprice index (CPI) and core inflation were marginallyhigher at 1.4% and 1% respectively during the year(2003: 1.2% and 0.5% respectively).

In 2004, external demand expanded further andprovided an important contribution to the overallgrowth of the economy. The stronger expansion inexports of manufactured goods, in particularelectronics, and sustained growth in commodityearnings contributed to the large trade surplus ofRM81.1 billion (2003: RM81.3 billion). The stronger

export growth of 20.8% (2003: 11.3%) reflected thebuoyant growth in consumer and investment demandin major industrial countries as well as in the region. Intandem with the stronger private sector demand andmanufacturing output, imports recorded a highergrowth of 26.3% (2003: 4.4%). The sustained largetrade surplus, coupled with the significantimprovement in the services account deficit due tohigher tourism receipts, more than compensated forthe larger income account deficit attributed to higherprofits accruing to foreign direct investors. As a result,the current account surplus increased further toRM56.6 billion, equivalent to 13.4% of GNP (2003:RM50.8 billion or 13.7% of GNP).

The financial account turned around, recording a netinflow of RM15.4 billion in 2004 (2003: -RM12.1billion). The higher inflows of FDI and portfolioinvestment more than offset the higher outflow due tooverseas investments by Malaysian companies andother investments by both the public and privatesectors. A significant portion of the FDI was channelledto the manufacturing sector, particularly the electronicsindustry, and the services sector. Meanwhile, inflowsinto the oil and gas sector were the result of recentdiscoveries, especially off the coast of East Malaysia.Funds for portfolio investment increased significantly,in tandem with improved investor confidence amidstsovereign ratings upgrades, and speculation that someregional currencies, including the ringgit, had thepotential for an upward revaluation during the year.

Arising from the larger current account surplus, higherinflows for investment and foreign exchangerevaluation gains, Bank Negara Malaysia’s netinternational reserves increased further to a record levelof RM253.5 billion, or equivalent to US$66.7 billion atthe end of 2004. By 28 February 2005, the reserveslevel rose further to RM272.9 billion or US$71.8 billion,adequate to finance 8.6 months of retained importsand is 6.1 times the short-term external debt.

Malaysia’s external debt increased moderately toRM197.3 billion in 2004 (2003: RM186.6 billion),reflecting mainly higher short-term debt of the bankingsector, which was largely due to hedging activities fortrade-related transactions and treasury activities.Nevertheless, the share of short-term debt to total debtremained low, accounting for 21.8% of total externaldebt. Given the prudent debt management policy inplace, Malaysia’s external debt position remainssustainable with the share of external debt to GNP anddebt-service ratio improving to 46.6% and 4.3%respectively (2003: 50.2% and 6.2% respectively).

9


Macroeconomic ManagementThe strong performance of the economy in 2004reflected the broad-based improvement in theMalaysian economy, amidst the rapid growth of globaltrade in manufactures and higher prices for oil andmost non-oil commodities. The strengthening ofdomestic demand provided the impetus for sustainedgrowth throughout the year in spite of somemoderation in global growth in the second half of the

not reflect any change in the policy stance. Theframework was designed to enhance the effectivenessof monetary policy by facilitating the transmission ofchanges in the policy rate, the Overnight Policy Rate(OPR), to the other market interest rates and ultimately,to key macroeconomic objectives. The OPR serves adual role – as a signalling device to indicate themonetary policy stance and as a target rate for theCentral Bank’s day-to-day liquidity operations. The

Macroeconomic policy in 2004 focused on maintaining stability andimproving the risk-bearing capacity of the economy. Lookingahead, improved flexibility, innovativeness and productivity are thekey components to sustaining long-term growth.

year. There were notable shocks to the global economyin 2004, namely, high oil prices, revival in inflationarypressures, tightening of the global monetary cycle,tightening measures to reduce overheating in thePeople’s Republic of China (PR China), sporadicoutbreaks of avian flu and effects of the tsunami inDecember. Nevertheless, the Malaysian economyremained resilient. With the private sector assumingthe lead role in driving growth, Government policieswere targeted at maintaining stable economicconditions and ensuring a more efficient, pro-businessand investor-friendly public sector delivery system tosustain private investment growth.

The monetary policy stance in 2004 remainedsupportive of domestic economic activities. Domesticinflation was low at 1.4%, with no significantpass-through arising from higher import prices. Inaddition, external inflows comprised mainly long-termtrade and investment flows, with some increase inportfolio flows. Given the ample liquidity in the systemarising from sustained trade and investment inflows,money market operations by the Central Bank werefocused on stabilizing interest rates at levels that weresupportive of economic activity. In addition, sustainedcompetition in the banking sector also contained anyupward pressure on interest rates as private sectordemand for funds gathered momentum.

The stable macroeconomic conditions allowed theCentral Bank to make a significant change in theconduct of monetary policy during the year. On23 April, the New Interest Rate Framework, designedto strengthen the monetary policy transmissionmechanism and promote more efficient pricing by thefinancial system, was announced. Although the newframework represented a change in theimplementation mechanism for monetary policy, it did

introduction of the OPR complements the changes thatbegan with the issuance of the Monetary PolicyStatement in 2003. These changes aimed at improvingcommunications on policy, while also conveying theBank’s assessment of economic and financialconditions to the market. This would also help anchormarket expectations, thereby increasing the efficacy ofmonetary policy.

While the prevailing low interest rates wereappropriate and consistent with the overall needs ofthe economy, it was recognised that there weresegments of society who depend on income fromdeposits, such as senior citizens and charitable groups,could be affected. In view of this, a special instrument,the Merdeka Savings Bond (MSB), was launched toalleviate the effects of lower interest income to thesegroups. The MSB provides holders with a return of 5%,which is higher than the fixed deposit rates, would beissued at regular intervals in 2004 and 2005.

On the exchange rate front, the pegged exchangerate arrangement continues to provide significantbenefits to the Malaysian economy by maintainingpredictability and relative stability for trade andinvestment activities. The weakness of the US dollarand speculation that PR China was considering amore flexible regime during the year underpinnedsome market expectations that Malaysia’s exchangerate policy would be reviewed. The Central Bank hasconsistently maintained that the exchange rateregime would only be reviewed in the event that theringgit was headed for a sustained misalignmentarising from major structural changes within theinternational and regional financial system, or ifeconomic fundamentals warranted a change in thesystem. Any change to the exchange rate regimewould thus be on the basis of such longer-term

10

structural considerations and not short-termmovements in capital flows and transient shifts inexchange rate expectations.

Given the stronger economic fundamentals, theCentral Bank has taken steps during the year tofurther liberalise the foreign exchangeadministration rules. Effective 1 April, severalchanges are being made, including the simplificationof reporting requirements for exporters to reduceadministrative costs and business processes;increasing the overnight limit of Foreign CurrencyAccounts of residents to enhance cash flowmanagement and support value chain expansion inMalaysia; extension of loans in ringgit to non-residents to enhance access to ringgit funds foroperations in Malaysia; allowing selected residentsto invest abroad to enhance flexibility in fundmanagement; and allowing residents to enter intoforward foreign exchange contracts to facilitateefficient risk management of foreign currencyexposure. These changes are part of the Bank’scontinuous efforts to enhance the businessenvironment and increase efficiency of theregulatory delivery system. The relaxation of therules allows greater flexibility to residents inmanaging their investments by promoting a widerrisk management options.

As part of this package of measures, Bank NegaraMalaysia allowed Multilateral Development Banks(MDBs) or Multilateral Financial Institutions (MFIs)and Multinational Corporations to raise ringgit-denominated bonds in the Malaysian capital market.In addition, the Securities Commission allowedinterest income derived by non-resident companiesfrom approved Ringgit-denominated Islamicsecurities and debentures, excluding convertible loanstocks and securities issued by the Government ofMalaysia to be tax exempt. The impact of thesechanges was immediate. In particular, the move toallow multilateral development banks to issue ringgitbonds was followed by two important issues in thedomestic bond markets. The Asian DevelopmentBank became the first foreign entity to issueringgit-denominated bonds in November. Thisissuance was closely followed by the InternationalFinance Corporation, which also became the firstmultilateral body to issue ringgit-denominatedbonds that conform to Islamic principles.

The monetary developments were complementary tothe Government’s continued pursuit of a policy ofgradual fiscal consolidation. The overall Federal

Government deficit declined from 5.3% of GDP in2003 to 4.3% in 2004. The Governmentstrengthened its financial position by improvingspending efficiency and effectiveness and enhancingrevenue whilst optimising the utilisation of existingresources and capacity.

In addition to the focus on strengthening themanagement of public finances, public policy in2004 aimed at improving the delivery system toenhance competitiveness. Development expenditurewas targeted towards expenditure that ensuredhigher productivity and competitiveness in theeconomy. The focus of development expenditurewas towards rural development and smaller projectsin agriculture sector, improving the supply of utilitiesto rural areas, enhancing roads and other transportlinks, healthcare and low-cost housing programmesfor the general populace. These programmes, whilesmall in value terms, have significant multipliereffects, thus ensuring that the Government’s socio-economic goals are met.

The Government will continue to proceed with itsmeasured pace of implementing the fiscalconsolidation programme. Prudent financialmanagement remains a key feature of fiscal policytowards improving the overall financial position of theGovernment. A lower deficit will provide greater policyoptions for the Government and would permitmacroeconomic policy to more effectively mitigatepotential adverse shocks in the economy.

The 2004 and 2005 Budgets were formulated with theobjective of generating stronger private investmentactivity and reinstating the private sector as the mainengine of economic growth. In particular, public policycontinued to emphasise on the need for Malaysiancompanies to identify and take advantage of theopportunities available in new growth areas. Thediversification of the economy would further enhancethe resilience of the economy while providingopportunities for companies to move up the value chain.Among the sectors targeted included agriculture,services and high value-added manufacturing activities.In order to further boost some of these activities, theBudgets provided additional funds to further developthe venture capital industry. Other incentives announcedincluded the extension of the MSC status to Kulim High-Technology Park and Bayan Lepas, improving ICTinfrastructures including broadband facilities andintroducing a centralised Government portal as a singlegateway to public services, as well as various taxincentives to specific sectors.

11


Special attention was given to improvecompetitiveness and promote investment by smalland medium enterprises (SMEs), not only becauseof their significant contribution to the economy butalso due to their strong growth potential. In 2004,Bank Negara Malaysia initiated the establishment ofthe National SME Development Council, chaired bythe Prime Minister. The Council represents thehighest policy-making body and will chart thefuture direction and strategies for SMEdevelopment. The Council is not only responsiblefor formulating broad policies and strategies tofacilitate SME development but also for ensuing theeffective implementation of the policies and actionplans. Bank Negara Malaysia has been appointedthe Secretariat for the Council. During the year, theCouncil standardised the definitions for SMEsacross all sectors of the economy and tookinitiatives to improve information on SMEs as first

ensure the interaction between short- andlonger-term policies are mutually reinforcing andsupportive. Given the encouraging growthperformance, strong fundamentals and thesupportive macroeconomic and development policystance, Malaysia is well placed to sustain economicgrowth. The private sector response to public policyhas been encouraging and it is expected thatactions and strategies taken would contribute tosustainable long-term growth with balancedsocio-economic development.

SECTORAL REVIEW

Manufacturing SectorThe manufacturing sector recorded another strongdouble-digit expansion in 2004, with output growthstrengthening to 12.7% (2003: 10.5%). The robustperformance was supported by the positive external

Robust performance in the manufacturing sector supported bypositive external environment and improved domestic demand.

steps towards more effective policy formulation andimplementation. The Council also initiated anumber of schemes to improve access to financing,training and advisory services for SMEs.

The activities of Government-linked companies(GLCs) were revisited during the year in order totransform them into more efficient and globallycompetitive corporations. The GLCs have started toundergo a series of reforms to promote a culture ofhigh performance, which includes, among others,shareholders value creation and performance-linkedcompensation and competitive contracts for seniormanagement of all GLCs. Given the influence andimpact of the GLCs on the economy, their reformwould also have a beneficial impact on privatesector companies that are suppliers and customersof these large corporations. The restructuring ofthe GLCs, with the greater emphasis accorded tocommercially-driven strategies, would thus enhanceoverall competitiveness.

Short- and longer-term macroeconomic policies inMalaysia have been designed to reinforce oneanother to achieve sustainable economicdevelopment. Short-term policies that destabiliselong-term fundamentals are not only less likely tosucceed in their own right but would also adverselyaffect the ability to implement appropriate policiesin the future. Therefore, policy design andimplementation in Malaysia has been balanced to

Table 1.3Manufacturing Sector: Value Added andProduction

2003 2004

Annual change (%)

Value added(Constant at 1987 prices) 8.3 9.8

Overall Production 10.5 12.7

Export-oriented industries 11.9 14.2 of which:

Electronics 15.1 25.0Electrical products -7.0 -9.4Chemicals and chemical products 20.8 14.1Wood and wood products 0.9 12.7

Off-estate processing 11.8 4.0Textiles and wearing apparel -2.2 -11.7

Rubber products 18.7 14.8

Domestic-oriented industries 6.1 7.1 of which:

Construction-related products 10.2 -0.6Fabricated metal products 7.4 29.2Food products 8.8 3.0Transport equipment -5.5 8.6Petroleum products 2.3 1.3

Source: Department of Statistics, Malaysia

environment following stronger growth in both theindustrial and regional countries, and furtherreinforced by improved domestic demand. Growthwas more pronounced in the first half-year (16.1%;second half-year: 9.6%), fuelled by strong demandfor electronics, in line with the upward momentumin the global semiconductor cycle. Growth duringthe year was also underpinned by strong exportdemand for resource-based products including

12

% Annual change (%)

Capacity utilisation (LHS) Output (RHS)

Graph 1.7Capacity Utilisation in the Manufacturing Sector

p Preliminary

Source: Department of Statistics, Malaysia Bank Negara Malaysia

1998 1999 2000 2001 2002 2003 2004p60

65

70

75

80

85

-20

-10

0

10

20

30

rubber, chemicals and wood. In thedomestic-oriented industries, growth was led by aturnaround in the transport equipment industry androbust expansion in the fabricated metal industry,which more than offset the moderation in theconstruction-related materials industry.Consequently, growth in both the export-orientedand domestic-oriented industries strengthened to14.2% and 7.1% respectively in 2004 (2003: 11.9%and 6.1% respectively).

In tandem with the significant expansion inproduction, overall value added growth of themanufacturing sector in 2004 strengthened furtherto 9.8% (2003: 8.3%). The manufacturing sectorremained as the leading driver of economic growth,with its contribution to GDP increasing from 30.8%in 2003 to 31.6% in 2004. Amidst the strong outputgrowth, the overall capacity utilisation rate in the

manufacturing sector was marginally lower at 79%in 2004 (2003: 80%), due to additions in capacitiesin selected industries. The capacity utilisation rate forexport-oriented and domestic-oriented industriesstood at 81% and 75% respectively (2003: 82% and76% respectively).

Growth in the electronics and electrical products(E&E) industry doubled to 17.7% in 2004 (2003:9.6%), spurred by the robust expansion in theelectronics segment. The performance of theelectronics industry was in line with trends in theglobal semiconductor cycle. In the early part of theyear, the electronics sector was buoyed by thestrong growth momentum in the globalsemiconductor industry which started in the secondhalf of 2003. The cycle peaked in mid-year andconsolidated thereafter as companies undertookinventory adjustments due to overproduction in theearly part of the year.

The semiconductor up-cycle in 2003 – 04 was broadbased, characterised by expansion in all categories ofchips, from personal computers (PCs) spurred by thereplacement cycle, to telecommunications andwireless products to consumer electronics. Thestrong consumer demand and pick-up in businessinvestment in the industrial countries during the yearfurther contributed to the strength in globalsemiconductor sales. This positive development wasfurther augmented by the continued trend in widerapplication of chips and the higher chip content,particularly in the consumer electronics segment.Newly emerging electronic devices such as digitalcameras, personal digital assistants, flat panel

Graph 1.6Manufacturing Sector: Sales, Production and Exports

Sales


Production Exports

2003 2004

Annual change (%)

0

5

10

15

20

25

30

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Graph 1.8 Production and Exports of the Electronics Industry

Annual change (%)

-40

-20

0

20

40

J J D J J D

20042003

Production of electronics in Malaysia

Electronics exports of Malaysia

Worldwide sales of semiconductors

Source: Department of Statistics, Malaysia Semiconductor Industry Association (SIA)

13


televisions and multi-function handsets became thedrivers of growth in the consumer electronicssegment. Global sales of PCs also continued toexpand rapidly in 2004, led mainly by strongdemand from the Asia-Pacific region.

Unlike the previous semiconductor cycle (1999 –2000), which was mainly driven by Y2K-relatedcorporate spending, the latest cycle is differentiatedby no significant over-investments in thetechnology sector. Secondly, the current downturnis caused by an oversupply situation, while theprevious cycle was caused by both supply anddemand factors. World growth almost halvedwithin a year to 2.4% in 2001 (2000: 4.7%).However, latest indicators show that demand forelectronics should continue to hold up as theoutlook for world growth remains positive in 2005(4%). In the US, new orders for electronicscontinued to register growth throughout 2004 andthe US book-to-bill ratio for semiconductorequipment has hovered close to one. Thirdly,inventory accumulation has not been excessive inthe current cycle. The inventory-to-shipment ratioof electronic products in the US has remained lowat 1.22 at end-December 2004 (September 2004:1.26; August 2001: 1.93). Lastly, the adjustment toinventories have been relatively quick, as largemultinational companies have begun to cut back onproduction and reduced their inventories since thefourth quarter of 2004. Given these factors, theview is that the current downcycle can be expectedto be modest compared with the sharp downturnin 2001.

Since many multinational companies are located inMalaysia, domestic manufacturers are alsoundertaking the inventory adjustment as reflected inthe slowdown in manufacturing production index inthe closing months of 2004. During the year,semiconductor manufacturers in Malaysia have alsocontinued to move up the value chain to producehigher value added products and ventured intomanufacturing-related activities, including locatingtheir regional hubs in Malaysia.

The electrical products industry continued toconsolidate further in 2004, with the industry stillundergoing structural adjustments in shifting tohigher value added products. With the migration tohigh-value products, the number of units producedwas lower while the total export value of electricalproducts expanded during the year on higherselling prices.

The chemicals and chemical products industryexpanded at a double-digit rate of 14.1% for thesecond consecutive year (2003: 20.8%). The strongexpansion was led mainly by higher growth inindustrial gases, which accounted for about 40%of the overall chemicals and chemical productsindustry. The robust growth in industrial gases(19.5%; 2003: 15.8%) was in line with the strongincrease in natural gas production following theaddition in the capacity and the rise in the capacityutilisation of the MLNG plants, especially the newMLNG Tiga Plant. Meanwhile, production of plasticproducts expanded further, supported by strongerdomestic and external demand. Intensification inthe usage of fertilisers and pesticides in theagriculture sector due to Good Agriculture Practicesamidst the favourable commodity prices spurredthe strong growth in the fertilizer and pesticidessub-sector in 2004. Only output of the syntheticresins industry moderated during the year duepartly to shortages in chemical inputs as well as theslowdown in the production of PVC pipes due tosubdued construction activity. Overall, externaldemand for chemical products continued toremain strong, with both PR China and Japanremaining as Malaysia’s largest export market forchemical products.

Growth in production of wood productsaccelerated to 12.7% (2003: 0.9%), amidst thestrong external demand and high prices. Theproduction of plywood and particleboard wasstronger in response to rising demand from the US,United Kingdom (UK) and Japan. The move byIndonesia to ban exports of sawn timber has alsobenefited the timber-producing sector in Malaysia.Meanwhile, the furniture industry was supported byhigher demand from the US, UK, Thailand, ChineseTaipei and the Netherlands.

Similarly, output of rubber products remainedstrong, expanding by 14.8% in 2004 (2003: 18.7%).The double-digit expansion was supported mainly byrising external demand for rubber gloves, as morethan 90% of the domestic production is for theexport market. Stable prices and sufficient supply oflatex enabled domestic glove manufacturers tocompete successfully in the global market.Manufacturers remained competitive by utilising ahigher share of inputs with natural rubber given thehigher cost of oil-based synthetic rubber. The USremained as the major export destination ofMalaysia’s rubber products, followed by Europe,Japan, Korea and Australia.

14

Production of the off-estate processing industryexpanded, albeit at a more moderate pace in linewith the output of crude palm oil during the year.Palm oil production expanded at a moderate rateduring the year after two consecutive years ofhigh growth.

Production of transport equipment turnedaround in 2004 to record a positive growth,following higher volume of cars assembled andsharp increase in production of motorcycle andscooters for the export market. Assembly of motorvehicles rebounded strongly following a contractionin 2003 to record a double-digit growth of 10.6%,spurred by pent-up demand for passenger carsfollowing the revision to the tariff structure in theearly part of the year. Rising income levels amidstthe availability of attractive financing packages aswell as the introduction of many affordable newmodels during the year further lent support for themotor vehicles industry. In the motorcycle andscooters segment, the year 2004 witnessed theincrease in production from new capacity mainlytargeted for exports to the regional countries suchas Indonesia and Singapore as well as Europeancountries such as Greece and Turkey.

products, were adversely affected. Nevertheless, theiron and steel industry continued to registerexpansion as steel manufacturers gradually shiftedaway from long products, mainly for theconstruction sector to flat products that have awider usage, ranging from electronic appliances tofurniture. Flat products were also not subject todomestic price controls and had benefited fromstrong export demand during the year.

Production of fabricated metal surged during theyear (29.2%; 2003: 7.4%), mainly supported bydemand from the export market. Of significance,manufacturers, particularly those producing bolts,nuts, gas and water pipes as well as steel structuresfor buildings and containers, increased theirproduction during the year, responding to the strongexternal demand and higher prices.

Growth in the paper products industry softenedto 2.3% in 2004 (2003: 8%), arising from the strongcompetition from the regional countries in the pulpand paper segment. While the pulp and papersegment contracted, the containers and paperboardssegment continued to register expansion during theyear following the increased economic activities that

The services sector remained as one of the main drivers ofeconomic growth and was supported by domestic consumption,tourism and trade-related activities.

The textiles and wearing apparel industrycontinued to undergo a structural change. Outputdeclined further due to competition from lower costproducing countries, namely PR China, India andVietnam. As part of their business strategy, somelocal textile manufacturers established a presence inother countries in the region to benefit from thelower operating cost and to reap the opportunitiesarising from the expiry of the Agreement on Textileand Clothing (ATC) in early 2005. Amidst the strongcompetition, local textile manufacturers alsocontinued to move up the value chain by producinghigher value added products for external markets asreflected in the increase in exports of textile andclothing in 2004.

Output of construction-related products declinedfor the first time after five consecutive years ofexpansion. The sector was affected by the subduedperformance of the construction sector during theyear. In particular, output of non-metallic mineralsproducts, namely cement and structural clay

supported the packaging industry. Production ofpetroleum products continued to increase, albeitat a more moderate pace given that the oil refinerieswere operating close to full capacity.

The food products industry continued to expand,albeit at a more moderate pace due partly to importsubstitution, while output in the beverages andtobacco industries were negatively affected by theincrease in excise duties as well as stricterregulations on cigarette advertisement andpackaging requirement.

Services SectorIn 2004, growth in the services sector strengthenedto 6.7% supported by strong domestic consumption,tourism, and trade-related activities. In particular, thefinal services segment, comprising the wholesaleand retail trade; hotels and restaurants; utilities;Government services; and other servicesstrengthened significantly, with growth picking upfrom 3.7% in 2003 to 6.3% in 2004, reflecting

15


mainly stronger consumption and the recovery intourism activities during the year. In line with thehigher trade, business and travel activities, growth inintermediate services segment was also higherduring the year at 7.2% (2003: 5.5%).

Of significance, the wholesale and retail trade,hotels and restaurants sub-sector reboundedstrongly from the effects of SARS in the previousyear to expand by 7.1% (2003: 1.5%). Growth wassupported by increased consumer activity arisingfrom higher disposable incomes and increasedconsumer confidence, and was further reinforcedby robust tourism activities. Expenditure ondurables, including passenger cars, rose during the

year. In particular, sales of passenger cars andimports of consumption goods recordedstrong growth rates of 15.3% and 24.1%respectively in 2004.

In the post-SARS period, there was a strong revivalin tourist arrivals with the total number of touristsreaching a record level of 15.7 million in 2004(2003: 10.6 million). The increase in tourists fromhigh-spending markets such as the West Asian andNorth Asian countries supported activities in thehotels, restaurants and specialty retail stores. Thehosting of the Formula One Grand PrixChampionship in March and the twice-a-year MegaSales Carnival (in the first and third quarters of theyear) attracted tourist spending. The averageoccupancy rate of hotels rose to over 60% for thefirst time since 1996 (2003: 53.3%) with manypremier hotels recording close to full occupancyduring the peak seasons.

The transport, storage and communicationsub-sector registered a strong growth of 8.4% in2004 (2003: 5.7%) in line with the rapid expansionin trade and travel activities. Growth was furtheraugmented by the robust expansion in thetelecommunications industry, driven mainly by thecellular segment. Wider subscriber base, increases ininternational calls and increased popularity in theusage of mobile data supported the growth in thissegment. By end-2004, the number of cellularphone subscribers rose to 14.5 million (end-2003:11.1 million), representing a penetration rate of55.9%. The intense price competition betweenoperators has helped to increase the usage of short

Table 1.4Growth in the Services Sector at Constant 1987 Prices

2003 2004p 2003 2004p

Annual change (%) % share of GDP

Services 4.4 6.7 57.6 57.4

Intermediate services 5.5 7.2 23.8 23.8Transport, storage and communication 5.7 8.4 8.6 8.7Finance, insurance, real estate and

business services 5.4 6.5 15.1 15.0

Final services 3.7 6.3 33.9 33.6Electricity, gas and water 5.7 8.1 4.1 4.2Wholesale and retail trade, hotels and restaurants 1.5 7.1 14.3 14.3Government services 1 7.6 5.1 7.4 7.2Other services 2 3.3 5.0 8.0 7.9

1 Include general public services (general public administration, external affairs and public order and safety), defence, health, education and others.2 Include imputed rent from owner-occupied dwellings; community, social and personal services; products of private non-profit services to households and domestic

services of households.p Preliminary


-60

-40

-20

0

20

40

60

80100

120

140

Private consumption (LHS)

Tourist arrivals (RHS)

Graph 1.9 Trends in the Wholesale and Retail Trade, Hotels and Restaurants Sub-sector vis-à-vis Private Consumption and Tourist Arrivals

Value-added of the sub-sector (LHS)

Annual change (%)

2003 2004

Annual change (%)

-8

-3

3

8

13

18

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

16

Table 1.5Selected Indicators for the Services Sector

2003 2004p

Annual change (%)

Electricity production index 5.7 8.3Loans outstanding in the banking system 4.8 8.5Insurance premiums 14.0 16.3Bursa Malaysia (turnover, value) 57.2 18.3LRT ridership1 8.8 5.7Tourist arrivals -20.4 48.5Airport passenger traffic 2.0 18.9Air cargo handled 7.0 10.5Bulk cargo throughput at major ports2 7.9 9.1Container throughput at major ports3 14.9 10.7

%

Hotel occupancy rate 53.3 60.8Penetration rate of telecommunications

services (end-period)- Internet dial-up 11.4 12.7- Broadband 0.45 0.98- Cellular phone 43.9 55.9- Fixed line 18.1 17.2

1 STARline and PUTRAline.2 Comprise Port Klang, Johor Port, Penang Port, Sabah ports and Bintulu Port.3 Comprise Port Klang, Johor Port, Port of Tanjung Pelepas, Penang Port,

Sabah ports and Bintulu Port.p Preliminary

Source:Bursa Malaysia Berhad; Department of Statistics, Malaysia; Malaysia AirportsHoldings Berhad; Senai Airport Terminal Services Sdn. Bhd.; Malaysian Communi-cations and Multimedia Commission; Ministry of Finance; relevant port authorities;Syarikat Prasarana Negara Berhad; Malaysia Tourism Promotion Board; and BankNegara Malaysia

messaging service (SMS) and other mobile dataduring the year. Subsequently, revenue from dataaccounted for an increased share of 16% of totalmobile revenue in 2004, up from 12% a yearago, while SMS traffic reached 9.5 billion (2003:6.2 billion).

Robust trade activities contributed favourablytowards the growth in sea and air cargo. Total TEUshandled at major ports expanded by 10.7%,reflecting increases in both indigenous cargo aswell as transhipment activity. In terms ofoperational efficiency, Port of Tanjung Pelepas (PTP)recorded the highest level of productivity amonglocal ports at 32 gross moves per crane per hour.The port received the Container Terminal of theYear Award at the Asia Logistics Award 2004 heldin Kuala Lumpur. Air cargo handled in the countryalso recorded a higher growth of 10.5% in 2004,due mainly to the aggressive promotion by thenational airline, including the promotion of theI-port concept, which facilitates seamlessmovement of cargo between airports and the threemajor seaports in Malaysia, namely Northport, PTPand the Kuantan Port.

Meanwhile, the passenger segment of the airtransportation industry recorded a strongperformance of close to 20%. The segmentbenefited not only from the strong growth ofinbound tourists but also from more Malaysianstravelling locally and abroad due to greateraffordability with the advent of low-cost air travel.

The finance, insurance, real estate and businessservices sub-sector recorded a stronger growth in2004, driven mainly by banking and insuranceactivities, which account for the bulk of thesub-sector. In the banking industry, growthemanated from both interest and non-interestincome, namely fee-based income. Nevertheless,narrowing interest spreads amidst ample liquidityand intense competition continued to limit thegrowth in interest income. The increasing Islamicbanking activity further contributed to growthduring the year. In terms of lending, Islamicfinancing rose by 19% to account for 11.3% oftotal bank lending during the year. Total assets inIslamic banking doubled in the last four years toRM94.6 billion as at end-2004. Meanwhile, in theinsurance industry, net insurance premiumscollected rose significantly underpinned by strongconsumer demand for investment-linked lifeinsurance and endowment products.

Activities in the real estate and business servicessegments also expanded during the year. Realestate activity was supported by a marked increasein the volume of property transactions (20.5%),while the increased turnover at Bursa Malaysiabenefited the stock broking industry in the businessservices segment. Other new growth areas, namelyICT services and shared services, gained momentumto add to the growth in the business servicessegment. As at end-2004, 910 companies were inoperation at the Multimedia Super Corridor (MSC),of which 67 are world-class companies. Activities ofthese companies include software and contentdevelopment and providing Internet-based serviceapplications and e-commerce solutions. In theshared services and outsourcing industry, byend-2004 the Malaysian Industrial DevelopmentAuthority (MIDA) had approved incentives to 87Operational Headquarters, 162 InternationalProcurement Centres and seven RegionalDistribution Centres as companies found Malaysia asuitable country to locate their regional hub forinsourcing and outsourcing activities. A.T. Kearney’s2004 Offshore Location Attractiveness Index rankedMalaysia as the third most attractive offshorelocation for companies to locate their sharedservices operations abroad.

17


The other services sub-sector expanded at a fasterpace of 5% (2003: 3.3%) with strong growth in theentertainment segment and supported by the newgrowth areas such as private education and privatehealthcare services industries. In the private highereducation segment, there were 27 privateuniversities, including six foreign university branchcampuses, and 532 private colleges in operation asat end-2004. Total student enrolment in theseinstitutions was around 232,200, of which 8.3%comprised foreign students (2003: 7.9%). In theprivate healthcare industry, the existing 35 privatehospitals treated about 174,300 foreign patientsduring the year. The majority of patients came to

The Government services sub-sector continued toexpand by 5.1%, due to higher expenditure onemoluments for the civil service, including the higherbonus payment made during the year. Meanwhile,the utilities sub-sector expanded strongly in linewith the stronger economic performance resulting inincreased demand for electricity and water by allcategories of consumers, including the industrial,commercial and household sub-sectors.

Agriculture SectorThe agriculture, forestry and fishing(agriculture) sector registered another year ofstrong and broad-based growth, reflecting its revival

The agriculture sector recorded a strong and broad-basedexpansion amidst favourable commodity prices.

Table 1.6Agriculture Sector: Value Added, Production and Exports

2003 2004p

Volume and Value Annual change (%) Volume and Value Annual change (%)

Value Added (RM million at 1987 prices) 20,123 5.7 21,135 5.0

Production1

of which:

Crude palm oil 13,355 12.1 13,976 4.7Rubber 986 10.8 1,186 20.4Saw logs 21,532 4.3 21,576 0.2Cocoa beans 36 -24.0 33 -7.8Fish landings 1,480 1.1 1,576 6.5

Exports (RM million) 33,693 28.0 36,176 7.4of which:

Palm oil(‘000 tonnes) 12,487 15.0 11,788 -5.6(RM/tonne) 1,617 18.3 1,706 5.5(RM million) 20,192 36.1 20,107 -0.4

Rubber(‘000 tonnes) 946 2.0 1,105 16.7(sen/kilogramme) 379 41.0 470 24.3(RM million) 3,583 43.8 5,198 45.1

Saw logs(‘000 cubic metres) 5,532 8.4 5,207 -5.9(RM/cubic metre) 366 1.8 398 8.9(RM million) 2,021 10.3 2,070 2.5

Sawn timber(‘000 cubic metres) 2,789 1.3 3,166 13.5(RM/cubic metre) 1,134 2.9 1,015 -10.4(RM million) 3,162 4.2 3,214 1.7

1 All in ‘000 tonnes, except for saw logs in ‘000 cubic metres.p Preliminary

Source: Department of Statistics, MalaysiaMalaysian Palm Oil BoardForestry Departments (Peninsular Malaysia, Sabah and Sarawak)Malaysian Cocoa BoardFisheries Department, Malaysia

Malaysia for treatment for cardiology, radiology andgeneral surgery. Some tourists also came fordiagnostic services and wellness programme,including basic and total health-screening services.

as an important engine of growth for the economy.The sector contributed to 0.4 percentage points tooverall GDP growth in 2004 (2003: 0.5 percentagepoints; 1993-2002: average of 0.03 percentage

18

0

2

4

6

8

10

12

14

16

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2000 2001 2002 2003 2004p

Graph 1.10 Oil Palm: Area, Production and Yield

Production in million tonnes (RHS)

Hectare Tonne

Mature area in '000 hectares (LHS)

Yield of CPO in tonnes per mature hectare (RHS)

p Preliminary

Source: Malaysian Palm Oil Board (MPOB)

points). Value added growth in the sector expandedby 5% in 2004 reflecting an expansion across a widerange of commodities, namely crude palm oil,rubber, saw logs and food-related activities. On theexternal front, foreign exchange earnings fromagriculture commodities increased by 7.4%, duewholly to the marked increases in export prices ofbetween 5 – 47%. Agriculture exports accounted for7.5% of gross exports in 2004.

The strong performance of the agriculture sectorwas due to a confluence of positive developmentsduring the year. Conducive weather conditions,increases in mature areas and strong productivitygains as a result of Good Agriculture Practices (GAP)by farmers encouraged by the high global prices ofagriculture commodities were key factors drivinggrowth. In particular, production of crude palm oiland rubber reached record levels during the year.While palm oil production was supported by largeexpansions in new matured areas and morewidespread application of agricultural inputs,especially fertilisers, rubber output was induced byintensive tapping activity, especially amongsmallholders and higher yields from application ofnew labour-saving technologies.

The broad-based growth in the agriculture sectorwas also contributed by higher output of the foodcrops sub-sector, a major component of Malaysia’sagriculture sector (about 40% of the value added inthe agriculture sector). The Government’s efforts totransform and modernise the agriculture sector inrecent years, by encouraging higher productivity andestablishing deeper linkages with downstream agro-based industries, has helped to diversify theagriculture base. These contributed to higher andmore stable income and increased consumptionactivity among farmers, fishermen and othersmallholders in the rural communities of Malaysia.

Production of crude palm oil (CPO) reached arecord high of 13.98 million tonnes in 2004,representing an increase of 4.7% over the previousyear (2003: 13.35 million tonnes; 12.1%). Growthwas driven by two key factors. Firstly, matured oilpalm areas rose by 4.5% to 3.45 million hectares in2004 (2003: 3.6%), reflecting mainly increases inEast Malaysia. Sabah and Sarawak registered growthrates of 4.4% and 17.7% respectively, while inPeninsular Malaysia the expansion was moremoderate at 2.2%. Nevertheless, Peninsular Malaysiacontinued to constitute a majority share of about58% to total CPO production.

The second factor was the marked improvement inthe oil extraction rates (OER), which is one of thecritical barometers of palm oil yield productivity. TheMalaysian OER breached the critical 20% thresholdfor the first time in history, to 20.03% (2003:19.75%). This is an important milestone in theindustry, as every 1% increment in OER translates toan estimated increase of about 500,000 tonnes inCPO output. Given these positive developments,Malaysia retained its position as the world’s largestpalm oil producer and exporter, accounting for 47%of global output, and 54% of world exports.

The Malaysian palm oil commanded a strong pricein the global market, with the CPO local deliveryprices averaging RM1,664 per tonne in 2004 or5.5% higher than in 2003 (RM1,577 per tonne).Prices strengthened considerably in the first half ofthe year (RM1,848 per tonne) amidst the shortageof world supply of oils and fats, which began sincethe latter half of 2003. The three largest producersof soybean oil (palm oil’s closest competitor),namely the US, Brazil and Argentina recordeddisappointing harvests in early 2004 due to droughtand the onset of the Asian rust disease.Nevertheless, CPO prices consolidated thereafter(second half of 2004: RM1,481 per tonne)following a bumper soybean harvest in the US.Market sentiment was also influenced by theslowdown in external demand for palm oil as wellas the gradual build-up in domestic crude palm oil

19


stocks (end-2004: 1.49 million tonnes; end-2003:1.16 million tonnes). This caused the already largeprice discount of CPO against the three other majorcompeting edible oils (soybean, rapeseed andsunflower oils) to widen further during the year.

PR China continued to dominate as the major buyerof Malaysian palm oil, accounting for about 24% ofthe total exports. Exports to PR China rose duringthe year as its import quota for palm oil increased to2.7 million tonnes (2002: 2.3 million tonnes)following the republic’s accession into the WorldTrade Organisation (WTO). There was also adiscernable increase in offtake by the US (29.2%) to298,760 tonnes following the announcement by theFood and Drug Administration (FDA) on the changesto the regulations on the labelling of food productsthat contain trans fatty acid. Beginning 2006, USfood manufacturers are mandated to label allproducts that contain trans fatty acids, which clinicalstudies have linked to serious diseases. Palm oil,which is trans fatty acid-free has benefited from theregulation as it has been increasingly used by USmanufacturers as a substitute for other edible oils.Meanwhile, purchases from other Asian countries,notably India and Pakistan, declined sharply (-44%and -24.2% respectively) following an improvementin the production of their domestic rapeseed oil.

On the development front, the Malaysian palm oilindustry continued to make significant progress.Malaysia ventured into four new markets duringthe year, namely Sao Tome and Principe, Tuvalu,Costa Rica and Guam. In terms of research anddevelopment, the Malaysian Palm Oil Board (MPOB)introduced 43 new technologies and products forcommercialisation in the industry and undertook

Price (RM/tonne)

Q1 Q1 Q1 Q1Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4

Source: Malaysian Palm Oil Board (MPOB)

2001 2002 2003 2004

Graph 1.11 Palm Oil Price and Stocks

Stocks ('000 tonne)

CPO local delivery price

0

500

1,000

1,500

2,000

0

300

600

900

Stocks

1,200

1,500

312 research projects during the year. The newbreakthroughs were mainly in developingcost-effective milling and refining techniques,improving yields, minimising wastage and creatinghigher value-added palm-based products (edibleand non-edible products) and palm-based biomass.In line with the Government’s policy on utilisingrenewable energy sources, efforts were alsointensified in research and development related tobiofuel energy prompted by the sharp increase incrude oil prices in 2004.

Natural rubber production continued to expandstrongly for the second consecutive year, to breachthe 1 million tonne mark for the first time in eightyears. Output increased by 20.4% to reach 1.19million tonnes. The sharp increase emanated entirelyfrom smallholders, who accounted for almost 95%of total Malaysian rubber output. Output bysmallholders rose by 22.7% as high prices motivatedincreased tapping activity and utilisation of improvedtechniques that raised productivity. While totaltapped areas by smallholders expanded by 2.3% to768,440 hectares, areas tapped by estates declinedfurther by 1.5%, as more rubber land holdings wereeither replanted with other crops or converted intoother economic activities during the year. Malaysiamaintained its position as the third largest producerof rubber (16% share of world output) afterThailand and Indonesia.

Malaysian rubber prices, as benchmarked by SMR20 (RSS 1 was discontinued effective 1 January

0

80

160

240

320

400

480

560

Production in million tonnes (RHS)

Export prices in sen per kg (LHS)

Average yield in kg per tapped hectare (RHS)

sen

p Preliminary for average yield

Source: Malaysian Rubber Board (MRB)

'000 tonne or kg

Graph 1.12 Natural Rubber: Production, Prices and Yield

2000 2001 2002 2003 2004p0

200

400

600

800

1,000

1,200

1,400

1,600

20

2004), strengthened significantly by 21% to anaverage of 461 sen per kilogramme in 2004 (2003:381 sen/kg). Prices rose significantly in the earlypart of the year to reach the highest daily tradedprice of 502 sen on 2 March and to record amonthly high of 489 sen in March. The surge inprices was caused by lower world supply as a resultof heavy rains and some localised disruptions, whileglobal demand continued to remain strongespecially from PR China. As output picked up inthe major producing regions in the latter part ofthe year, prices trended lower to around 425 senbefore closing the year slightly higher at 450 sendue to rising price of synthetic rubber following thehigher crude oil prices.

Export proceeds from rubber rose significantly by45.1% to RM5.2 billion in 2004, to account for1.1% share of total exports. PR China expanded itspurchases from Malaysia, registering a strongdouble-digit growth for the third consecutive year(39.2%; 2003: 60.3%). The strong purchases werefuelled by demand from tyre manufacturers cateringto the surge in demand for automobiles. This wasfurther augmented by the Chinese government’sdecision earlier in the year to abolish the importquota for natural rubber, in accordance with theWTO’s trade liberalization measures. As a result,PR China continued to remain as Malaysia’s largestimporter of rubber with a 26.1% share of totalexports (2003: 21.9%). Apart from PR China, theother major export market was the European Union(EU), which accounted for 32% of the total rubberexports, particularly Germany and France.

Rubber remains an important crop for Malaysia, givenits strong linkages to the rural community anddownstream industries. In recent years, the strongprices have helped to revive the industry, particularlyamong smallholders. Besides increasing tappingactivities, smallholders have also adopted exploitationtechnologies such as the low frequency tapping system(LITS) and Good Agricultural Practices by usingstimulants to improve rubber yield.

The Government has also provided replantinggrants since 2002 amounting to RM330 million toencourage smallholders to replant rubber as well asto diversify their activities to supplement theirincome. They were encouraged to replant latextimber clones (LTC) that yield higher latex. Theseclones would also ensure adequate supply ofrubber wood in future for the local furnitureindustry. At the same time, the Government has

implemented a number of programmes includingthe G++ Planting System (integrated farming inrubber plantation) and Rubber Technology VillageProjects (incorporating technology in rubbercultivation). These initiatives have resulted in higherincomes for smallholders. Rubber smallholdersunder the Federal Land Development Authority(FELDA) schemes (accounting for 10% of thenation’s rubber output) doubled their monthlyincome from RM980 in 2002 to RM1,800 in 2004.

Other agriculture commodities, comprisingfisheries, livestock, as well as miscellaneousagriculture (which includes fruits and vegetables),performed favourably in 2004. The fisheriessub-sector grew by 6.5% in 2004 to 1.58 milliontonnes (2003: 1.48 million tonnes), driven mainly bymore active deep-sea fishing and increased output ofhigh value-added aquaculture and ornamental fish.Similarly, livestock production expanded by 4.5%,led by growth in output of cattle and poultry, mainlythrough better farming techniques such as theintegrated cattle farming in oil palm and rubberplantations and poultry rearing via the closed housesystem. The increase in output was to meet the risingexternal demand and demand from the domesticfood processing industries. Strong growth in fruits(7.1%) and vegetables (25%) production was duemainly to increases in cultivation areas amidst thestrong domestic consumption.

During the year, the Ministry of Agriculture andAgro-based Industry (MoA) and related agenciesundertook a Food Trade Balance Action Plan. Theaim is to reverse the net deficit in the balance ofpayments for the food bill to a surplus position by2010, as stated in the Third National AgriculturePolicy (NAP3). In realising this goal, three keyobjectives have been emphasised. Firstly, to raise theproduction levels of food crops by increasingplanting and catchment areas through schemes suchas Permanent Food Production Parks (TKPM),Aquaculture Industrial Zones (AIZ) and private sector-led large scale commercial farming endeavours.Secondly, to strengthen the industry’scompetitiveness by establishing a deeper linkagewith higher value-creating downstream processingactivities, such as the agro-based food industries.Thirdly, to establish a sound marketing plan andensuring the quality and safety of the food productsfor overseas markets by embarking on a series ofaccreditation and labelling schemes that isbenchmarked to internationally recognised foodstandards. Some of these schemes that were

21


launched recently include the Farm AccreditationScheme of Malaysia (SALM), Malaysian AquacultureFarm Certification Scheme (SPLAM), Livestock FarmAccreditation Scheme (SALT) and labelling of‘Malaysia’s Best’ on exported fruits.

In the forestry sector, logging activities weremoderate during the year in line with theconservation efforts to implement sustainable forestmanagement practises. Production of saw logsincreased marginally by 0.2% to 21,576 millioncubic metres (2003: 21,532 million cubic metres).However, global demand for logs remained firmduring the year, particularly from Japan, PR China,US and the EU countries, which led to higher prices.The average Malaysian log price reached a recordhigh of RM398 per cubic metre following a ban onlog exports and sawn timber by Indonesia. Amidstthe increase in export prices (8.9%) and the declinein volume of 5.9%, export proceeds from saw logsrose by 2.5% to RM2.1 billion.

Tropical timber continued to come under pressure byenvironmentalists, particularly from Europe, onconcerns regarding illegal logging and trade inendangered tropical species. Malaysia has developedits own timber certification scheme to provideconfidence and assurance to importers andconsumers that Malaysian timber products are fromlegal and sustainable sources. By end-2004, theMalaysian Timber Certification Council (MTCC)awarded the Certificate for Forest Management toeight Peninsular Malaysia states, as well as theUpper Ulu Baram region in Sarawak, covering a totalof 4.73 million hectares of permanent reserveforests. The credibility of these certification effortshave been recognised by major buyers of Malaysiantimber products, most recently by the UK and theNetherlands. In addition, to counter persistentallegations that Malaysia was importing illegaltropical logs from Indonesia, including theendangered Ramin species, the Government hasimposed a blanket ban on importing such logs.Malaysia has also been vigilant in enforcingregulations on trade in Ramin in accordance with theregulations under the Convention for InternationalTrade of Endangered Species of Wild Flora andFauna (CITES).

As a long-term strategy to reduce reliance on naturalforest, the Government has embarked on forestplantation as well as considered alternative resourcessuch as oil palm biomass and Kenaf to supplementthe inadequate supply of raw materials. While

biomass has been identified as being suitable formanufacturing of panel products, Kenaf, from thehibiscus family, is for production of fibreboard. Onforest plantation, as of end-2004, there has been atotal of 316,196 hectares in Malaysia, with almost68% of the planted areas in Sabah. Almostone-third of the total forest plantation is expected toemanate from the rubber species from whichrubberwood is produced. In recent years,rubberwood has been increasingly used by thedomestic furniture and building componentindustries due to its suitability. In addition,rubberwood products have also been exported,contributing to about RM5 billion export receipts in2004. The replanting of rubber trees with LTCswould augment the production of rubberwood inthe years to come.

Cocoa production fell further by 7.8% to 33,423tonnes (2003: 36,236 tonnes) amidst the continuedreduction in cultivated area to 44,000 hectares(2003: 44,897 hectares; 1990: 393,000 hectares).The reduction reflected mainly the activeconversion into other crops. In addition, averageproductivity has also declined especially amongstsmallholders, who account for two-thirds of totalMalaysian cocoa acreage, due to decreasedapplication of inputs. Nevertheless, demand forcocoa from the domestic downstream industrieshas been increasing, resulting in a significantincrease in the import bill. As part of the efforts toencourage cocoa planting among smallholders, theMalaysian Cocoa Board has implemented theCocoa Smallholders’ Development Programme.Currently, there are 4,673 farmers who are activelyinvolved in the programme, with a total area of4,609 hectares. In addition, the Government hasalso announced that a 100% replanting grantwould be given to cocoa smallholders.

Mining SectorThe mining and quarrying (mining) sectorexpanded further by 4.1% in 2004, on account ofhigher production of crude oil and natural gas dueto strong external and domestic demand.Meanwhile, production of tin-in-concentratescontinued to decline amidst the lower number ofactive tin mines in the country. As a net oil exportingnation, Malaysia largely benefited from theprevailing high crude oil prices during the year.Export receipts from minerals rose significantly forthe second consecutive year by 38.2% to RM41.2billion resulting in its share to total exportsincreasing to 8.6% (2003: 7.5%).

22

Table 1.7Mining Sector: Value Added, Production and Exports

2003 2004p

Volume and Value Annual change (%) Volume and Value Annual change (%)

Value added (RM million at 1987 prices) 16,699 5.9 17,384 4.1

Production

Crude oil and condensates(barrels per day) 737,858 5.6 762,318 3.6

of which:Crude oil (barrels per day) 621,902 4.3 623,957 0.6

Natural gas - net(million standard cubic feet per day) 5,013 7.2 5,196 4.0

Tin-in-concentrates (tonnes) 3,358 -20.3 2,800 -16.6

Exports (RM million) 29,801 33.3 41,177 38.2of which:

Crude oil(‘000 tonnes) 17,913 10.6 18,090 1.0(US$/barrel) 30.27 22.0 40.81 34.8(RM million) 15,659 35.0 21,318 36.1

Liquefied natural gas(‘000 tonnes) 17,311 15.4 20,729 19.7(RM/tonne) 772 17.1 824 6.8(RM million) 13,358 35.1 17,079 27.9

Tin(tonnes) 15,244 -43.7 29,966 96.6(RM/tonne) 18,730 19.2 31,585 68.6(RM million) 286 -32.9 947 231.5

p Preliminary

Source: PETRONASDepartment of Statistics, MalaysiaDepartment of Minerals and Geoscience, Malaysia

Crude oil and natural gas production rose to the highest levels.Higher external demand and strong prices contributed to asignificant increase in export earnings from minerals.

Malaysian crude oil production (including condensates)rose to the highest level of 762,318 barrels per day(bpd) in 2004, an increase of 3.6% (2003: 737,858barrels per day). Output excluding condensates waswithin the target range set for the year under theNational Depletion Policy. The higher production wassupported by increase in demand from Australia,Thailand and Korea, as well as increased domesticdemand from downstream industries producing

Sea Brent. In 2004, the price of Tapis Blendstrengthened by 38% to US$41.12 per barrel(2003: US$29.79 per barrel). The price rose steadilyduring the course of the year to reach a high ofUS$55.10 per barrel on 21 October. The surge incrude oil prices during the year was driven by bothfundamental factors as well as market sentiment.The fine balance between global supply anddemand as well as higher risk premiums for crude

petroleum products. High prices and increased volumeresulted in proceeds from crude oil rising by 36.1% toRM21.3 billion, constituting an increased share of 4.4%to total export receipts (2003: 3.9%).

The year saw the Malaysian Tapis Blend, which is ofthe ‘light and sweet’ variety due to its low sulphurcontent, priced at a premium relative to the North

oil prices due to geopolitical risks, was furtherexacerbated by active speculative activities in theenergy markets.

Based on the estimates by the International EnergyAgency (IEA), global oil demand in 2004 experiencedthe strongest yearly increment in 21 years, rising by2.7 million bpd to 82.4 million bpd, while global

23


Crude oil and condensates (LHS)

Barrels per day (bpd)

Million standard cubic feet per day (mmscfd)

Graph 1.14 Production of Crude Oil and Natural Gas

500,000

550,000

600,000

650,000

700,000

750,000

800,000

2000 2001 2002 2003 2004p3,800

4,200

4,600

5,000

5,400

p Preliminary

Source: PETRONAS

Natural gas (RHS)

supply picked up slightly to 83 million bpd. Thestrong global demand emanated mainly from thePR China and the US. PR China contributed to aboutone-third of the increase in global demand driven byrobust economic activities, while strong demand fromthe US reflected its need to build up its inventorylevel. Sentiment was further heightened bygeopolitical risks in the Middle East and supplydisruptions in some producing nations, such asRussia, Venezuela and Nigeria. As such, the riskpremium inherent to crude oil prices widenedsignificantly, leading to higher speculative activities.Thus, the global benchmark oil prices, namely WestTexas Intermediate and North Sea Brent, averagedhigher at US$41.40 and US$38.34 per barrelrespectively (2003: US$30.92 and US$28.70 perbarrel respectively).

Crude oil prices were also influenced by decisionsof the Organisation of Petroleum ExportingCountries (OPEC). For the first time in 23 years,OPEC, which accounts for almost 40% of global oilsupply, experienced a sharp reduction in spareproduction capacity to around 1 million bpd, lowerthan the average of 4 – 5 million bpd seenpreviously. This was crucial as non-OPECproducing nations have essentially very littlespare capacity. After initially cutting its outputquota by 1 million bpd to 23.5 million bpd inMarch, OPEC subsequently reversed its action dueto strong global demand. OPEC raised its quota onthree occasions, by 2 million bpd, 0.5 million bpdand 1 million bpd respectively, ending the yearwith a quota of 27 million bpd. Productionincreases by OPEC helped to stabilise andmoderate oil prices. The Tapis Blend closed the yearat US$40.50 per barrel.

West Texas Intermediate (WTI)

Tapis Blend

US$ per barrel

Graph 1.13 Crude Oil Prices (1-Month Futures) in 2004

Highest level recorded on 21 Oct:Tapis US$55.10 WTI US$55.80

20

25

30

35

40

45

50

55

60

Jan Mar May Jul Sep Nov Dec

Natural gas production also reached historic levelsin 2004, with a rise in output by 4% to 5,196million standard cubic feet per day (mmscfd) (2003:5,013 mmscfd). The increased capacity utilisation atthe MLNG plants and Gas Processing Plants (GPPs)enabled the industry to meet the higher demandfrom traditional buyers. In addition, domesticdemand for natural gas rose during the year due tohigher utilisation by the power generation sub-sector and also increased growth from domesticindustrial users.

The year 2004 also saw Malaysia remaining as thethird largest liquefied natural gas (LNG) exporter inthe world after Indonesia and Algeria. Malaysiaexported a record high of 20.7 million tonnes orabout 16% of the world’s total LNG exports. Thisrepresented a strong increase in volume of 19.7%.The higher offtake were mainly from traditionalbuyers, namely Korea and Chinese Taipei whoseimports rose sharply by 74.7% and 24.4%respectively. While the majority of Malaysian LNGtrade is conducted on a medium- to long-termcontractual basis, the country has also benefitedfrom the growing trend in LNG trading on spot andshort-term contractual basis (defined as less thanfive years). In 2004, the US bought about 300,000tonnes of Malaysian LNG on a spot basis to offsetdeclining imports from Canada, their traditionalsupplier of natural gas. In line with trendsin the energy markets, LNG export price rose byabout 6.8% to RM824 per tonne. Accordingly,export receipts from LNG rose by 27.9% toRM17.1 billion.

24

In the construction sector, activity in the residential and non-residential segments expanded but overall activity was subdueddue mainly to lower civil engineering activity.

Reflecting the vast potential of the Malaysian oil andgas industry, further discoveries of oil and gasresources were recorded in 2004. Six new oil fieldswere discovered offshore Sabah, includingdeepwater discoveries in Gumusut, Malikai andSenangin. This brings the total number of discoveriessince 2002 to 12. In addition, 11 new gas fieldswere discovered. Of the 507,263 square kilometresof onshore and offshore areas in Malaysia madeavailable for oil and gas exploration, 227,520 squarekilometres have been awarded under 52 production

stocks (particularly in the US), coupled with strongdemand from the electronics industry arising fromthe environmental guidelines set by the EU, toreplace lead with tin as the main material insoldering activities.

Construction SectorIn 2004, the construction sector contracted by1.9% due mainly to lower civil engineering activity.The weaker civil engineering performance was aresult of fewer infrastructure projects following thecompletion of many privatised projects in recentyears as well as lower Government spending on newlarge infrastructure. On the other hand, overallactivity in the residential and non-residentialsegments expanded during the year. Demand forresidential properties was supported by risingdisposable incomes and attractive financingpackages, while the non-residential segmentrecovered in line with the stronger economic andbusiness activities during the year.

The sharp decline in civil engineering activitywas on account of completion of major privatisedprojects as well as lower public spending on largeinfrastructure projects. The slowdown was,

Table 1.8Malaysia: Crude Oil and Natural Gas Reserves1

As at end

2003 2004p

Crude oil (including condensates)Reserves (billion barrels) 4.84 4.81Reserve/Production (year) 17.5 17.7

Natural gasReserves

(trillion standard cubic feet) 87.02 87.33Reserve/Production (year) 36.7 35.1

1 The National Depletion Policy was introduced in 1980 to safeguard theexploitation of the national oil reserves by postponing the development andcontrol the production of major oil fields (with reserves of 400 million barrelsor more).

p Preliminary

Source: PETRONAS

however, partially mitigated by higher constructionactivity in the oil and gas sector following thediscovery of several oil fields offshore Sabah.Construction activity centred on building terminalsand production facilities, such as installation of oilrigs and pipelines. Ongoing construction in the civilengineering sub-sector was largely for powergeneration plants, roads, ports, and water andsewerage projects. Malaysian constructioncompanies also secured a number of overseascontracts particularly in India, Middle East andIndochina to help to diversify their earnings base.

Activity in the residential segment remainedstrong, underpinned by firm demand for residentialproperty, especially affordable housing in choicelocations with good accessibility. Demand forresidential property was encouraged by the lowinterest rates, attractive housing loan packages aswell as incentives provided under the 2003Economic Package which ended at end-May 2004.Supported by the favourable demand conditions,

sharing contracts (PSCs), four of which were signedduring the year. In addition, 125 development wellsand 36 exploration wells were drilled. During theyear, the national oil corporation, Petroliam NasionalBerhad (PETRONAS) undertook major geological andgeophysics studies. 3D seismic data mappingamounting to 546,311 line kilometres were acquiredfor exploration and development purposes, morethan double the acquisition made just two years ago(2002: 246,475 line kilometres). Steps were alsotaken to enhance oil recovery via utilisation ofnon-conventional drilling methods.

Production of tin-in-concentrates continued todecline by 16.6% in 2004 due mainly to a decreasein the number of active tin mines in the country, aswell as a depletion of tin reserves in the existingmines. This development took place despite thestrong tin prices during the year. The average tinprices at the Kuala Lumpur Tin Market rosesubstantially by 73.8% to US$8,494 per tonne. Thesurge in prices was due to decreasing global tin

25


the Projek Perumahan Rakyat (PPR) in 2004. In the2005 Budget, the Government has allocated RM778million for the construction of 21,000 low-costhouses under the PPR.

During the year, guidelines on the purchase ofproperties by foreigners were further liberalised.Bank Negara Malaysia liberalised its lendingguidelines to allow all residents (bank andnon-bank) to extend ringgit credit facilities up to amaximum of three property loans to a non-residentto finance or re-finance the purchase orconstruction of properties in Malaysia with nolimitation on the credit facilities. As of 1 August2004, the Foreign Investment Committee (FIC) alsorelaxed its guideline to allow foreigners to purchaseproperties valued more than RM150,000(previously: more than RM250,000). For the year asa whole, FIC approvals for purchase of propertiesby foreigners rose significantly by 74.6% to 2,824units or RM1.5 billion (2003: RM770.6 million).Average price of properties purchased by foreignersincreased by 10.2% (2003: 0.4%). However, thepurchase of commercial properties by foreignersdeclined during the year.

In 2004, the definition of property overhang wasreclassified to cover only completed property withcertificate of fitness for occupation (CFO) issued,but remaining unsold for more than nine monthsafter it was launched for sale. Previously, allproperties that were launched and remained unsoldfor more than nine months, irrespective of whetherthe CFO was issued, were defined as overhang.Based on the new classification, data compiled byNational Property Information Centre (NAPIC)showed that the overhang of residential propertiesincreased to 15,162 units as at end-September

construction of new houses as indicated byincoming supply and housing starts, continued toexpand by 5.5% and 1% respectively in the firstnine months of 2004. In recent years, thedevelopment of high-end properties has gainedgrowing buyer interest. Reflecting this, theconstruction of high-end houses, as reflected bythe incoming supply of semi-detached anddetached houses, rose by 4.7% in the first ninemonths of 2004. With improving demand, houseprices trended upwards in 2004. Latest data for thefirst half of 2004 showed that the Malaysian HousePrice Index rose by 5.7%, with increases recordedin all types of houses.

In line with the Government’s effort to provideaffordable houses to the low-income group, anadditional RM1 billion was allocated to implement

Table 1.9Residential Property Indicators

2003 2004

Units

Residential property transactionsUnits 164,723 195,241Value (RM billion) 23.0 29.3

Approvals1 203,372 174,671Developers’ licences

New 1,062 1,071Renewals 436 353

Sales and advertising permitsNew 1,103 1,038Renewals 1,707 1,510

Loans by banking system- Value (RM billion)

Outstanding 116.6 132.9Approvals 30.0 35.7

1 Units approved for construction by private developers.

Source: NAPIC, Valuation and Property Services Department, Ministry ofHousing and Local Government and Bank Negara Malaysia

Table 1.10Incoming Supply and Planned Supply of Property

Incoming Planned Incoming PlannedSupply1 Supply2 Supply1 Supply2

As at end-2003 As at end-Sept 2004p

Units/’000 sq.m.

Residential (units) 595,248 539,655 608,140 575,325

Purpose-built office (‘000 sq.m.) 2,155 1,903 2,074 1,920

Shopping complexes (‘000 sq.m.) 1,707 1,701 1,570 1,723

Retail shops (units) 33,455 35,260 36,123 34,839

Industrial properties (units) 8,443 22,077 8,333 21,658

1 Consists of properties that are under construction, including those where certificates of fitness/temporary certificates of fitness have not been issued.2 Approved but not started.

p Preliminary

Source: NAPIC, Valuation and Property Services Department

26

2004 (end-2003: 9,300 units) due to increasedsupply. Total value of overhang was RM1.8 billion.The overhang units were mainly located in thestates of Johor, Selangor and Melaka. Majority ofthe overhang involved properties priced belowRM150,000.

Construction activity in the non-residentialsegment recovered in 2004, driven largely by higherdemand for office and retail space following morerobust business activities. New office and retail spacecompleted increased by 222,000 sq. metres and265,000 sq. metres respectively in the first ninemonths of 2004 (first nine months of 2003: 159,000sq. metres and 183,000 sq. metres respectively). Inthe purpose-built office segment, demand wassupported by growth of service-related businessessuch as finance, insurance, education and health. Inthe shopping complex segment, demand for retailspace was boosted by strong consumer spending. Thenew shopping complexes were located mainly in thepopular residential areas and suburbs to target thegrowing affluent population in the surroundingneighbourhoods. Notwithstanding the increase innew supply, the overall occupancy rate for office andretail space improved to 81.9% and 79.6%respectively in the first nine months of 2004 (2003:80.5% and 78% respectively).

Reflecting stronger demand, rentals for prime officeand retail space in the Klang Valley firmed during

the year. The average monthly rental rates of primeretail space in the shopping complexes rose toRM242 per square metres (2003: RM226 per squaremetres), while rentals for prime office space roseslightly to RM46 per square metre per month (2003:RM45 per square metre).

In the hotel segment, there were 235 new hotelscompleted during the year, providing an additional

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

0 70

75

80

85

90

2001 2002 2003 3Q 2004p

Graph 1.15 Supply and Occupancy Rate of Office Space in Malaysia : 2001 - 2004

Existing Stock

Net lettable area('000 sq.m)

Occupancy rate (%)

Completion

Occupancy Rate (%)

Occupied Space

Incoming Supply

p Preliminary

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2001 2002 2003 3Q 2004p70

75

80

85

90

Graph 1.16 Supply and Occupancy Rate of Retail Space in Malaysia : 2001 - 2004

Existing Stock

Net lettable area ('000 sq.m)

Occupancy rate (%)

Completion

Occupancy Rate (%)

Occupied Space

Incoming Supply

p Preliminary

38

40

42

44

46

48

50

1998 1999 2000 2001 2002 2003 20040

50

100

150

200

250

300

Graph 1.17 Average Monthly Rentals for Prime Office and Retail Space in the Klang Valley1

RM/sq.m RM/sq.m

Prime office space (LHS)

Prime retail space (RHS)

1 Refers to Kuala Lumpur and Selangor. Source: CH Williams Talhar & Wong Sdn. Bhd.

27


Table 1.11Office and Retail Space - Unoccupied Space, Incoming Supply and PlannedSupply by State (as at end-September 2004)

Office Space Retail Space

Unoccupied Incoming Planned Unoccupied Incoming PlannedSpace Supply1 Supply2 Space Supply1 Supply2

( ‘000 sq.m. )

WP Kuala Lumpur 1,158 1,078 1,061 322 566 653

Selangor 335 58 0 171 304 63

WP Putrajaya 0 419 177 44 0 0

Johor 273 118 495 299 232 809

Pulau Pinang 281 63 41 268 212 47

Negeri Sembilan 18 45 111 36 72 88

Perak 60 52 0 42 0 0

Melaka 34 0 0 66 0 0

Kedah 26 29 1 53 53 14

Pahang 16 23 15 51 4 6

Terengganu 9 0 0 6 7 0

Kelantan 7 4 20 0 63 0

Perlis 0 26 0 0 0 0

Sabah 118 134 0 30 56 44

WP Labuan 40 0 0 15 0 0

Sarawak 49 25 0 28 0 0

Total3 2,423 2,074 1,920 1,431 1,570 1,723

1 Consists of properties that are under construction, including those where certificates of fitness/temporary certificates of fitness have not been issued.2 Approved but not started.3 Total may not not necessarily add up due to rounding.


6,755 rooms. After being adversely affected bySARS in 2003, the hotels segment recoveredstrongly with the average occupancy rate rising toabove 60% in 2004 (2003: 53%). The improvedperformance was supported largely by thesignificant increase in tourist arrivals, which rose byalmost 50% to 15.7 million (2003: 10.6 million) aswell as robust domestic tourism.

The availability of affordable financing contributedsignificantly to the increase in constructionactivities. During the year, Bank Negara Malaysialiberalised restrictions on the provision of bridgingfinance for property development. While thebanking sector remained the main provider offinancing, the construction sector increased itsreliance on the private debt securities (PDS) marketas well as Bank Pembangunan dan InfrastrukturMalaysia Berhad (BPIMB) to meet part of itsfinancing requirements. During the year, fundsraised via PDS issuance for the construction sectorrose to RM8.8 billion, representing a significantincrease of 46.2% to account for a higher share of31.5% of total PDS issued (2003: 14.1%). Loansextended by BPIMB also increased strongly by15.3% to RM9.9 billion (2003: RM8.6 billion).Reflecting the strong demand for houses,end-financing for properties approved by the

banking system rose by 18.8% to RM35.7 billion(2003: 2.9% to RM30 billion). Loans approved byother housing credit institutions as a group alsoincreased during the year. Of significance, loansapproved by Bank Kerjasama Rakyat MalaysiaBerhad, Malaysia Building Society Berhad and BankSimpanan Nasional as a group rose significantly by195% to RM3.1 billion (2003: RM1.1 billion).

In early 2004, activity in the construction sectorwas partly affected by the temporary shortage ofsteel bars, which led to delays in some projects,particularly in the civil engineering segment. Toaddress the situation, the Governmentimplemented several measures, including arelaxation on imports of steel bars and billets aswell as stricter control on exports of steel. TheGovernment also revised upwards the ceiling priceof steel bars and billets to reflect the increase inthe global prices of these materials. Thesemeasures, coupled with the increased stability inglobal steel prices helped to ease the shortage.Beside steel products, cost of other buildingmaterials such as sand and timber products alsoincreased during the year. This was reflected by theBuilding Materials Cost Index (BMCI), whichshowed that prices of building materials generallyincreased during the year.

28

Report on Small and Medium Enterprise Development Framework

The development of diverse and competitive small and medium enterprises (SMEs) remains centralin the national agenda towards creating economic resilience in the face of an increasinglychallenging economic and financial landscape. Bank Negara Malaysia has been actively drivinginter-Ministry initiatives to strengthen the infrastructure for SME development and promotionthrough the formation of the SME Steering Committee, which is chaired by the Governor.

Culminating from the recommendations of the SME Steering Committee, the National SMEDevelopment Council was established and is chaired by the Prime Minister. The formation of theCouncil represents the Government’s commitment at the highest level to promote the developmentof SMEs. It is recognised that efforts to promote and strengthen SMEs require a comprehensiveapproach comprising establishing enabling infrastructure for SME development, strengthening thecapacity and capability of SMEs, and enhancing access to financing. A formal structure dedicated tothe development of SMEs would allow for greater synergies and the synchronisation of effortsamong the various stakeholders involved in SME development. It also ensures that SMEdevelopment issues across all sectors are adequately addressed.

Bank Negara Malaysia continues its SME developmental role through its SME Unit, which focuseson the promotion of greater access to financing by SMEs. The SME Unit is also the Secretariat tothe National SME Development Council.

Towards Focused and Coordinated SME DevelopmentThe establishment of the National SME Development Council provides the necessary strategicframework for more focused and coordinated inter-Ministry and Agency efforts on SMEdevelopment to oversee efficient coordination and ensure effectiveness of policy implementationand outreach. The terms of reference of the Council are as follows:• Formulate broad policies and strategies to facilitate the overall development of SMEs across all

sectors;• To increase the focus of the roles and responsibilities of Government Ministries and Agencies

responsible for SME development;• Enhance inter-Ministry and Agency cooperation and coordination to ensure effective

implementation of SME development policies and action plans;• Encourage and strengthen the role of the private sector in supporting the overall development

of SMEs; and• To give emphasis to the development of Bumiputera SMEs across all economic sectors

The Ministries and Agencies represented in this Council, based on their role and contribution inSME and entrepreneurial development, are as follows:1. Y.A.B. Prime Minister (Chairman)2. Minister of International Trade and Industry3. Minister of Domestic Trade and Consumer Affairs4. Minister of Entrepreneurial and Cooperative Development5. Minister of Agriculture and Agro-Based Industries6. Minister of Human Resources7. Minister of Finance II8. Minister of Energy, Water and Communications9. Minister of Plantation Industries and Commodities10. Minister of Science, Technology and Innovations11. Minister of Tourism

29


12. Minister of Rural and Regional Development13. Minister of Education14. Minister of Higher Education15. Minister of Housing and Local Government16. Minister in the Prime Minister’s Department, Y.B. Dato’ Mustapa Mohamed17. Governor of Bank Negara Malaysia18. Director General of the Economic Planning Unit19. Chief Executive Officer of the Multimedia Development Corporation

The Council convened two meetings in 2004 and have implemented a number of strategicinitiatives. The Council approved the following initiatives to strengthen the existing infrastructurefor SME development.

Strengthening Infrastructure for SME DevelopmentDefinitions for SMEs in Various Sectors for Targeted DevelopmentTo assist in the identification of SMEs across sectors and for more effective targeting of SMEs withrespect to the design of future development policies, support programmes and the provision oftechnical and financial assistance, the Council had approved the definitions for SMEs according tothe manufacturing, manufacturing-related services, primary agriculture and services sectors. Theadoption of a common identifier for SMEs in these sectors will facilitate the identification of issuesand prospects of the sectors concerned to enable appropriate policy actions to be taken. It will alsoallow closer monitoring of SME performance and contribution to the economy.

An enterprise is considered an SME in each of the respective sectors based on the Annual SalesTurnover or Number of Full-Time Employees as shown in the tables below.

Approved SME Definitions in terms of Annual Sales Turnover

SizeManufacturing (including Agro-Based)

Primary Agriculture Services Sector (including ICT)& Manufacturing-Related Services

Micro Less than RM250,000 Less than RM200,000 Less than RM200,000

SmallBetween RM250,000 and less than Between RM200,000 and Between RM200,000 and less

RM10 million less than RM1 million than RM1 million

MediumBetween RM10 million and Between RM1 million and Between RM1 million and

RM25 million RM5 million RM5 million

Approved SME Definitions in terms of Number of Full-Time Employees

SizeManufacturing (including Agro-Based)

Primary Agriculture Services Sector (including ICT)& Manufacturing-Related Services

Micro Less than 5 employees Less than 5 employees Less than 5 employees

Small Between 5 and 50 employeesBetween 5 and 19

Between 5 and 19 employeesemployees

Medium Between 51 and 150 employeesBetween 20 and 50

Between 20 and 50 employeesemployees

Establishment of a Comprehensive National SME DatabaseThe availability of relevant and timely information on SMEs, including their operational conditions,financial status and development requirements, is important to facilitate better policy formulationin promoting SME development. Towards this end, the Department of Statistics has been appointed

30

to establish and maintain a comprehensive National SME Database. To facilitate the collection ofrelevant and comparable SME data across the various sectors, the Department of Statistics haslaunched a nationwide 2005 Baseline Census of all enterprises and businesses, with a focus onestablishments in the manufacturing, agriculture and services sectors. This would assist the Councilin assessing the current status of SMEs and their requirements, as well as identifying importantissues relating to SMEs’ performance and development. Information compiled from the censuswould facilitate the formulation of policies to promote SMEs as an important driver of growth andin the formulation of strategies for the forthcoming 9th Malaysia Plan.

Enhanced Management and Publication of SME StatisticsThe role of the Secretariat under Bank Negara Malaysia has been enhanced to include the functionof overseeing and coordinating the monitoring, evaluation and publication of SME statistics andreports. Apart from meeting the information requirements of SME policymakers, the Secretariat willalso be responsible for developing key performance indicators to monitor and evaluate the progressof SME development, and will oversee the management of the National SME Database. TheSecretariat will also publish annual reports on SME development for the benefit of policymakersand the SMEs, thereby improving the availability of SME information in the market.

Building Capacity through Coordinated Training and Human Resource Development forSMEsPembangunan Sumber Manusia Berhad (PSMB), an agency under the Ministry of Human Resources,has been appointed as the coordinating authority to oversee and coordinate overall training andhuman resource development for SMEs. The role of PSMB will therefore be expanded to include:identification of training needs of SMEs across all sectors of the economy, coordination, monitoringand evaluation of SME training and development programmes conducted by Ministries andAgencies, and development of a formal training accreditation system for SMEs.

Enhancing Access to Financing by SMEsIn 2004, the banking system approved RM31.6 billion of new loans to more than 92,000 SMEaccounts, a significant increase of 21.9% from 2003. Loan disbursements grew strongly by 15.3%to RM100.4 billion, while outstanding loans to SMEs expanded by 7.7% to RM88.3 billion. Loansto SMEs accounted for 40.3% of outstanding business loans as at end-2004, compared with 38%as at end-2003. On a sectoral basis, lending to SMEs was diversified, with almost two-thirds beingchannelled to distributive trade, manufacturing and construction sectors, reflective of the businessfocus of majority of the SMEs. Gross non-performing loans of SMEs contracted by 11.4% toRM10.6 billion (NPL rate of 12.0%), reflective of the improving financial position of the SMEs.

Policy initiatives by BNM on enhancing access to financing by SMEs during the year focused on:• The provision of advisory support and awareness programmes;• Strengthening the existing infrastructure to ensure a more effective intermediation of funds to

SMEs; and• Assisting in debt restructuring of financially distressed SMEs with viable businesses.

New Initiatives to Improve Access to Financing by SMEsTo further improve access to financing by the SMEs, the National SME Development Councilapproved the following initiatives in 2004:

• Establishment of an SME BankThe Council approved the concept of establishing a specialised financial institution tonurture and meet the unique needs of SMEs. The banking system, with large financial

31


resources and extensive outreach, will continue to be the main provider of funds to SMEs.The set-up of a dedicated SME Bank will complement the banking institutions throughprovision of financial and non-financial services to SMEs, including ancillary services andcredit information. Besides financing, the SME Bank will focus on nurturing the SMEs andcreating an entrepreneurial society.

Direct lending activities include start-up and working capital financing, while the SME Bankmay also guarantee loans granted by banking institutions to SMEs and facilitate securitisationof SME loans. The SME Bank will also provide ancillary services aimed at nurturing SMEsthrough the provision of advisory services on financial and business management, marketingand other business aspects. In addition, similar to countries like Japan and Korea, the SMEBank will provide credit information on SMEs to facilitate credit rating and business report onindividual SMEs.

• Interest SubsidyViable SMEs are currently being assisted through special funds established by theGovernment to obtain financing at relatively lower costs. As a strategic initiative to furtherextend accessibility to financing at reasonable costs to more SMEs, while reducing theGovernment’s financial outlay, the Council has approved the introduction of a mechanismto provide interest subsidy on SME loans to selected priority sectors extended by thebanking institutions.

• Securitisation of SME LoansTo provide greater flexibility to banking institutions in managing their SME loan portfolio andfurther enhance their financial capacity to provide lending to SMEs, the Council approved aframework to facilitate the banking institutions to securitise their SME loans. The securitisationframework would also enable SMEs to indirectly tap the capital market for financing, thusbroadening the sources of funding for them.

• New Trade Financing Arrangement for SMEsIn an effort to encourage SMEs to participate in the export markets, especially in the non-traditional markets and with members of the Organisation of Islamic Countries, newtrade-financing arrangements for SMEs that are more accessible and with lower financing costswill be introduced. Under the arrangements, the SMEs would be able to obtain financing forpre- and post-shipment from banking institutions, with credit risks to be shared betweenbanking institutions and the Malaysian Export Credit Insurance Berhad.

Expanded Role of SME Unit in Bank Negara MalaysiaBank Negara Malaysia established a dedicated SME Unit in May 2003 to provide informationon various sources of financing, facilitate loan application process, assist viable SMEs inaccessing financing, and to provide advisory services on financial requirements. For greatereffectiveness in planning, implementation and outreach of SME programmes and institutionalarrangements for access to financing, the Council approved the enhancement of the SMEUnit’s role to include:i Coordination, monitoring and evaluation of overall SME financing across all economic

sectors;ii Coordination of the implementation of all SME financing policies and strategies for greater

effectiveness;iii Review of policies and strategies to enhance SMEs access to financing; andiv Formulate alternative modes of financing for SMEs.

32

With this enhancement, the Unit is now responsible for interfacing with the banking institutions,relevant Ministries and Agencies to ensure that a comprehensive financial infrastructure is in placeto continuously support the growth and development of SMEs across all sectors.

During the year, the Unit undertook various initiatives to increase awareness among SMEs onfinancial requirements and procedures, as well as financing sources. These were done through roadshows, exhibitions and briefings to SMEs, as well as publication of brochures on special funds. Inaddition, the Unit also conducted quarterly dialogues with SME-related trade organisations andbanking institutions. Also, in 2004, the Unit received 1,401 enquiries, requests for assistance andcomplaints from the SMEs, of which 90% were enquiries on information and sources of financingand details relating to the special funds. Complaints relating to access to financing constituted only10% of the enquiries received.

Higher Allocations for Special FundsTo ensure continued access to financing at reasonable costs, Bank Negara Malaysia has establishedseveral special funds for SMEs. The funds are channelled through participating institutionscomprising banking institutions, development financial institutions and ERF Sdn Bhd with lendingrates ranging from 3.75% to 5.00%. Five special funds are currently available to the SMEs, namely:• Fund for Small and Medium Industries 2 (fund size: RM4.5 billion);• New Entrepreneurs Fund 2 (fund size: RM2 billion);• Fund for Food (fund size: RM1.3 billion);• Rehabilitation Fund for Small Businesses (fund size: RM800 million); and• Bumiputera Entrepreneurs Project Fund (fund size: RM 300 million);

Due to strong demand, allocations for the Fund for Small and Medium Industries 2 and the NewEntrepreneurs Fund 2 had been increased in 2004, by RM2.5 billion and RM850 million respectively.As a result, the total allocation of the five special funds amounted to RM8.9 billion at the end of2004. Of this amount, RM8.1 billion or 91% has been approved to more than 19,000 borrowers. In2004, RM2.9 billion in financing was approved to 4,570 new borrowers, compared with RM1.9billion to 3,741 borrowers in 2003.

Performance of Small Debt Resolution SchemeThe Small Debt Resolution Scheme was established on 1 November 2003 to facilitate therestructuring of non-performing loans (NPLs) of SMEs with on-going businesses. Under thismechanism, a Small Debt Resolution Committee was established to undertake independentassessments on the viability of the businesses, and loan restructuring and financing requirements ofthe SMEs, with the SME Unit serving as its Secretariat.

As at end-December 2004, 228 applications with NPLs of RM180.2 million were received underthe scheme. Of these, 116 applications (51%) involving NPLs amounting to RM81.8 million havebeen approved for restructuring, whilst RM10.5 million in new financing was approved to eligibleborrowers under the Rehabilitation Fund for Small Businesses. A total of 25 cases, with total NPLsof RM26.5 million, were rejected due to non-viability, while 87 cases involving NPLs of RM72million were being evaluated. For most of the cases under evaluation, the evaluation by theimplementing institutions and the Secretariat have been delayed due to the inability of applicantsto provide the necessary information that form an important part of the evaluation process. Theperformance of the scheme has demonstrated that the restructuring of NPLs is more importantthan the provision of new financing to ensure the viability and sustainability of financiallydistressed SMEs.

33


DOMESTIC DEMAND CONDITIONS

Domestic demand conditions strengthened further,registering a growth of 7.3% in 2004 (2003:5.9%). Growth in aggregate domestic demandwas supported mainly by the robust expansion inprivate sector. Stronger consumer confidence wassupported by higher disposable incomes, lowinflation and favourable financing conditions.Business spending also accelerated as companiesadded capacity in response to strong demand andreplaced obsolete machinery and equipment. Thepublic sector, while consolidating, remainedsupportive of growth by providing betterinfrastructure facilities and improving the deliveryof essential services.

Public consumption increased steadily by 6.6% in2004, largely on account of higher expenditure onsupplies and services as well as emoluments. The

continued to focus on oil and gas projects inMalaysia and abroad, as well as the shippingbusiness. TNB’s capital spending was largely forfurther improving the power generation andtransmission system, while TMB’s expenditure wasmainly to expand its network infrastructure to meetincreasing demand for mobile and data services aswell as broadband Internet access.

Private consumption increased at a faster pace of10.1% in 2004 (2003: 6.6%), following risingconsumer confidence. The MIER ConsumerSentiments Index (CSI), which measures consumers’perception of the economy and personal finances,improved since the second quarter of 2003 andpeaked in the first quarter of 2004. Although theCSI softened somewhat towards the second half ofthe year, consumers’ willingness to spend remainedunaffected. While the prolonged increase in oilprices had some effect on consumers’ optimism,these were largely mitigated by the continued rise indisposable income and continuing favourableemployment market. The higher oil prices were notfully translated into higher retail fuel cost asMalaysia, being a net oil exporter, was able tocushion the impact on consumers throughgraduated subsidies on fuel. In addition, various

Domestic demand conditions continued to strengthen in 2005,supported mainly by robust expansion in private sector activities.Public sector expenditure, while lower, remained supportive ofprivate demand.

Aggregate domestic demand (excl. stocks)

Private consumption

Public consumption

Private investment

Public investment

Graph 1.18 Real Domestic Demand Aggregates

Annual change (%)

-60

-40

-20

0

20

40

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

increased expenditure for supplies and services wasto improve the administrative machinery and deliverysystem of the public sector. Reflecting theGovernment’s emphasis on human resourcedevelopment to enhance the nation’s productivityand competitiveness, expenditure on emolumentsincreased further.

Public investment declined by 3.5% in 2004(2003: 3.9%) on the back of the notable decline inFederal Government’s development expenditure.However, capital expenditure for the Governmentremained supportive of growth, with a bias towardseconomic and social sectors, and spread over largernumbers of smaller-scale projects. In the economicsector, expenditures were mainly for modernisingthe non-plantation agriculture, improving the livingstandard in rural areas and the transportation systemin the country. Meanwhile, capital spending forsocial projects mainly focused on essential servicesprovided by the Government, such as education,health and housing. Capital expenditure of theNFPEs remained high during the year, due mainly toupgrading and capacity expansion programmes bythe three largest NFPEs, namely PETRONAS, TenagaNasional Berhad (TNB) and Telekom Malaysia Berhad(TMB). The bulk of PETRONAS’ expenditure

34

tax rebates to sustain consumption announcedduring the 2004 Budget and the bonus paymentsto civil servants reinforced the resilience ofhousehold consumption.

The low interest rates provided additional impetusfor households to spend on durable goods andhouses. Sales of passenger cars rose by 15.3% in2004, as the car buyers were enticed by theintroduction of new car models and attractivefinancing packages. The willingness to accumulatedebt by individuals was reflected in the ratio ofdeposits to loans dipping below 1.

However, the increased willingness to access creditfor consumption expenditure did not see an increasein the vulnerability of households. Rather, this newdevelopment was primarily driven by income growthand financial innovation, as new lending packageswere made available to households by an

increasingly competitive banking sector. Theimplementation of the Central Credit ReferenceInformation System has brought down the cost ofassessing the credit-worthiness of potentialcustomers, thereby allowing banks to provide moreattractive financing terms to viable borrowers. Thenon-performing loan (NPL) ratio for consumptioncredit declined from 9.5% to 8% in 2004 while theNPL ratio for credit card debt remained stable at4.7%. Importantly, the availability and popularity ofother modes of savings, such as unit trusts,insurance funds and pension funds, ensured thatwhile deposit growth slowed, household savingsremained high.

Apart from the purchases of passenger cars,purchases of household furnishings and equipmentincreased in tandem with the relatively strongproperty sales in recent years. In addition,households that continue to see some modestappreciation in the values of their homes were

Table 1.12Private Consumption Indicators

20032004

1Q 2Q 3Q 4Q Year

Sales of passengercars (incl. 4WD)

‘000 units 334.4 82.3 98.8 107.2 97.3 385.7Annual change (%) -10.9 -3.3 18.8 19.6 27.3 15.3

Imports of consumptiongoods(RM billion) 18.7 5.1 5.8 6.1 6.3 23.2

Annual charge % -1.2 14.8 28.0 38.8 16.5 24.1

Tax collectionSales tax

(RM billion) 8.0 1.2 1.8 1.6 2.2 6.8Service tax

(RM billion) 2.0 0.3 0.7 0.5 0.8 2.3

Narrow money (M1)Annual change (%) 14.6 19.6 15.9 14.9 11.9 11.9

Loans disbursed bybanking system

Consumption credit(excl. passenger cars)Annual change (%) 10.2 21.4 17.5 16.7 12.5 16.8

Retail trade, restaurantsand hotelsAnnual change (%) 8.4 13.2 14.0 25.5 24.3 19.5

MRA retail salesAnnual change (%) 8.4 5.9 15.1 8.8 n.a. n.a.

Credit card operationTurnover spending

(RM billion) 30.9 8.5 8.7 9.6 10.0 36.8Annual change (%) 15.5 17.6 22.3 20.0 16.7 19.1

MIER ConsumerSentiments Index - 117.5 112.4 113.9 109.3 -

KL Composite Index 793.9 901.9 819.9 850.0 907.4 907.4

Commodity pricesCPO (RM/tonne) 1,577 1,895 1,800 1,505 1,458 1,664Crude oil (USD/barrel) 30 35 38 46 47 41Rubber (sen/kg) 381 476 475 435 459 461

1999 2000 2001 2002 2003 2004

Graph 1.19 Individual Deposits/Loans and Consumption

RM million Ratio

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

Deposits/Loans

Consumption

1999 2000 2001 2002 2003 2004

Graph 1.20 Individual Loans and Deposits

Loans/Deposits RM billion

Resource gapRM billion

0

50

100

150

200

250

300

-10

10

30

50

70

90

Loans

Deposits

Resource gap

35


encouraged to spend further. The favourable equitymarket performance also stimulated householdconsumption.

Private investment in 2004 was robust (15.8%; 2003:0.4%) as businesses gained confidence in the strengthof economic expansion and in the prospective payoffs ofcapital investment. Additional production capacitieswere put in place in response to strong demand, whilereplacement of obsolete machinery was at a brisk paceas companies were keener to invest in an expandingeconomy. At the same time, favourable financing

conditions were supportive of business investmentactivities. Loans disbursed to businesses increasedfurther by 10.5% (2003: 7.6%) during the year. Thestrengthened financial position of companies in terms ofprofitability and debt-servicing capacity also encouragedcompanies to expand their productive capacities.

The strong global growth environment, togetherwith steps taken by the Government to improve thebusiness environment, led to indicators ofMalaysia’s investment climate improving in 2004.For instance, the A.T. Kearney FDI Confidence Indexfor 2004, which measures the likelihood ofinvestment in specific markets, showed thatMalaysia scored well among foreign investors.Malaysia demonstrated among the strongestimprovements in investor confidence among all thecountries surveyed, rising to 15th place during theyear from 23rd in 2003. This significant

Table 1.13Private Investment Indicators

2004

1Q 2Q 3Q 4Q Year

Sales of commercialvehicles (incl. 4WD)

‘000 units 70.6 19.4 23.7 24.3 28.0 95.5 Annual change (%) 18.5 30.2 46.4 25.3 39.5 35.2

Import of capital goods(RM billion) 40.8 12.3 13.3 14.0 16.0 55.5Annual change (%) -5.6 30.9 37.0 38.4 37.7 36.1

Applications toMITI

No. of projects 925 286 285 260 248 1,079Capital investment(RM billion) 25.6 3.9 5.3 7.0 13.1 29.3

Foreign 11.6 1.6 2.3 1.7 7.4 13.0Local 14.0 2.3 3.0 5.3 5.7 16.3

Approvals by MITINo. of projects 965 299 249 246 307 1,101Capital investment(RM billion) 29.1 3.7 3.5 5.5 16.1 28.7

Foreign 15.6 1.4 1.7 2.6 7.5 13.1Local 13.5 2.3 1.8 2.9 8.6 15.6

Loans disbursed bybanking system

Manufacturing sectorAnnual change (%) 4.8 -0.4 15.1 11.7 14.2 10.2Construction sectorAnnual change (%) -8.6 11.3 10.4 3.0 17.2 10.4Business servicesAnnual change (%) 6.7 53.6 9.3 13.0 5.8 19.0

Private Debt Securities(excluding Cagamas)

Total funds raised(RM billion) 42.8 2.8 6.5 9.3 9.5 28.1New activities 2.8 1.1 3.6 4.5 3.8 13.0

Initial Public Offerings(KLSE)

Total funds raised(RM billion) 4.0 0.4 0.4 1.3 2.0 4.0

MIER BusinessConditions Survey

Business ConditionsIndex - 112.0 124.1 110.2 97.3 -Capacity UtilisationRate (%) - 80.2 81.1 82.5 82.2 -

MSC-Status CompaniesNo. of companies 161 38 46 56 50 190Approved investment(RM billion) 1.6 0.2 0.5 0.8 0.5 2.0

2003

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q0

2

4

6

Graph 1.21 Investments and Profitability

% %

8

10

12

2001 2002 2003 2004

-40

-30

-20

-10

0

10

20

30ROE (LHS)

Investment (RHS)

Mining 15%

Manufacturing 34%

Construction 21%

Services 20%

Agriculture 10%

2004

Graph 1.22 Private Investment by Sector (% share)

36

improvement underscores the better domesticinvestment climate and augurs well for thepromotion of domestic investment activities.

Higher capital expenditure was evident in all sectors ofthe economy, with the manufacturing, services andmining sectors registering exceptionally strong outlaysduring the year. Investment in the manufacturingsector, which registered a 32.7% (2003: 4%) growth,was mainly supported by capacity expansion andreplacement of old machinery and equipment. Althoughinvestment approvals by MITI declined by 1.4% (2003:+63%), the staggered implementation of previouslyapproved projects had contributed to the outlays in2004. Approvals for new investments continued toexceed reinvestments, suggesting that manufacturersremained keen on venturing into high value-addedmanufacturing activities. These investments were largelyconcentrated in the electrical and electronic products,chemicals and chemical products and paper, printingand publishing industries. The positive sentiment thatwas observed among domestic investors was echoed byforeign investors in the manufacturing sector. In the A.T.Kearney’s FDI Confidence Index, both heavy and lightmanufacturers indicated that Malaysia’s attractiveness asan investment destination had improved. Heavymanufacturers now rate Malaysia as the 16th mostattractive destination in their industries, up from 18thplace in 2003 while light manufacturers placed Malaysiain 9th place, a significant improvement from the 21stposition a year ago.

Investment in the construction sector increasedmoderately during the year. Construction activities inthe residential sub-sector were the main contributorto the investment in this sector, arising from thestrong demand for residential property, which wassupported by the prevailing low interest rates andattractive housing mortgage packages offered by thebanking institutions. Meanwhile, activity in severalongoing privatised projects, namely, the GuthrieCorridor Expressway, Kajang-Seremban Expressway,Jelutong Highway and Butterworth Outer Ring Road,also provided support to the investment in theconstruction sector.

Investment was higher in the services sector asevidenced by stronger capital spending activities in theutilities and the retail, wholesale and business sub-sectors. Capital expenditure in the utilities sub-sectorincluded the development of the Tanjung Bin powerplant and water projects, namely, the Sungai SelangorProject Scheme Phase 3 (SSP3) and StormwaterManagement and Road Tunnel (SMART). Following the

New investment

Source: Malaysian Industrial Development Authority

Reinvestment

Graph 1.25 Share of Approved New Investments and Reinvestments in the Manufacturing Sector

01990 1995 1999 2000 2001 2002 2003 2004

10

20

30

40

50

60

70

80

90

100%

0

10

20

30

40

50

60

70

80

90

1997 1998 1999 2000 2001 2002 2003 2004

0

200

400

600

800

1,000

1,200


Graph 1.23 Private Investment in the Manufacturing Sector

RM billion No. of projects

Foreign applications

Domestic applications

No. of applications (RHS)

Foreign approvals

Domestic approvals

No. of approvals (RHS)

Electrical & electronic products

30%

Chemical & chemical products

11%

Basic metal 7%Transport

equipment 5%

Petroleum products

7%

Paper, printing & publishing

16%

Others 24%


Graph 1.24 Approved Manufacturing Investment by Industry, 2004 (% share)

37


consolidation process in the telecommunicationindustry in 2003, the industry players began to increasetheir investment to further improve their services anddevelop new systems to enhance their competitiveness.Capital spending activities in the transport sub-sectorwere supported by capacity expansion anddevelopment of PTP and West Port. During the year,banking institutions continued to invest in IT projects,mainly to upgrade and optimise their retail bankingsystems, enhance processing capacity and improve themanagement of product offerings in order to furtherimprove their customer support services. In the retailsector, capital-spending activities were visible from theestablishment of new outlets by major hypermarketoperators and retailers in major towns.

Capital outlays in the mining sector remained largelydriven by the oil and gas segment. The spending wasspurred by the increased upstream activities inexploration and production, following the newdiscoveries of oil fields, stronger demand and higherprices for crude oil. Investment in the agriculturesector was mainly for the development of cropplantation. Capital spending for crop plantationactivities remained high, particularly for palm oilplantations arising from the increase of crude palm oilproduction coupled with the favourable CPO pricesduring the year. The bulk of the capital expenditurewas mainly to expand capacity and new planting. Inaddition, higher imports of agricultural equipment forthe year also reflected increased capital spending in theagriculture sector.

The significant expansion in nominal gross nationalincome in 2004 was not only reflected in a robustconsumption spending, but also in a further increase inGross National Savings (GNS). Recording a growthof 16.3%, this increase largely reflected the continuingexpansion of private sector savings amidst strongercorporate profitability and higher households’disposable incomes due to the concurrentimprovement in domestic and external activities. Assuch, both households and the corporate sectorenjoyed stronger cash flows, supported mainly byfavourable commodity prices, high export earnings,low levels of inflation and interest rates as well as astable employment condition. In all, private sectorsavings increased by 53% in 2004.

In the public sector, however, lower savings wererecorded, due mainly to the lower operating surplus ofthe Federal Government. The decrease in the FederalGovernment’s operating surplus was due mainly tohigher subsidies as a result of higher oil prices, higher

payments for emoluments, increased expenditure onsupplies and services to upgrade the quality andefficiency of public services as well as larger refundsand write-offs. However, due to the lower publicgross fixed capital formation, the public sectorsavings-investment balance remained in surplus.

Overall, GNS continued to increase in 2004 to total37.1% of Gross National Product (GNP) as compared to36.3% in 2003. This high rate of savings has enabledMalaysia to finance its growth primarily from domesticsources. Excess liquidity and a lower cost of debtcontributed to the marked improvement of private grossinvestment, which despite the decline in publicinvestment expenditure, resulted in a total improvementof 19.3% for overall gross domestic capital formation(including stocks). Given the simultaneous increase insavings, the savings-investment balance, as reflected inthe current account of the balance of payments,remained large at 13.4% of GNP in 2004.

PRICES AND EMPLOYMENT

Consumer PricesInflation edged up slightly in 2004. The overallinflation rate, as measured by the annual change inthe Consumer Price Index (CPI), was marginallyhigher at 1.4% (2003: 1.2%). Core inflation, whichis inflation excluding price-controlled andprice-volatile items as well as items that are subjectto one-off price adjustments, also increased to 1%in 2004 (2003: 0.5%).

Despite the stronger expansion in domestic demandduring the year, several factors combined to ensurethat price pressures were contained. The continued

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Graph 1.26 Gross National Savings and the Savings- Investment Gap

RM million

Gross National Savings

Gross Capital Formation

Public Savings

Private Savings

02000 2001 2002 2003 2004

Savings-Investment Gap

38

-0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6

Overall CPI

Food

Beverages and tobacco

Clothing and footwear

Gross rent, fuel and power

Furniture, furnishings and household equipment and operation

Medical care and health expenses

Transport and communication

Recreation, entertainment, education and cultural services

Miscellaneous goods and services

percentage point

2004 2003

Graph 1.27 Contribution to Annual Change in the Consumer Price Index

improvements in productivity growth, the absence ofwage cost pressures, adequate expansion in capacityand a more competitive environment were factorsthat contributed to price stability.

The marginal rise in overall prices in 2004 was duemainly to faster increases in the prices of food andbeverages and tobacco, moderated by the slower

Table 1.14Price Indicators

Weight 2003 2004

Consumer Price Index Annual change(2000=100) (%)

100.0 1.2 1.4

of which:Food 33.8 1.3 2.2Beverages and tobacco 3.1 1.6 7.8Clothing and footwear 3.4 -2.0 -1.8Gross rent, fuel and power 22.4 0.9 1.0Furniture, furnishings and

household equipment andoperation 5.3 -0.6 0.4

Medical care and health expenses 1.8 1.7 1.4Transport and communication 18.8 1.6 0.8Recreation, entertaiment,

education and cultural services 5.9 0.6 -0.1Miscellaneous goods and services 5.5 1.3 1.8

Consumer Price IndexDurable goods 9.4 -1.1 0.2Semi–durable goods 5.4 -1.4 -0.9Non-durable goods 40.2 1.6 2.4Services 45.0 1.3 1.0

Producer Price Index(1989=100) 100.0 5.7 8.9 of which:

Local Production 79.3 6.8 10.3Imports 20.7 0.8 2.0


increase in prices in the communications sector. Theincrease in food prices contributed the most to theincrease in prices in 2004, due mainly to the higherprices of food taken away from home, followed bythe increase in the prices of beverages and tobaccoconsequent to the increase in excise dutiesannounced in Budget 2005. The impact however,was offset by the slower increase in telephone andtelegraph charges. The increases in the retail pricesof petrol in May and October had minimal impact onthe rise in personal transportation charges and onthe overall inflation rate.

Producer PricesProducer prices, as measured by the Producer PriceIndex (PPI), rose at an annual growth rate of 8.9% in2004 (2003: 5.7%), largely reflecting higher pricesfor commodity-related products, following higherprices of crude petroleum and crude palm oil.Excluding commodity-related products, the non-commodity related PPI increased at an annual rate of2% (2003: 0.5%) due mainly to higher prices offood and live animals. Prices paid for importedgoods increased by 2% (2003: 0.8%), reflectingmainly higher petroleum prices and the depreciationof the US dollar against the major currencies.

Labour Market DevelopmentsThe domestic labour market conditions continued toimprove in 2004. The underlying growth in labourproductivity provided support for competitiveness andthe ensuing strong growth environment led to positivejob creation. According to latest estimates for 2004,

39


employment grew at a faster rate of 3.6% to 10.2million workers compared with the labour forcegrowth of 3.4% to 10.6 million persons. Consequently,

Graph 1.29 Beveridge Curve for Malaysia (1998-2004)

Vacancy Rate (%)

Unemployment Rate (%)

Source: Economic Planning Unit Ministry of Human Resources Bank Negara Malaysia

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

3.1 3.2 3.3 3.4 3.5 3.6 3.7

1998

1999

2000 2001

2002

2003

20042002

2002

J M M J S N J M M J S N J M M J S N

Annual change (%)

Measures of Consumer Price Inflation

Producer Price Index

Annual change (%)

Consumer Price Index

Annual change (%)

Graph 1.28Inflation: Annual Rate of Change

0.0

0.5

1.0

1.5

2.0

2.5

2002 2003 2004

Headline

Core inflation

-2

0

2

4

6

8

10

12

14

J M M J S N J2003

M M J S N J2004

M M J S N

Transport & communication

Beverages & tobacco

FoodOverall

Gross rent, fuel & power

-10

-5

0

5

10

15

20

25

30

35

J M M J S N J2003

M M J S N J2004

M M J S N

Commodity related

Overall

Non-commodity related

the unemployment rate declined to 3.5% (2003:3.6%). The labour force participation rate alsoincreased to 66%. Training for workers continued tobe promoted to enhance the quality of labour, increaseagility and to alleviate skills mismatches to suit theon-going transformation of the economy.

The Beveridge Curve, which tracks the pattern ofunemployment and vacancies in the labour market,shifted further downwards and inwards in 2004,indicating lower turnover in the labour market andhigher efficiency in the worker-job matching process.Findings from the Salary and Fringe Benefits Survey,conducted by the Malaysian Employers Federation(MEF), confirmed that the overall average monthlyturnover rate was lower at 1.51% in 2004 (2003:1.76%). Similarly, the Salary, Benefits andEmployment Conditions Survey in the ManufacturingSector conducted by the Federation of MalaysianManufacturers (FMM) showed that the overallaverage monthly turnover rate remained low at1.79% (2003: 1.76%).

Table 1.15Labour Market Indicators

2000 2001 2002 2003 2004e

Labour force (‘000) 9,572.5 9,699.4 9,886.2 10,239.6 10,587.7(annual change in %) 4.3 1.3 1.9 3.6 3.4

Employment (‘000) 9,271.2 9,348.1 9,542.1 9,866.7 10,221.0(annual change in %) 4.5 0.8 2.1 3.4 3.6

Unemployment rate (%) 3.1 3.6 3.5 3.6 3.5Labour productivity (GDP/Employment)

(annual change in %) 3.9 -0.5 2.3 1.9 3.4Real wage per employee in manufacturing sector

(annual change in %) 5.0 1.7 3.2 2.8 1.8

e Estimate

Source: Economic Planning UnitDepartment of Statistics, MalaysiaBank Negara Malaysia

40

0

1,000

2,000

3,000

4,000

5,000

6,000

Agriculture, forestry, livestock

and fishing

Manufacturing Construction Services

Graph 1.31 Total Employment by Sector

Number ('000 persons)

2001 2002 2003 2004

Source: Economic Planing Unit

Labour market conditions improved, supported by significantlyhigher growth in labour productivity.

The low turnover in the labour market is also reflected indata on vacancies and retrenchment, while placementsand the lower number of unplaced job seekers mirroredthe efficiency in the job matching process. Vacanciesreported, which were mainly in the services,manufacturing, construction and agriculture sectors,declined to 49,975 positions (2003: 96,918 positions).

reasons for retrenchment included reduction in demandfor products, company reorganization, high costs ofproduction, completion of projects and outsourcing.Placements in relation to vacancies remained strong(12%; 2003: 17%) while the number of registeredunplaced jobseekers stood at 27,227 persons as atend-2004, the lowest in four years, indicating improvingmatching of workers to jobs available.

The strong economic growth environment did not exertundue pressure on wages in 2004. Available indicatorsshowed that the rate of increase in wages was slightlylower in 2004:

• Data from the Monthly Manufacturing Surveyconducted by the Department of Statistics, Malaysiaindicated that for 2004, real wage per employeeincreased by 1.8% (2003: 2.8%).

• The Salary and Fringe Benefits Survey undertaken bythe MEF showed that the increase in the averageprivate sector salary was slightly lower at 5.6% in2004 (2003: 5.8%). On a sectoral basis, the averagesalary increase in the non-manufacturing sector was

Graph 1.30 Output and Employment

Annual change (%)

2000 2001 2002 2003 2004

Source: Economic Planning Unit Department of Statistics, Malaysia

GDP

Labour force

Total employment

Unemployment rate (RHS)

0

2

4

6

8

10

0

1

2

3

4

%

higher (6.1%; 2003: 6.1%) than in themanufacturing sector (5%; 2003: 5.5%). Theaverage minimum monthly salary offered to thosewith a basic degree was unchanged at RM1,666(2003: RM1,669).

• The Salary, Benefits and Employment ConditionsSurvey in the Manufacturing Sector conducted bythe FMM showed that the increase in overallaverage salary paid to employees was also moderateat 5.6% in 2004 (2003: 5.5%). The average basicsalary offered to a fresh graduate was lower atRM1,799 (2003: RM1,861).

Labour productivity, as measured by the ratio of GDP tototal employment, improved significantly, with growthincreasing to 3.4% in 2004 (2003: 1.9%). Productivitygrowth was reflected across most major sectors of theeconomy. Productivity growth in the manufacturingsector improved significantly to 3.2% (2003: 1.1%) dueto increased use of capital and improvements in businessprocesses. Productivity growth in the agriculture andservices sectors remained high at 5% and 2.7%respectively. High productivity in the agriculture sectorreflected largely higher yields due to good weather

This could be partly attributed to the more open policy onforeign labour. However, vacancies reported for clerical,managerial and professional positions indicated asignificant increase (25,495 positions; 2003: 12,611positions). Retrenchments, which were mainly in themanufacturing and transport-related sectors, dropped by6% (19,956 persons; 2003: 21,206 persons). The main

41


conditions, Good Agriculture Practices, mechanisationand automation. The wholesale and retail trade,restaurants and hotels sub-sector also recorded animpressive gain, with productivity growth of 2.3% (2003:0%) due to higher capital investment.

The Government continues to allow the recruitment offoreign workers to alleviate labour and skills shortagesand tap synergies that enhance productivity andcompetitiveness. Currently, there are 34,358 foreignprofessionals and highly skilled workers employed in thecountry, mostly in the manufacturing and services sectors.For the semi-skilled and unskilled foreign labour, thenumber recruited in 2004 declined, despite the stronggrowth in the economy. This was partly attributed to thesubdued performance of the construction sector, wherethere is a large presence of foreign workers. In addition,employers have increased capital intensity in theirbusinesses, thereby reducing the dependence on foreignlabour. The 507,732 foreign nationals recruited duringthe year (2003: 516,257 foreign nationals ) were mostlyfrom Indonesia, Nepal, India, Myanmar and Vietnam andfor employment mainly in the manufacturing, agricultureand domestic services sectors.

As at end-2004, the number of foreign workers in thecountry increased by 18.6% to 1,470,090 (2003:17.2% to 1,239,406), constituting 14.4% of totalemployment. They are mostly engaged in themanufacturing sector, followed by the agriculture,services (including domestic services), and construction

sectors. About 69.7% are Indonesian nationals, whilethose from Nepal and India constitute the second andthird largest group or 10.2% and 5.4% respectively.

During the year, certain regulations regarding therecruitment of foreign semi-skilled and unskilledworkers were amended, mainly to reduce further thedependence on such workers, particularly in theservices sector. In addition, with effect from August2004, foreign workers are only allowed to work in thecountry for a maximum period of eight years, fromten years previously.

Meanwhile, developmental efforts to enhance thecapabilities of the labour force have continued. As atend-2004, a total of 9,213 participants have benefitedfrom the Graduate Training Scheme II. Launched inAugust 2003, the Scheme helps graduates who areunable to gain employment to acquire additional skillsand increase their employability. As funds under theearlier special scheme implemented in 2001 forunemployed graduates and retrenched workers werestill available, the schemes were continued into 2004. Asat end-2004, a total of 40,460 persons haveparticipated in the various attachments and trainingschemes for unemployed graduates, also known asGraduate Training Scheme I, while another 12,783participants have benefited from the scheme forretrenched workers and unemployed. To augment theGovernment’s efforts, the various financial institutionsassociations introduced the Banking Industry Training

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Total retrenchment

Retrenchment in the manufacturing sector

Retrenchment in the services sector

Retrenchment in the agriculture sector

Retrenchment in the construction sector

Number of workers

Source: Ministry of Human Resources

Graph 1.32 Retrenchment in Selected Sectors

-2001 2002 2003 2004

2003

2004

0

1,000

2,000

3,000

4,000

5,000

6,000

Number of employees

Source: Ministry of Human Resources

Graph 1.33 Reasons for Retrenchment

1 2 3 4 5 6 7

1 Closure of companies 2 Sale of companies3 Relocation to foreign countries 4 Relocation locally5 High production cost 6 Reduction in demand for products 7 Company reorganisation and automation8 Others

8

42

Scheme and equivalent insurance training anddevelopment programmes for unemployed graduates inearly 2004. A total of 148 unemployed graduates, weresponsored by 55 financial institutions to undergostructured training programmes, which were designedand implemented in collaboration with the Institute ofBankers Malaysia (IBBM) and the Malaysian InsuranceInstitute. The schemes were aimed at improvingparticipants’ communication skills, with a focus onEnglish, as well as providing relevant exposure to thegraduates in the fields of banking, finance andinsurance. Ten other employers have also offeredtraining attachments to unemployed graduates underthe double taxation incentive in the 2004 Budget insupport of Government efforts to improve theemployability of graduates.

The Human Resource Development Fund (HRDF)continued to be important in encouraging employers toenroll their staff in initiatives aimed at expandingemployees’ expertise, knowledge, resourcefulness andability to adapt to the more liberalised and competitivebusiness landscape. Established in 1993, the HRDF ismanaged by the corporatised entity known asPembangunan Sumber Manusia Berhad (PSMB). In2004, PSMB approved a total of 460,651 training placeswith financial assistance of more than RM200 million,bringing the total for the period 1993-2004,to 4.4 million training places costing a total of RM1.6billion. To keep abreast with changes in the business

Graph 1.34 HRDF: Number of Training Places Approved

0

100,000

200,000

300,000

400,000

500,000

600,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Number of training places

Source: Pembangunan Sumber Manusia Berhad

and plans are underway to vary the amount of financialassistance such that greater priority in training is accordedto the more crucial skills. In 2004, the SDF providedfinancial assistance to about 34,000 applicants (2003:46,421 applicants).

EXTERNAL SECTOR

Balance of PaymentsThe overall balance of payments strengthened in2004, reflecting the more buoyant external demandunderpinned by the stronger global growth andimproved foreign investor sentiment on Malaysia. Thesustained large current account surplus supplementedby higher foreign direct investment (FDI) and inflowsof portfolio capital resulted in a substantial increase in

Graph 1.35a Current Account

Goods imports

Balance on current account (RHS)

RM billion RM billion

Goods exports

Balance on services and income

2002 2003 2004e

0

10

20

30

40

50

60

-100

0

100

200

300

400

500

600

e Estimate

The external position strengthened significantly in 2004, supportedby a sustained large current account surplus and higher inflows offoreign direct investment and portfolio investment. External debtremained within prudential limits.

environment, new programmes and training wereincluded under the HRDF during the year. Theseincluded strategic management, product branding,English proficiency, adult literacy, particularly for workersin SMEs and an industrial technician apprentice scheme.

The Skills Development Fund (SDF) is another initiativefor developing and upgrading skills of the workforce. Itsaim is to enhance the participation of the private sector astraining providers and increase accessibility to technicaleducation and vocational training (TEVT) by providingfinancial assistance to candidates. School leavers,retrenched workers as well as employees undertakingtraining in approved public and private training institutesare eligible. After four years in operation, the SDF is beingrestructured. Legislation for the establishment of acorporatised entity to manage the SDF has been passed

43


Negara Malaysia increased to a record level ofRM253.5 billion or US$66.7 billion as at end-2004.The reserves increased further to RM272.9 billion(US$71.8 billion) as at 28 February 2005. This level ofreserves represented 8.6 months of retained importsand 6.1 times coverage of short-term external debt.Malaysia’s reserves remained usable andunencumbered.

international reserves of Bank Negara Malaysia. Errorsand omissions, including exchange gains from therevaluation of international reserves due to theappreciation of major currencies against the US dollar,was RM11.1 billion. After adjusting for the errors andomissions, the overall balance of payments recorded alarger surplus of RM83.1 billion or US$21.9 billion.Consequently, the net international reserves of Bank

Graph 1.35b Capital and Financial Account

-30

-20

-10

0

10

20

30

40

2002 2003 2004e

RM billion

Direct investment

Official long-term capital

Portfolio investment

Other investment - private sector

Balance on capital and financial account

e Estimate

Graph 1.35c Net International Reserves

-50

0

50

100

150

200

250

300

2002 2003 2004

Net international reserves

Balance on capital and financial account

Balance on current account

RM billion

Table 1.16Balance of Payments

Item

2003 2004e

+ - Net + - Net

RM million

Goods 398,998 301,297 97,701 481,240 376,766 104,474Trade account 397,884 316,538 81,347 480,722 399,648 81,073

Services 51,595 66,621 -15,026 63,716 72,497 -8,780

Balance on goods and services 450,594 367,918 82,675 544,957 449,263 95,694

Income 13,103 35,630 -22,527 15,307 39,787 -24,480Current transfers 1,929 11,229 -9,300 1,700 16,333 -14,633

Balance on current account 465,626 414,777 50,848 561,964 505,384 56,580% of GNP 13.7 13.4

Capital account – –

Financial account -12,146 15,386Direct investment 4,194 10,823Portfolio investment 4,168 33,112Other investment -20,508 -28,550

Balance on capital and financial account -12,146 15,386

Errors and omissions 358 11,095of which:

Exchange revaluation gain (+) or loss (-) 11,927 7,997

Overall balance 39,059 83,061

Bank Negara Malaysiainternational reserves, net 170,452 253,513

(US$ million) 44,856 66,714

Note: Numbers may not necessarily add up due to rounding.

e Estimate

Source: Department of Statistics, Malaysia and Bank Negara Malaysia

44

Current AccountThe current account recorded a larger surplus ofRM56.6 billion or 13.4% of GNP, reflecting sustainedlarge trade surplus and a significant improvement inthe services account deficit. The strong export growthwas underpinned by the upswing in global demandfor electronics and expansion in most commodityexports. The substantial decline in the services

The large trade surplus was attributed to stronger growth inmanufactured exports and sustained high growth in commodityearnings. The strong expansion in imports was reflective of growthin production and exports of manufactured goods as well as strongdomestic consumer and investment spending.

account deficit reflected the significant improvementin the travel receipts following higher tourist arrivals.The income account deficit increased due to higherprofits and dividends accruing to foreign directinvestors. The current transfers account recorded a

higher outflow attributable to the one-offremittance by illegal foreign workers under theAmnesty Programme.

Amidst stronger global growth, gross exportsexpanded significantly by 20.8% in 2004 (2003:11.3%). Growth was supported by marked expansion inexports of manufactured goods and minerals. Growth in

agriculture exports moderated during the year. Higherexport receipts during the year reflected both increasesin volume (16.1%) and unit value (3.6%). The increasein unit value was due to higher prices for mostcommodities and resource-based industries.

Table 1.17Gross Exports

2004p

RM million Annual change (%) % share

Manufactured goods 390,449 19.7 81.2of which:

Electronics, electrical machinery and appliances 257,051 15.3 53.5Electronics 188,605 12.7 39.2Semiconductor 89,298 4.9 18.6

Electronic equipment & parts 99,307 20.8 20.7Electrical machinery & appliances 68,446 23.4 14.2

Consumer electrical products 22,170 12.5 4.6 Industrial & commercial electrical products 25,769 27.0 5.4 Electrical industrial machinery and equipment 17,783 30.8 3.7 Household electrical appliances 2,724 45.3 0.6

Chemicals & chemical products 27,767 31.0 5.8Manufactures of metal 16,140 43.6 3.4Optical and scientific equipment 11,568 26.3 2.4Textiles, clothing and footwear 10,328 17.9 2.1Wood products 8,677 29.5 1.8Food 7,776 22.7 2.0Rubber products 6,036 19.3 1.3Transport equipment 5,324 65.0 1.1

Agricultural commodities 36,176 7.4 7.5of which:

Palm oil 20,107 -0.4 4.2Rubber 5,198 45.1 1.1Sawn timber 3,214 1.7 0.7Saw logs 2,070 2.5 0.4

Minerals 41,177 38.2 8.6of which:

Crude oil 21,318 36.1 4.4LNG 17,079 27.9 3.6Tin 947 231.5 0.2

Other exports 12,920 60.1 2.7

Total 480,722 20.8 100.0

p Preliminary


45


Exports of manufactured goods recorded a stronggrowth of 19.7% in 2004 (2003: 8%), contributed byboth higher volume (18.3%) and unit value (1.2%).Of significance, exports of electronics and electricalproducts expanded strongly, particularly in the firsthalf-year benefiting largely from the globalsemiconductor up-cycle. Resource-based productssuch as petroleum, chemical, wood and rubberproducts also benefited from higher prices andvolume. The rapid expansion in construction activityin PR China supported the strong demand for metalproducts from Malaysia. Exports of rubber products,especially for gloves remained strong during the yeardue to the demand stimulated by the outbreak of theAvian flu in the regional countries. In the transport

1 Volume and prices are estimates based on Bank Negara Malaysia's survey of selected companies.

Source: Department of Statistics, Malaysia Bank Negara Malaysia

-10

-5

0

5

10

15

20

25

30

Export Value Export Volume1 Export Prices1

Graph 1.36Export Performance of the Manufacturing Sector

Annual Change (%)

2003 2004

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

0

10

20

30

40

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2003 2004

Manufactured Exports


Electronics Non-electronics

Graph 1.37Export Performance of Electronics and Non-electronics Industries

Annual Change (%)

equipment sub-segment, increased investments inglobal oil and gas exploration led to the strongdemand for floating and submersible drillingplatforms for exploration activity. Meanwhile, growthin exports of wood products was supported bysustained demand from Japan and US.

Primary commodities continued to contributesignificantly to gross exports during the year, with itsshare rising to 16.1% (2002: 13.6%). Commodityexports grew by 21.8%, reflecting mainly strongergrowth in petroleum exports, while growth inagriculture exports was moderate.

Table 1.18External Trade

2003 2004p 2003 2004p

RM billion US$ billion

Gross exports (f.o.b) 397.9 480.7 104.7 126.5

Annual change (%) 11.3 20.8 11.3 20.8

Annual change (%)

Volume1 5.9 16.1 5.9 16.1Prices1 1.1 3.6 1.1 3.6

Gross imports (c.i.f) 316.5 399.6 83.3 105.2

Annual change (%) 4.4 26.3 4.4 26.3

Annual change (%)

Volume1 -1.0 23.0 -1.0 23.0Prices1 2.2 3.1 2.2 3.1

Trade balance 81.3 81.1 21.4 21.3

1 Volume and prices for 2004 are estimates.

p Preliminary


0 5 10 15 20 25

United States

Singapore

Japan

People's Republic of China, Hong Kong China,

Korea & Chinese Taipei

ASEAN excl. Singapore

European Union

Others

% share


Graph 1.38 Exports of Manufactured Goods by Destination

2004

2000

46

Table 1.19Gross Imports by End Use

2004p

RM Annual million change (%)

% share

Capital goods 55,545 36.1 13.9Capital goods (except transport equipment) 49,094 28.4 12.3

Industrial machinery and equipment 13,219 36.2 3.3Office equipment 9,139 78.0 2.3Telecommunication equipment 6,957 37.8 1.7

Transport equipment 6,451 151.0 1.6

Intermediate goods 287,223 22.0 71.9Food and beverages, mainly for industry 8,842 52.9 2.2Industrial supplies, n.e.s. 91,138 38.9 22.8

Metals & metal products 27,568 50.1 6.9Chemicals 10,648 44.1 2.7

Fuels and lubricants 19,322 41.8 4.8Parts and accessories of capital goods(except transport equipment) 158,848 10.5 39.7Electronics 102,949 8.0 25.8Parts and accessories of telecommunication equipment 7,434 8.2 1.9

Parts and accessories of transport equipment 9,073 35.0 2.3

Consumption goods 23,234 24.1 5.8Food and beverages, mainly for household consumption 8,926 31.3 2.2Transport equipment, non-industrial 334 -6.7 0.1Consumer goods, n.e.s. 13,974 20.8 3.5

Consumer durables 3,119 20.8 0.8Consumer semi-durables 4,671 18.2 1.2Consumer non-durables 6,184 22.9 1.5

Dual use goods 9,310 39.8 2.3Motor spirit 4,743 59.1 1.2Passenger motor cars 4,567 24.1 1.1

Others 7,110 10.8 1.8

Re-exports 17,226 102.9 4.3

Gross Imports 399,648 26.3 100.0

Note: Numbers may not necessarily add up due to rounding.n.e.s. Not elsewhere specified.p Preliminary


Mineral exports recorded another year of strongexpansion, increasing by 38.2% to RM41.2 billion.Export revenue from crude oil rose by 36.1% toRM21.3 billion, on the back of significantly higherprice which rose by 34.8% to average US$40.81 perbarrel for 2004. Exports of LNG also rose strongly by27.9% to RM17.1 billion, on account of highervolume (19.7%) following the increased offtake bytraditional LNG buyers, as well as higher price (6.8%).

Export receipts from agriculture totalled RM36.2billion in 2004, of which palm oil accounted for thelargest share of 56% or RM20.1 billion. Despite thehigher export price of palm oil, earnings from palmoil fell marginally by 0.4% during the year due tolower export volume (-5.6%). Demand was affectedby significant reductions in imports by India (-44%)and Pakistan (-24.2%) as a result of higherproduction of their domestic oilseeds. Nevertheless,

purchases by the other major buyers of Malaysianpalm oil, namely PR China and the EU, with acombined share of almost 40% of total palm oilexports, increased by 13% and 12.6% respectively.Rubber exports performed strongly for the secondconsecutive year, registering a growth of 45.1%(2003: 43.8%) due to both higher prices (24.3%)and volume (16.7%), as imports by PR China andthe EU recorded significant increases (39.2% and15.6% respectively).

Growth in gross imports of 26.3% reflected higherproduction and exports of manufactured goods, aswell as stronger domestic consumer and investmentspending. Both imports of intermediate and capitalgoods were higher. Intermediate imports weremainly to support higher manufacturing production,while the surge in imports of capital goods reflectedhigher investment activity in the services and

47


manufacturing sectors. Higher disposable incomeand improved consumer confidence led to thegrowth in imports of consumption goods.

Imports of intermediate goods expanded stronglyby 22%. Components, such as parts and accessoriesfor the electronics industry, expanded strongly with arising trend towards substitution from lower costsuppliers, in particular increased sourcing fromThailand, Indonesia and PR China. In line with higherdemand in regional countries for metal andresource-based products, significant increases wererecorded in industrial supplies, namely, constructionmaterials, metals, and chemicals. Intermediateimports related to the manufacture of goods for thedomestic market also registered growth. Growth ofthe motor assembly industry, stemming from therobust demand for passenger cars, lifted imports ofparts and accessories. In line with sustained consumerspending on food and beverages, imports of primaryand processed materials used by the food andbeverages industry recorded strong growth.

Imports of capital goods increased significantly by36.1% following the strong pick up in investment.The impetus came from capacity expansion andupgrading of technology in the manufacturing,services, shipping and airline sectors. Investment inmachinery and equipment in the manufacturingsector, particularly in new growth areas such aschemicals, metal fabrication and higher-endelectrical and electronics, strengthened. Theextension of network infrastructure and theintroduction of new products and technologies bytelecommunication companies also caused importsof telecommunication equipment to record stronggrowth. Imports of office equipment remainedstrong as corporations in the services industryimproved their service delivery by upgradinginfrastructure in information technology. Capacityexpansion in the power generation sector led tostrong growth of imports of generators, turbinesand electric motors. Strong external demand forcommodity exports and fleet expansion to servicenew markets also induced the deliveries of shipsand aircraft.

Consonant with higher private consumption, importsof consumption goods increased by 24.1%. Importgrowth was strong for food and beverages, electricalgoods, furniture, clothing and footwear, householdfurnishings, and medicine. Nevertheless, the share ofconsumption goods imports to total imports remainedlow, accounting for only 5.8% of total imports.

The exports diversification index is a modified version of Herfindahl-Hirschmann index. It is normalised to obtain a numeric range from 0 to 1. A lower index value signifies a higher degree of diversification.

0.10

0.12

0.14

0.16

0.18

0.20

0.22

Graph 1.39 Exports Diversification Index

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

A notable development was the significant growth of102.9% in imports for re-exports, arising frompacking and assembling activities in the freecommercial zones. These imports, mainly electrical andelectronic products, telecommunication equipment andiron and steel products, were largely re-exported toSingapore, Thailand and Hong Kong China.

Malaysia’s trade with other countries in East Asia(excluding Japan) has grown over the years and theregion now accounts for 45.4% of Malaysia’s totaltrade (1995: 35.9%). Efforts taken to diversify tradewith non-traditional markets, such as West Asia,Eastern Europe and South Asia, have made progress.The diversification index, as measured by thenormalized Herfindahl-Hirschmann index, improved in2004. The index for both exports and importsdeclined from 0.15 in 2003 to 0.14 in 2004, implyingincreasing diversification.

The US remained as Malaysia’s largest trading partnerwith a share of 16.8% (2003: 17.7%) and contributedto a larger trade surplus of RM32.4 billion. The surpluswas attributed to higher exports of electrical andelectronic products, in particular, integrated circuits,parts for data processing machines and computercomponents, rubber, optical and scientific instruments,furniture and petroleum products. The US was thesecond largest source of imports for Malaysia, withimports comprising mainly intermediate inputs, such assemiconductors and office machine parts used in theelectrical and electronic industry, optic and medicalinstruments and aircraft.

Despite the decline in the share of trade to 13.2%(2003: 13.9%), Singapore maintained its position as

48

Table 1.20Direction of External Trade

2004p

Exports Imports Trade balance

RM million % share RM million % share RM million

ASEAN countries 120,601 25.1 95,729 24.0 24,872Singapore 72,176 15.0 44,437 11.1 27,740Thailand 22,954 4.8 21,992 5.5 962Indonesia 11,677 2.4 15,936 4.0 -4,259Philippines 7,362 1.5 10,667 2.7 -3,305Other ASEAN countries 6,431 1.3 2,697 0.7 3,735

Selected North East Asia countries 93,430 19.4 91,603 22.9 1,828The People’s Republic of China 32,143 6.7 39,279 9.8 -7,135Hong Kong China 28,686 6.0 10,850 2.7 17,835Chinese Taipei 15,763 3.3 21,630 5.4 -5,867Korea 16,839 3.5 19,843 5.0 -3,005

European Union (EU) 1 60,374 12.6 47,930 12.0 12,444United Kingdom 10,556 2.2 6,640 1.7 3,916Germany 10,485 2.2 17,798 4.5 -7,313Netherlands 15,752 3.3 3,434 0.9 12,318Other EU countries 23,581 4.9 20,058 5.0 3,523

United States 90,181 18.8 57,752 14.5 32,429Japan 48,552 10.1 63,693 15.9 -15,141India 11,410 2.4 4,897 1.2 6,513Australia 15,783 3.3 6,793 1.7 8,990Rest of the world 40,389 8.4 31,252 7.8 9,137

Total 480,722 100.0 399,648 100.0 81,073

Note: Numbers may not necessarily add up due to rounding.1 Includes the 10 new member states.p Preliminary


the second largest trading partner of Malaysia.Exports of electrical and electronic products remainedthe largest export earner with receipts of RM40.9billion or 56.6% of total exports to Singapore. Otherexports that recorded strong growth included refinedpetroleum products, manufactures of metal,chemicals and transport equipment, particularlyfloating and submersible drilling platforms for oil andgas exploration activity. On the imports side,Singapore was the third largest source of imports forMalaysia. Imports from Singapore were mainly officemachine parts, computers and components,chemicals and optical and scientific equipment.

Japan remained as the third most important tradingpartner of Malaysia although its share to total tradedeclined to 12.7%. Export growth of 14.2% wasunderpinned by exports of electrical machinery, woodproducts, chemicals, optical and scientific, metal andplastic products. Despite the appreciation of the yen,imports grew by 17.9%, reflecting inelastic demandfor machinery, electrical machinery and transportequipment. Consequently, the trade deficit widenedto RM15.1 billion (2003: -RM11.5 billion).

Reflecting the improvement in economicperformance, total trade with the enlarged EU grewby 23.6% to account for a share of 12.3% ofMalaysia’s total trade. The impetus to the growthcame from strong growth in trade with theNetherlands, Spain, Italy, Hungary and Sweden. Thetrade surplus of RM12.4 billion (2003: RM12.2billion) recorded with the group arose mainly fromtrade surplus with Netherlands (RM12.3 billion) andthe UK (RM3.9 billion), while trade with Germanyand Sweden recorded deficits of RM7.3 billion andRM2.2 billion respectively.

Strong economic growth supported the expansionof intra-regional trade with the East Asia andASEAN countries. Supporting this growth is thegrowing extensive production network and thelinkages in the region arising from relocation ofcompanies into PR China and ASEAN countries aswell as increased outsourcing activity. Trade withthe North East Asia region (excluding Japan)expanded by 26.3% as increased sourcing ofcheaper inputs caused import growth from thesecountries to outpace export growth. Trade with

49


PR China grew by 33.7% and exports consistedmainly of integrated circuits, office machine parts,chemicals and palm oil. Nevertheless, the higherimport growth from PR China caused the tradedeficit to widen to RM7.1 billion (2003: -RM1.8billion). Malaysia is PR China’s eighth largesttrading partner and its largest trading partner inASEAN. Exports to Korea increased by 45.7%underpinned by demand for resource-basedproducts namely chemicals, petroleum products,rubber products and LNG. The trade pattern wassimilar for the ASEAN (excluding Singapore)countries, with trade expanding by 31.9%. Asimporters continued to source inputs from low costsuppliers, Malaysia continued to experience tradedeficits with Indonesia and Philippines, while thetrade surplus with Thailand narrowed. Exports tothe ASEAN countries were supported mainly byexports of electrical and electronics andresource-based products. The strong import growthfrom Thailand and Indonesia were driven byelectronic products, chemicals, manufactures ofmetal and iron and steel products.

In 2004, the services account deficit narrowed toRM8.8 billion or -2.1% of GNP (2003: -RM15 billionor -4% of GNP). Policies to promote the export ofservices and investment in infrastructure in theservices industry have enabled new sources offoreign exchange earnings, particularly from tourismand other services, mainly computer and informationservices, and thereby contributing to significantimprovement in the services account deficit.

Travel continued to be the largest contributor to servicesreceipts, accounting for 48.9% of gross services receiptsin 2004. Receipts in the travel account increased by38.9% to RM31.2 billion. The strong performance ofthe travel account reflected the marked increase in thenumber of tourist arrivals to 15.7 million visitors (2003:10.6 million). Strong economic performance of regionalcountries and greater connectivity in air services throughan increase in the number of flights, including charterflights and promotional fares provided by low costcarriers, led to a higher number of visitors. Singapore,Thailand, Indonesia and PR China were the main sourcesof visitors, accounting for 78.8% of total arrivals.Aggressive marketing campaigns targeted, in particular,at summer vacation travel by West Asians induced a

0

2

4

6

8

10

12

14

16

18

1997 1998 1999 2000 2001 2002 2003 2004p0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

p Preliminary Source: Malaysia Tourism Promotion Board

Tourist arrivals Tourism receipts

Graph 1.41 Tourist Arrivals and Tourism Receipts

Tourist arrivals in million

Receipts inRM million

Graph 1.40 Direction of Exports (% share): 1995 Direction of Exports (% share): 2004

Singapore 20.3%

Japan 12.7%

People's Republic of China2.7%

United States20.7%

European Union (EU) 14.2%

Rest of the world11.2%

NIEs 2

11.3%

ASEAN 1

6.9%

Singapore 15.0%

Japan 10.1%

People's Republic of China 6.7%

United States 18.8%

European Union (EU)3

12.6%

Rest of the world14.0%

NIEs 2

12.7%

ASEAN 1

10.1%

1 ASEAN excluding Singapore2 Hong Kong China, Korea and Chinese Taipei

1 ASEAN excluding Singapore 2 Hong Kong China, Korea and Chinese Taipei 3 Includes the 10 new member states

50

Table 1.21Services and Income Accounts

2003 2004e

RM billion

Net + – Net

Services Account

Transportation -13.3 12.0 29.8 -17.8Travel 11.6 31.2 11.8 19.4Other services -13.0 20.1 29.8 -9.7Government services n.i.e. -0.3 0.4 1.1 -0.7

RM billion -15.0 63.7 72.5 -8.8US$ billion -4.0 16.8 19.1 -2.3% of GNP -4.0 -2.1

Income Account

Compensation of employees -1.0 2.6 3.8 -1.1Investment income -21.6 12.7 36.0 -23.3

RM billion -22.5 15.3 39.8 -24.5US$ billion -5.9 4.0 10.5 -6.4% of GNP -6.1 -5.8

Note: Numbers may not necessarily add up due to rounding.e Estimate


Graph 1.42 2004: Components of Gross Receipts in the Services Account (% share)

Government services n.i.e.

0.7%

Transportation 18.9%

Other services 31.5%

Travel 48.9%

Graph 1.43 2004: Components of Gross Payments in the Services Account (% share)

Government services n.i.e.

1.6%

Transportation 41.1%

Other services 41.1%

Travel 16.2%

travel receipts. Education receipts from foreignstudents at all levels of education (comprisingtertiary, secondary and primary education) increasedby 40.5%. Students from PR China accounted forabout 40% of the students at private tertiaryinstitutions while the rest were mainly fromneighbouring countries, particularly Indonesia andIndia. Meanwhile, earnings from healthcare servicesimproved further due mainly to the increase innumber of foreign patients to 174,289 patients in2004 (2003: 102,946 patients). The bulk of foreignpatients were from the ASEAN countries, accountingfor 81.8% of total foreign patients.

On the payments front, higher incomes, increasedbusiness activities overseas and improved economicprospects led to higher expenditure on foreign travelwhich rose by 8.7% to RM11.8 billion. Payments fortravel to border towns rose sharply by 108.6% toRM2.4 billion. Education outflows increased by16.7% due mainly to higher expenditure on tuition

fees and living expenses arising mainly from theappreciation of Australian dollar, pound sterling andSingapore dollar against ringgit.

Another contributory factor to the lower servicesaccount deficit was the lower net outflow of RM9.7billion in the other services account stemming mainly

Higher tourism receipts and improvement in earnings fromcomputer and information services contributed to a lower servicesdeficit. Profits and dividends accrued to Malaysian companiesabroad also continued to increase.

57.1% increase in number of West Asian tourists.Tourists from emerging markets of Asia such as Koreaand Chinese Taipei increased sharply by 97.4% and38.3% respectively.

Higher foreign exchange earnings from educationand healthcare services also contributed to higher

51


from higher receipts for computer and informationservices. The setting up of regional hubs fordevelopment of ICT products, provision of regionalgroup network support services as well as businessprocess outsourcing and shared services underpinnedthe growth in exports of computer and informationservices. On the other hand, payments of royalties andlicence fees were larger reflecting usage of intellectualproperty in areas related to multimedia,communication and retail business. The bulk of theseroyalties and licence fees payments were made to theUS and Japan. Higher payments were also incurred forthe import of construction services for power and oiland gas exploration projects. Payments to foreignservice providers in areas related to communicationand multimedia services also increased in response tostrong demand.

The strong expansion in external trade together withhigher freight charges by international shipping linesdue to tight capacity resulted in the transportationaccount recording a significantly larger net outflow ofRM17.8 billion (2003: -RM13.3 billion). The highergross payments were offset partly by improvedearnings from cargo and passenger services providedby major domestic shipping companies and airlines.Capacity expansion by shipping companies and airlinesas well as an increase in transhipment cargocontributed to higher earnings.

services sector. For the second consecutive year,income from other investment recorded a net inflowof RM2.6 billion reflecting returns from larger externalreserves while the interest payments on external debtcontinued to decline.

The net outflow in the current transfers accountincreased significantly to RM14.6 billion (2003: -RM9.3billion). The increase in current transfers payments toRM16.3 billion reflected mainly the one-time lump sumrepatriation made by 309,248 illegal workers returningto their home countries under the Amnesty Programmefrom October 2004 to end of December 2004. Regularremittances by a larger number of registered foreignworkers employed, mainly in the manufacturing andagriculture sectors, also contributed towards the largernet outflow.

Financial AccountThe financial account turned around in 2004,recording a net inflow of RM15.4 billion (2003:-RM12.1 billion). The significant shift was attributedmainly to higher inflows of foreign direct investmentand portfolio funds following stronger economicgrowth and improved corporate earnings. Otherinvestment recorded a larger outflow due to both netrepayment of external loans by the official sector forthe second consecutive year and higher outflows ofother private sector investment.

The financial account turned around to record a net inflow in2004, attributed mainly to higher inflows of FDI and portfoliofunds following stronger economic growth and improvedcorporate earnings.

The income account deficit increased to RM24.5billion or -5.8% of GNP in 2004, attributable mainly tohigher profits and dividends accruing to foreign directinvestors. The higher income accruing to foreign directinvestors was due mainly to the improved exportperformance of the electrical and electronics industriesas well as the oil and gas sector on the back of thesurge in oil prices. Nevertheless, the actual outflowswere considerably lower as a large portion of theprofits was retained in the country for reinvestment.Meanwhile, income accruing to portfolio investorsrecorded a larger outflow in line with higher dividendpayouts by the Malaysian companies.

Profits and dividends accruing to Malaysian companiesfrom their investment abroad increased further toRM3.6 billion (2003: RM2 billion). These receipts weremainly from the oil and gas sector as well as the

On a gross basis, foreign direct investment (FDI) inMalaysia increased to RM24.8 billion (2003: RM19.9billion) or 5.9% of GNP reflecting broad-based flows toall the major sectors, namely services, manufacturingand oil and gas sectors. The bulk of the FDI continuedto be in the form of retained earnings. Nevertheless,inflows of new equity were higher. After taking intoaccount liquidation and loan repayments to parentcompanies abroad, net FDI increased to RM17.9 billion(2003: RM9.4 billion).

The services sector continued to be a major recipientof new FDI flows particularly in the new growth areassuch as the business support and shared services, inline with the Government policies geared towardsliberalisation and deregulation. Significant inflowswere recorded in the financing, insurance, real estateand business services sub-sector as well as wholesale

52

and retail trade, hotels and restaurants sub-sector. Inthe financing, insurance, real estate and businessservices sub-sector, there were new investments in thebanking sector upon the approval of Islamic bankinglicences to three foreign banks. In view of favourablefiscal incentives and good infrastructure, thesub-sector also witnessed the emergence of theshared services and outsourcing activities thataccelerated the development of value-add chain tosupport the MNCs’ operations in Malaysia and theAsian region. During the year, several MNCsestablished or expanded their regional or globaloperation centres for shared services and outsourcingactivities in Malaysia. Meanwhile, the informationtechnology-related back room and call centreoperations of some foreign banks continued toexpand, establishing linkages across differentsegments of the services sector. The competitiveadvantage of Malaysia in shared services activities isreflected in the A.T. Kearney 2004 Offshore LocationAttractiveness Index which ranked Malaysia as thethird most attractive investment destination forShared Services & Outsourcing (SSO). Confirming thisis the increase in the number of international andregional facilities in Malaysia during the year. In 2004,there was an increase of 6% in the international andregional facilities approved in Malaysia, totalling 233,of which 16 were operational headquarters (OHQs),193 regional and representative offices, 21international procurement centres (IPCs) and threeregional distribution centres (RDCs). In the wholesaleand retail trade, hotels and restaurants sub-sector,foreign investments were largely for the set-up and

expansion of hypermarkets and new hotels in responseto the growing affluence of Malaysians and the rapidgrowth of the tourism industry.

In view of the large and long-standing presence ofMNCs in the manufacturing sector, investment in thissector continued to be funded mainly by retainedearnings, especially in the electrical and electronics,petroleum-related and chemicals and machineryequipment industries. Foreign investments in themanufacturing sector were mainly for upgrading ofequipment and technology as well as establishingnew product lines and capacity. Meanwhile, in the oiland gas sector, investment in the upstream activitiescontinued to be significant following recent discoveryof new oil fields offshore East Malaysia. The nationaloil company and its foreign partners were also activelyengaged in deep-water oil exploration. Theinvestment in this sector was also spurred by higherglobal demand and prices for oil during the year. Inview of the expansion in the services, manufacturingand oil and gas sectors, the broadening anddeepening of FDI flows has further enhanced thecapacity, technology and skill-base to allow thecountry to continue to move up the value chain.

Direct investment abroad by Malaysian companiesincreased to RM7.1 billion in 2004 (2003: -RM5.2billion). The sizable increase in overseas investmentreflected companies’ strategy in expanding theiroperations worldwide to enhance synergisticcapabilities to their core operations in Malaysia aswell as to tap business opportunities availableabroad. Most of these investments were undertakenthrough acquisitions and joint ventures with somenew greenfield investments. The investment was ledby several large and established Malaysiancorporations in the oil and gas and services sectors,followed by companies in the manufacturing,agriculture and construction sectors. In terms oflocation, overseas investments by Malaysiancompanies were well-diversified, with investmentsdirected to diverse parts of the world, includingAfrica, ASEAN, South Asia, Europe and US.

Overseas investment in the oil and gas sector remainedlarge, especially in the upstream oil exploration andextraction activities following the discovery of new oilfields and the success of the national oil company inforging joint venture partnerships with several foreignnational oil companies for oil and gas exploration. Theinvestments were concentrated mainly in largeundeveloped oil fields in Africa and ASEAN countries.The investment abroad in the services sector was

Table 1.22Balance of Payments: Financial Account

2003 2004e 2003 2004e


Financial Account -12.1 15.4 -3.2 4.0

Direct Investment 4.2 10.8 1.1 2.8In Malaysia 9.4 17.9 2.5 4.7Abroad -5.2 -7.1 -1.4 -1.9

Portfolio Investment 4.2 33.1 1.1 8.7

Other Investment -20.5 -28.6 -5.4 -7.5Official sector -11.2 -1.1 -2.9 -0.3of which:

Federal Government (net) -3.7 0.1 -1.0 …Gross borrowing 3.1 1.1 0.8 0.3Repayment -6.9 -1.0 -1.8 -0.3

NFPEs (net) -7.3 -1.3 -1.9 -0.3Gross borrowing 5.1 11.4 1.4 3.0Repayment -12.4 -12.7 -3.3 -3.3

Private sector -9.3 -27.4 -2.4 -7.2

Note: Numbers may not necessarily add up due to rounding.… Negligiblee Estimate


53


broad-based, with the bulk of the investmentschannelled into the utilities and the financing,insurance, real estate and business services sub-sectors.In the manufacturing sector, local companiescontinued to venture abroad, emulating global MNCsin establishing subsidiaries or joint ventures with theircounterparties in emerging economies so as to relocatetheir labour-intensive operations abroad, or to be inclose proximity to their suppliers and consumers. Theseinvestments were largely for the manufacturing offabricated metal products, machinery and equipments(including electronic and electrical products), palm oil,and wood and wood products including furniture.

Agro-based overseas investments were mainly for oilpalm estates in Indonesia and South Africa.Investments abroad by construction companies alsocontinued to increase during the year. Several largeand established construction and engineeringcompanies have leveraged on their expertise andexperience in civil engineering and propertydevelopment to secure numerous developmentcontracts in India, PR China, Sri Lanka, Africa and WestAsia. Reflecting Malaysian companies’ success inoverseas ventures, the net profits and dividendsaccruing to companies investing abroad increasedfurther to RM3.6 billion in 2004 (2003: RM2 billion).

reflecting mainly the Federal Government’s fiscalconsolidation and sustained net repayments by theNon-Financial Public Enterprises (NFPEs).

The other investment by the private sector,comprising mainly borrowing and lending as well asplacements and withdrawals of deposits by thebanking sector as well as non-bank private sectortransactions with unrelated counterparties, recorded ahigher net outflow of RM27.4 billion (2003: -RM9.3billion). This is attributed mainly to the reversal in thebanking sector position to register a net outflowduring the year arising from higher placement of assetsabroad. The net outflows by the non-bank privatesector were marginally higher, reflecting the sustainedlarge trade credits extended by Malaysian exporters inline with the significantly stronger trade performance.

External DebtMalaysia continued to maintain a prudent external debtmanagement strategy. The framework for external debtmanagement has been guided by prudential policiesand an efficient debt monitoring system. Permission toallow recourse to external loans by corporations isbased on a transparent set of criteria, which requiresthat external funds be utilised to finance productiveinvestments and for investments that will generate

External debt remained within prudent level, with the debtprofile biased towards a longer maturity structure. The publicsector continued to record net repayments. Lower drawdownsamidst higher repayments resulted in a small net borrowing bythe private sector.Portfolio investment recorded a significant increasein net inflow of RM33.1 billion in 2004 (2003: RM4.2billion) reflecting higher inflows into both the equityand debt markets. The flows of portfolio funds haverisen steadily, as international institutional fundmanagers increased their medium- and long-termstrategic exposure in Malaysia in line with upwardadjustments in sovereign ratings, positive economicoutlook, improving earnings prospects of Malaysiancorporations and expectations of realignments ofexchange rates in the Asian region.

The other investment recorded a higher net outflowof RM28.6 billion (2003: -RM20.5 billion), reflectingthe net repayment of external loans by the officialsector and larger short-term outflows by the privatesector. The official sector recorded a net repayment ofexternal loans for the second consecutive year,amounting to RM1.1 billion (2003: -RM11.2 billion),

sufficient foreign earnings to service the debt. Theprudential safeguards include efforts to minimise riskexposure against global interest rate shocks, adverseexchange rate movements and shifts in investorsentiment. Meanwhile, the debt monitoring systemenables the authorities to monitor the overall debt level,the structure of the debt as well as the servicingobligations of both the public and private sectors. Theseguidelines have been effective in ensuring that thenation’s external debt is contained within prudent levelsand its debt profile biased towards a longer maturitystructure. Overall, the prudential debt managementapproach has served the nation well in strengtheningthe underlying economic fundamentals and reducing itsvulnerability to external shocks.

In 2004, total external debt outstanding increased by5.7% to RM197.3 billion (US$51.9 billion).Notwithstanding a higher total external debt, the ratios of

54

The medium- and long-term external debtincreased by 0.9% to RM154.3 billion (US$40.6 billion)as at the end-2004. The increase was due largely to anexchange revaluation loss of RM1.3 billion followingthe appreciation of major currencies against the USdollar. During the year, the public sector, comprisingthe Federal Government and NFPEs, registered a lowernet repayment of RM1.2 billion (2003: -RM11 billion).In contrast, gross borrowing by the private sector waslower in 2004, while repayments of external loansincreased, resulting in a smaller net borrowing ofRM1.6 billion (2003: RM3.9 billion).

The bulk of the medium- and long-term debtcontinued to be denominated in US dollars, accountingfor 77% of the nation’s total medium- and long-termexternal debt as at end-2004. Meanwhile, the share ofyen-denominated debt declined marginally to 12.5%(2003:13%) due partly to settlement of ayen-denominated bond by a NFPE. The share of theeuro-denominated debt stabilised at 5.2%, while theremaining 5.3% of total external debt was accountedfor by other international currencies, including thepound sterling, Swiss franc and Singapore dollar.

The outstanding external debt of the public sectordeclined marginally to RM96.7 billion (US$25.4 billion)as at end-2004 (2003: RM96.8 billion), as the netrepayment of external loans more than offset anexchange revaluation loss due to the appreciation ofmajor currencies against the US dollar. Accordingly, theshare of public external debt to total external debtdeclined to 49% (2003: 51.9%). During the year, whilethe NFPEs increased their borrowings, the FederalGovernment continued to exercise prudence in its

0

20

40

60

80

100

120

140

160

180

200

220

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004p0

10

20

30

40

50

60

70

Graph 1.44a Outstanding External Debt

RM billion %

Short-term1

NFPEsFederal Government

Private Sector

Debt/GNP (RHS)

1 Excludes currency and deposits held by non-residents with resident banking institutions.

p Preliminary

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20032004p

5

0

10

15

20

25

30

35

RM billion %

Repayment

Interest payment

Debt service ratio (RHS)

p Preliminary

Graph 1.44b Debt Servicing

0

1

2

3

4

5

6

7

8

external debt to GNP and exports of goods and servicesimproved further to 46.6% and 35.2% respectively(2003: 50.2% and 40.3% respectively). The increase inexternal debt reflected mainly an accumulation ofshort-term debt by the banking sector, resulting fromhedging activities for trade-related transactions as well asmoney market operations involving treasury activities.Nevertheless, the share of short-term debt to total debtremained low, accounting for 21.8% of total externaldebt. In addition, the ratio of short-term debt tointernational reserves improved further to account foronly 17% of international reserves (2003: 19.8%). Theoverall debt service ratio (excluding prepayment) declinedto 4.3% in 2004 (2003: 6.2%).

Table 1.23Outstanding External Debt

2003 2004p 2003 2004p

RM RM US$ US$million million million million

Total debt 186,640 197,321 49,116 51,927Medium- and long-term 152,950 154,298 40,250 40,605Short-term1 33,690 43,023 8,866 11,322

As % of total debt 18.1 21.8 18.1 21.8As % of net

international reserves 19.8 17.0 19.8 17.0

As % of GNPTotal debt 50.2 46.6 50.2 46.6Medium- and long-term debt 41.2 36.5 41.2 36.5

As % of exports of goods and services

Total debt 40.3 35.2 40.3 35.2Medium- and long-term

debt 33.0 27.5 33.0 27.5Debt service ratio (%) 6.2 4.3 6.2 4.3

1 Excludes currency and deposits held by non-residents with resident bankinginstitutions.

p Preliminary

Source: Ministry of Finance and Bank Negara Malaysia

55


recourse to external borrowing and relied mainly onnon-inflationary domestic sources to fund itsdevelopment programmes.

The Federal Government external debt declined toRM34.7 billion (US$9.1 billion) as at end-2004,attributed mainly to the novation of two externalloans, previously acquired from public and privatisedenterprises, to the NFPEs. Reflective of theGovernment’s prudent external debt managementpolicy, no new market loan was raised. The drawdownof the external loans by the Government was lower atRM1.1 billion (2003: RM3.1 billion), and were mainlyfrom the loans committed earlier under the MiyazawaInitiative as well as project loans from multilateralsources, such as the World Bank, Islamic DevelopmentBank and Asian Development Bank. Meanwhile,repayments of Government external debt were alsosignificantly lower, amounting to RM1 billion (2003:-RM6.9 billion), reflecting mainly scheduled principalrepayments of several project loans.

Malaysia’s strong and improving economicfundamentals led to several sovereign ratingupgrades in 2004 and the interest spread onMalaysia’s benchmark securities narrowed furtherduring the year. The spread on Malaysia’s GlobalBond due 2011 over US Treasuries narrowed steadilyto 29 basis points at the end of 2004 (end-2003: 84basis points). Similarly, the spread on the GlobalBond due 2009 narrowed to 48 basis points atend-2004 (end-2003: 76 basis points). During theyear, Malaysia’s sovereign ratings were furtherupgraded by several credit rating agencies. On

30 January 2004, Rating and Investment InformationInc. upgraded Malaysia’s long-term foreign currencyrating to A-, from BBB+, with a stable outlook. On11 May 2004, Standard & Poor’s reaffirmedMalaysia’s long-term foreign currency sovereigncredit rating at A-. Fitch International assigned apositive outlook to Malaysia’s rating on 6 April 2004and raised its long-term foreign currency rating toA-, from BBB+, with a stable outlook on 8 November2004. After assigning the outlook for Malaysia’ssovereign foreign currency rating to positive from astable outlook on 6 February 2004, Moody’s InvestorServices upgraded the rating further to A3, fromBaa1 on 16 December 2004.

In 2004, the NFPEs registered a smaller netrepayment of RM1.3 billion (2003: -RM7.3 billion), asgross borrowings were significantly higher (RM11.4billion; 2003: RM5.1 billion). The repayments,including the maturing of several bonds, were mainlyby NFPEs in the oil and gas, telecommunication andutilities sectors. The larger recourse to externalborrowing was mainly to finance capital investmentand repayments and prepayments of offshore loans.Nevertheless, after taking into account the novationof two external loans from the Federal Governmentand some exchange revaluation losses, theoutstanding external debt of NFPEs increased byRM2.5 billion to RM62.1 billion (US$16.3 billion) in2004 (2003: RM59.5 billion or US$15.7 billion).

The private sector external debt (includingshort-term debt) stood at RM100.6 billion (US$26.5billion) as at end-2004 (end-2003: RM89.8 billion)and continued to account for about one-half ofMalaysia’s total external debt. The medium- andlong-term external loans recorded a smaller netborrowing of RM1.6 billion (2003: RM3.9 billion),reflecting a lower drawdown (-9.5%) amidst ahigher repayment (+9.9%) during the year. Thedrawdown of external loans was mainly to financecapital expenditure and repayments of offshoreloans, particularly by manufacturing companies.Meanwhile, the bulk of the repayments wereeffected by companies in the manufacturing andplantation sectors. The overall risk profile of theprivate sector medium- and long-term external debtremained low as the bulk of these loans carried anatural hedge. Most of these loans were used tofinance export-oriented activities and overseasinvestments with foreign exchange revenue andincome. In addition, a significant share of theseloans was sourced from the offshore shareholdersand parent or associate companies with more

Global Bond (2009)

Global Bond (2011)

Petronas Bond (2006)

Graph 1.45Spread of Sovereign Bonds and Selected NFPE Bond Over US T-bills

0

50

100

150

200

250

300

350

F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D

2000

Yield Spread

2001 2002 2003 2004

56

Table 1.24Net International Reserves

As at end- Change

2002 2003 2004 2004

RM million

SDR holdings 585.0 685.0 765.3 80.3IMF reserve position 3,315.5 3,652.0 3,068.4 -583.6Gold and foreign

exchange 127,515.1 166,139.3 249,704.1 83,564.8

Gross InternationalReserves 131,415.6 170,476.3 253,537.8 83,061.5

Less Bank NegaraMalaysia externalliabilities 21.9 23.8 24.5 0.7

Net InternationalReserves 131,393.7 170,452.5 253,513.3 83,060.8

US$ million equivalent 34,577.3 44,855.9 66,714.0 21,858.1Months of retained

imports 5.4 6.6 8.0Reserves/Short-term

external debt (times) 4.1 5.1 5.9

flexible terms and at concessionary interest rates.After taking into account some exchange revaluationlosses, the private sector medium- and long-termexternal debt outstanding increased slightly by 2.6%to RM57.6 billion (US$15.2 billion) as at end-2004(end-2003: RM56.1 billion).

The outstanding short-term external debt(maturity of one year or less) rose by RM9.3 billion(US$2.5 billion) to RM43 billion (US$11.3 billion) in2004, reflecting an increase in the short-termexternal borrowing by the banking sector, largely forhedging activities on trade-related transactions andtreasury activities. Meanwhile, short-termborrowings by the non-bank private sector,comprising mainly revolving credits, overdraftfacilities and term loans declined further to RM8.1billion in 2004 (2003: RM10.4 billion). The declinereflected mainly repayment of these facilities byseveral large companies, particularly from themanufacturing sector.

International ReservesThe international reserves held by Bank NegaraMalaysia comprises holdings of foreign exchangeand gold, the IMF reserve position and holdings ofSpecial Drawing Rights (SDR). During the course of

Net international reserves strengthened to a record level ofUS$66.7 billion as at 31 December 2004, reflecting the overallstrong fundamentals of the economy, in particular the strongerexport performance and higher inflows of foreign directinvestment and portfolio funds.

2004, net international reserves strengthened byRM83.1 billion or US$21.9 billion to a record level ofRM253.5 billion or US$66.7 billion as at31 December 2004. The reserves level increasedfurther to RM272.9 billion (US$71.8 billion) as at28 February 2005. The reserves position is adequateto finance 8.6 months of retained imports and cover6.1 times the short-term external debt. The highlevel of reserves has increased the country’s externalresilience against future shocks to the economy.

The net increase in the reserves reflected the overallstrong fundamentals of the economy. The increase inforeign exchange holdings was due to both thestronger export performance as well as higherinflows of foreign direct investment and portfoliofunds. Notably, the increase in reserves occurredamidst higher outflows during the year. The higherpayments for imports of goods and services as well

as larger repatriation of profits and dividendsreflected the strong expansion of domestic economicactivity. Overseas investments by Malaysiancompanies were also higher, reflecting risinginterests of Malaysian companies to diversify theiractivities abroad. Meanwhile, repayments of externalloans by the public sector continued to exceed thedrawdown of external loans.

The diversified currency composition of the reservesyielded a net foreign exchange revaluation gain ofUS$2.1 billion (2003: US$3.1 billion), following thequarterly adjustments of the reserves. The revaluationgains during the third and fourth quarters, arisingmainly from the appreciation of the major currenciesagainst the US dollar more than offset the revaluationlosses during the first and second quarters when themajor currencies depreciated against the US dollar.

In managing the reserves, Bank Negara Malaysiaadopts a prudent approach to achieve the objectives ofensuring capital preservation and liquidity whilstoptimising returns. The reserves are held in the form offoreign currency deposits or in sovereign andquasi-sovereign papers of high investment grade.

Reflecting Malaysia’s strong balance of paymentsposition, Malaysia was included in the Operational

57


Table 1.25International Reserves for Selected RegionalEconomies

ReservesReserves

ReservesReserves

as atin months

as coveras coverCountry

end-2004of imports

of short-of total

(US$term

externalbillion)

externaldebt1

debt1

Chinese Taipei 241.7 17.3 3.7 2.9Hong Kong China 123.6 5.5 0.4 0.3Indonesia 36.3 9.4 5.4 0.3Korea 199.1 10.6 3.8 1.2Malaysia 66.7 8.0 5.9 1.3Philippines 16.0 4.6 2.8 0.3PR China 609.9 13.0 5.8 2.7Singapore 112.8 8.3 0.8 0.6Thailand 49.8 6.3 5.2 1.0

1 External debt data refers to amount outstanding as at end-September 2004,except for Chinese Taipei (end-June 2004), PR China and Malaysia (end-2004).

Source: National authorities; Asian Development Bank;SDDS, International Monetary Fund

Graph 1.46 Net International Reserves (end-month)

RM billion Months/Times

D J F M A M J J A S O N D0

2

4

6

8

10

160

180

200

220

240

260

2003 2004

Net international reserves, RM billion (LHS)

Retained imports cover (RHS)

Reserves/Short-term external debt (RHS)

Budget of the IMF by making resources available tomember countries that are facing short-term balanceof payments difficulties. Nevertheless, the reserveposition with the IMF decreased by RM583.6 millionin 2004, due mainly to the net repurchase of SDR86.4million (RM485.5 million) following repayments to theringgit account by various IMF member countries underthe Operational Budget arrangements and the maturityof investment with the Enhanced StructuralAdjustment Facility Trust (ESAF) amounting to SDR40million (RM224.1 million). Meanwhile, Malaysia’sholdings of reserves in the form of SDR increased byRM80.3 million, reflecting the net receipt ofremuneration from the IMF arising from Malaysia's netcreditor position with the Fund and some exchangerevaluation gains on holdings of SDR.

The international reserves held by the Bank remainsfully usable and unencumbered. There are no foreigncurrency loans with embedded options, and noundrawn, unconditional credit lines provided by or toother central banks, international organisations, banksand other financial institutions. Bank Negara Malaysiaalso does not engage in options in foreign currencieswith regard to the ringgit.

Bank Negara Malaysia releases information on theinternational reserves position and the statement of theBank’s assets and liabilities on a fortnightly basis with aone-week lag. The Bank also meets the IMF’s SpecialData Dissemination Standard (SDDS) requirements ondetailed disclosure of international reserves and foreigncurrency liquidity information at the end of each monthwith a one-month lag. The reserves data template alsoprovides forward-looking information on the size,composition and usability of official reserves and other

foreign currency assets, and the future and potential(contingent) inflows and outflows of foreign exchangeof the Federal Government and the Bank over the next12-month period.

FLOW OF FUNDS

The economy registered a higher resource surplus ofRM56.6 billion, representing 13.4% of GNP in 2004(2003: RM50.8 billion or 13.7% of GNP). In terms ofthe balance of payments, the higher resource surplusreflected higher exports of RM545 billion over importsof RM449.3 billion. From the perspective of thecountry’s savings-investment gap, the higher resourcesurplus reflected the higher net savings position of theprivate sector. The flow of funds between varioussectors of the economy in 2003 and 2004 are shownin Tables 1.26 and 1.27.

The resource surplus of the public sector was lower atRM8 billion in 2004 (2003: RM17.3 billion). Theresource surplus reflected entirely the surpluses fromthe NFPEs of RM25.3 billion, which helped to offsetthe resource gap of the general government ofRM17.3 billion. The lower resource surplus of thepublic sector was due to the lower disposable incomeof the public sector as well as higher operatingexpenditure. The disposable income of the publicsector declined by 4.4% to RM123.8 billion in 2004largely on account of the higher subsidy paymentsincurred by the Federal Government to keep retailprices of petroleum products relatively stable followingthe increase in global crude oil prices. While publicinvestment was lower as the Government began togradually consolidate its fiscal position, publicconsumption increased, reflecting primarily higher

58

Table 1.27Flow of Funds: 2004

Domestic Economy

Public Private BankingSector Sector System

RM billion

Disposable Income -408.4 123.8 284.6 0Consumption 251.4 -59.4 -192.0 0Investment 91.8 -56.5 -35.4 0Change in Stocks 8.7 -8.7 0

Exports of Goods and Non-Factor Services 545.0 -545.0 0Imports of Goods and Non-Factor Services -449.3 449.3 0Net Factor Payments Abroad -24.5 24.5 0Net Transfers -14.6 14.6 0

Non-Financial Balance 0.0 8.0 48.6 0.0 -56.6 0

Foreign FinancingDirect Investment 10.8 -10.8 0Net Foreign Borrowings -1.1 12.9 -11.7 0Change in Net Foreign Assets

Bank Negara Malaysia -75.1 75.1 0Banking System -7.2 7.2 0

Domestic FinancingChange in Credit 9.8 29.1 -38.9 0Change in Deposit1 -25.0 -63.4 88.5 0Net Borrowings from Non-Bank Sector 8.4 -8.4 0

Other Items (Net) -29.6 32.7 -3.1 0

Sum 0 0 0 0

1 Including currency in circulation

NationalAccounts

SumRest of

theWorld

Table 1.26Flow of Funds: 2003

Domestic Economy

Public Private BankingSector Sector System

RM billion

Disposable Income -362.4 129.5 232.9 0Consumption 227.3 -54.9 -172.4 0Investment 87.1 -57.2 -29.9 0Change in Stocks -2.8 2.8 0

Exports of Goods and Non-Factor Services 450.6 -450.6 0Imports of Goods and Non-Factor Services -367.9 367.9 0Net Factor Payments Abroad -22.5 22.5 0Net Transfers -9.3 9.3 0

Non-Financial Balance 0.0 17.3 33.5 0.0 -50.8 0

Foreign FinancingDirect Investment 4.2 -4.2 0Net Foreign Borrowings -11.2 -11.5 22.7 0Change in Net Foreign Assets

Bank Negara Malaysia -27.1 27.1 0Banking System 6.4 -6.4 0

Domestic FinancingChange in Credit 9.6 25.6 -35.2 0Change in Deposit1 9.4 -48.9 39.5 0Net Borrowings from Non-Bank Sector -25.2 25.2 0

Other Items (Net) -28.0 16.5 11.6 0

Sum 0 0 0 0

1 Including currency in circulation

NationalAccounts

SumRest of

theWorld

59


expenditures on supplies and services as well asemoluments. The resource surplus of the public sectortogether with borrowings from the banking system(RM9.8 billion) and private sector (RM8.4 billion), wereplaced as deposits (RM25 billion) and utilised for netrepayment of foreign borrowings (RM1.1 billion).

The resource surplus of the private sector increased toRM48.6 billion or 11.5% of GNP in 2004 from RM33.5billion or 9% of GNP in 2003. With continuedstrengthening in domestic activity and improvementson the external front, disposable income of the privatesector increased significantly, to RM284.6 billion (2003:RM232.9 billion). This enabled the private sector toincrease consumption expenditure by 11.4%. Private

investment was also higher, growing by 18.4% overthe previous year. The resource surplus of the privatesector, together with net inflows of FDI (RM10.8billion), net foreign borrowings (RM12.9 billion) andborrowings from the banking system (RM29.1 billion),led to a larger increase of resources available to theprivate sector amounting to RM101.4 billion in2004 (2003: RM88.5 billion). The bulk of theresources were placed as deposits with the bankingsystem (RM63.4 billion).

In the external sector, the large current account surplusand capital inflows contributed to the increase ofRM75.1 billion (excluding revaluation gain/loss) in BankNegara Malaysia’s net international reserves.

Monetary and FiscalDevelopments

62-67 Monetary Policy in 200463 White Box: New Interest Rate Framework

67-72 Monetary Developments in 200472-73 Exchange Rate Developments73-80 Fiscal Policy and Operations

62

MONETARY POLICY IN 2004

Following the reduction in interest rates in May 2003,Bank Negara Malaysia maintained the accommodativemonetary policy stance to support the growthmomentum in 2004. In particular, monetary policycontinued to support private sector activity as theGovernment began to gradually consolidate itsbudgetary position. At the same time, the Bankremained vigilant of inflationary pressures. Theassessment at several junctures over the course of theyear was that the inflation rate, as measured by theCPI, would remain below the average of 1.5% for theyear as a whole.

Monetary policy remained accommodative to support the growthmomentum amid low underlying inflationary pressures.The macroeconomic fundamentals, that provided thebase for growth in economic activity in 2003,strengthened to support a more rapid pace ofexpansion in 2004. In particular, the financially soundpositions of the corporate, household and bankingsectors were instrumental in ensuring the effectivenessof the accommodative monetary policy. On balance,given developments in the domestic economy and onthe global economic horizon, the decision was to keepinterest rates unchanged during the year with the goalof policy focussed on achieving sustainable long-termgrowth with price stability.

In early 2004, the outlook for the Malaysian economyimproved substantially. The significant recovery in theglobal economy, which had been underway since themiddle of 2003, had a positive impact on theMalaysian economy. In terms of domestic demand,consumption and investment indicators were trendingupwards, supported by improving consumer andbusiness sentiment. Businesses had benefited fromthe measures implemented under the 2003 EconomicPackage. In addition, the various efforts by the Bankto strengthen the small and medium enterprises’(SMEs) financing infrastructure had created animportant conduit for the increase in financingprovided to the sector. At the time of the release ofthe Bank’s first Monetary Policy Statement (MPS) for2004 in February, it was highlighted that maintainingthe low interest rate environment was necessary tostrengthen the private sector-led expansion,particularly given the early stage of the recovery in

the investment cycle and the need foraccommodation during the process of fiscalconsolidation.

In the subsequent months, developments in the majorindustrial economies and regional countries confirmedthat the global economy had gained firmer traction inthe first quarter of 2004. However, possible factors fora moderation in global growth had also emerged. Thesustained increase in crude oil prices had the potentialto weaken growth in Malaysia’s major trading partners.At the same time, there was potential for slowergrowth in the People’s Republic of China (PR China),following measures by the authorities in that country

to prevent the economy from overheating. There werealso greater expectations, particularly in May, thatinterest rate increases in the United States (US) wereimminent. With the emerging threat of deflation in theUS in 2003, the Federal Reserve had reduced interestrates significantly. Meanwhile, domestic interest ratesdid not move as much, resulting in a substantialpositive interest rate differential in favour of Malaysia.This, together with the strong economic fundamentals,provided the flexibility for domestic interest rates to begoverned by domestic considerations, while beingconsistent with the exchange rate policy.

With stable conditions more entrenched and theunderlying fundamentals strengthening significantlyin the early part of the year, favourable conditionsprovided a window of opportunity for the Bank tointroduce a new interest rate framework in late April.Under the new interest rate framework, theOvernight Policy Rate (OPR) replaced the 3-monthintervention rate as the policy rate and thecorresponding overnight interbank rate became theoperating target of monetary policy. To reflect theunchanged stance of monetary policy, the OPR wasset at the prevailing overnight interbank rate of2.70%. The rationale and operational infrastructureof the new framework are discussed in the white boxon New Interest Rate Framework.

In May, it was evident that the domestic economy hadstrengthened substantially. The economy hadexpanded by 7.8% in the first quarter of 2004, with

Monetary and Fiscal Developments

63


New Interest Rate Framework

A significant development in 2004 was the implementation of the new interest rate framework on26 April 2004. The new framework involved the introduction of a new policy rate and improvementsto the conduct of monetary operations, as well as the removal of the ceiling on base lending rates(BLRs) and prescribed lending spreads. Banking institutions now set their BLRs based on theirrespective cost structures and business strategies. The changes were designed to enhance theeffectiveness of monetary policy by facilitating the transmission of movements in the policy rate toother market rates and ultimately to key macroeconomic variables. The new framework also serves asa catalyst for the efficient pricing of financial products and services by banking institutions. Thederegulation of pricing is a key initiative under the Financial Sector Masterplan (FSMP) to ensuregreater efficiency in the allocation and distribution of resources in the financial system.

The transition to the new interest rate framework was timely given the favourable macroeconomicfundamentals and the more developed financial infrastructure, which is supported by a strongbanking system as well as sound regulatory and supervisory frameworks. These factors have beenreinforced by on-going enhancements to the consumer protection framework.

Changes in Monetary Policy Implementation and CommunicationTo signal monetary policy more effectively and enhance the efficiency of the monetary transmissionmechanism, Bank Negara Malaysia adopted a policy rate that is closely linked to other interest ratesand has introduced enhancements to its monetary operating procedures. Under the new interest rateframework, the Overnight Policy Rate (OPR) replaced the 3-month intervention rate as the indicator ofmonetary policy stance. The OPR is effectively the target for the average overnight interbank rate(AOIR). In turn, the AOIR serves as the sole operating target for the Bank’s daily liquidity operations.The overnight rate was chosen as the policy rate due to its minimal expectations content and highdegree of controllability.

Liquidity operations conducted at maturities other than the overnight tenure are done withouttargeting any specific interest rate level, thereby allowing interbank rates for these maturities to bemarket determined. To reflect the unchanged stance of monetary policy at the time of theimplementation of the new framework, the OPR was set at the prevailing AOIR of 2.70%. Over theperiod 26 April – 31 December 2004, the AOIR traded within a narrow range of 2.65 – 2.74% andaveraged 2.70%.

In order to prevent excess volatility in the AOIR, the Bank has put in place an interest rate corridor andstanding facilities. Essentially, the market rate is allowed to move within a corridor of ± 25 basis pointsaround the OPR. The ceiling and floor rates of the corridor are the rates at which the Bank is willing tolend to or borrow from the market to alleviate residual overnight liquidity shortages or surpluses.

The Bank has begun to complement direct borrowing in the money market with repo-based openmarket operations in its liquidity management. The use of such open market operations had beenpreviously hindered by the insufficiency of suitable papers. This has been partially addressed with theintroduction of the Institutional Securities Custodian Programme (ISCAP) in late 2004. Through ISCAP,the Bank borrows securities, mainly Malaysian Government Securities (MGS), from major institutionalinvestors such as pension funds and insurance companies for its repo operations.

An important aspect of enhancing the monetary transmission mechanism under the new interest rateframework is the communication of monetary policy. The Bank’s stance has been made moretransparent with explicit policy and operating target rates and the announcement of monetary policydecisions through the Monetary Policy Statement (MPS). The structured and transparent approach tothe announcement of monetary policy decisions reduces uncertainty among market participants on the

64

Bank’s stance and policy direction. Any change to the OPR will be announced in the MPS. The MPS isissued at pre-determined quarterly intervals to coincide with the release of Malaysia’s quarterly GDP data.Should there be a change in the monetary policy stance, in the period between two scheduled dates, anadditional MPS would be issued.

The Impact of the New Interest Rate FrameworkThe introduction of the new interest rate framework involved changes to the system of implementingmonetary policy. The monetary policy stance, however, remained unchanged. The introduction of the newframework did not bring about a change in the cost of funds of banking institutions. As such, nosignificant variation was expected in the general level of interest rates.

Lending Rates and FinancingUnder the new framework, the maximum lending rates charged by banking institutions are no longersubject to the previous BLR formula and the maximum lending spread of 2.5 percentage points above theBLR has also been removed. Instead, the BLR of each banking institution is based on the institution’s owncost structure and lending strategy as well as the level of competition in the industry.

At the end of 2004, the average BLR of commercial banks was relatively stable at 5.98% per annum(end-2003: 6.00% per annum), with one banking institution having reduced its BLR. The averageBLR of finance companies remained unchanged at 6.90% per annum. Given the unchanged stanceof monetary policy, it was expected that most banking institutions would not vary their BLRs in theshort- to medium-term.

With the removal of the ceiling on lending rates, loans are increasingly priced according to the risk profileof borrowers or projects. The flexibility accorded to banking institutions in the pricing of spreads allowswider access to financing for borrowers who previously faced difficulty in obtaining funds. Already, severalbanking institutions have introduced new specialised lending packages for individuals and small businesses.

SMEs have continued to enjoy access to financing under the new interest rate framework, with increaseddemand for funds as reflected in higher loan applications in the second half-year. Loan approvals anddisbursements also rose in the second half-year. At the same time, the lending rates on loans to the SMEsector have, on average, remained competitive. In the second half-year, the average lending rate on newloans approved to SMEs by commercial banks was 6.37% per annum compared with 6.42% per annumfor the first half-year. In the business sector as a whole, the average lending rate on new loans approved inthe second half-year was 5.79% per annum compared with 5.89% per annum in the first half-year.

Graph 1Daily Weighted Average Overnight Interbank Rate26 April - 31 December 2004

2.40

Apr

May Jun Jul

Aug Sep

Oct

Nov

Dec

2.45

2.50

2.55

2.60

2.65

2.70

2.75

2.80

2.85

2.90

2.953.00

OPR =

Ceiling Rate =

Floor Rate =

Lending Facility

Deposit Facility

OPR + 25 bps

OPR - 25 bps

Daily weighted average overnightinterbank rate

65


For the consumer-related sectors, the average lending rates on new loans approved for the purchase ofresidential property and passenger cars, the latter by finance companies, were 3.27% per annum and6.74% per annum respectively in the second half-year compared with 3.58% per annum and 6.82% perannum respectively for the first half-year.

The Bank will continue to monitor lending rates charged by banking institutions. To ensure fair and justpricing, the Bank has undertaken several new initiatives to safeguard the interests of consumers. Thesemeasures are aimed at ensuring greater product transparency and disclosure, strengthening theinfrastructure for consumer redress as well as increasing the financial literacy of the public (SeeManagement of the Banking System in Chapter 5 for further details).

The prescribed lending rates have been maintained for financing allocated through the Bank-administered specialfunds for SMEs and the ceiling still applies on lending rates on housing loans extended to the low- and middle-income groups under the Lending Guidelines to Priority Sectors. In addition, lending rates on hire purchase loansremain subject to the Hire-Purchase Act 1967, while lending rates on credit card loans are subject to the maximuminterest rate of 18% per annum as prescribed in the Credit Card Guidelines issued by the Bank.

Deposit RatesIn the sequencing of interest rate liberalisation, a distinction was made between wholesale and retailtransactions as well as loan and deposit transactions. The gradual approach adopted aimed at facilitating asmooth transition while at the same time recognising the different levels of financial sophistication amongdifferent market participants, namely financial institutions, business enterprises and the general public.

The gradual approach ensures a smooth transition under the new interest rate framework, such that theintermediation process is not disrupted. Another important consideration is the fact that a large section ofthe population, particularly the middle to lower income groups and retirees, relies on savings in the form ofbank deposits. Minimum rates are thus prescribed for deposits of RM1 million and below with tenuresbetween 1 to 12 months. Notwithstanding the current prescribed deposit rates, the Bank has provided anenabling environment for banking institutions to broaden their product range to serve the growingsophistication of the range of savers with different risk-return profiles. In addition, the Bank has channelledefforts towards increasing the financial literacy of the general public.

further expansion in private investment andconsumption, as well as buoyant export growth. Theexternal sector had benefited from the globalelectronics up-cycle, high commodity prices andincreased tourist arrivals. However, this faster growthwas taking place in an environment of low inflation,with the CPI rising by an average of 1% in the firstfour months. The increase in crude oil prices wasassessed to have minimal impact on inflation given thecontrol of retail prices of petroleum products throughthe automatic pricing mechanism. In terms ofproduction capacity, the weighted average of capacityutilisation in the manufacturing sector remainedrelatively stable at 82% in the first quarter and therewas evidence of capacity expansion in sectorsexperiencing strong growth. Further, labourproductivity, as measured by real sales value ofproducts per employee in the manufacturing sector,rose by 9%, exceeding the 2.7% increase in real wageper employee. With these considerations, interest rates

could continue to remain low to support the growthmomentum in an environment of positive output gapstill prevailing in the economy. Thus, the OPR remainedunchanged at 2.70%.

By the time of the release of the second quarter GDPalong with the third MPS in August, global growth forthe first half-year had exceeded expectations. Duringthis period, the global monetary cycle entered atightening phase, engendered by the stronger-than-expected recovery cycle and higher commodity prices.Indicators, however, pointed to some moderation inglobal growth in the second half-year, but theconsensus was that the impact of high crude oilprices and rising interest rates would be modest. Inthe domestic economy, GDP expanded by 8.2% in thesecond quarter, with stronger household consumptionand private investment activity as the public sectorcontinued to consolidate. Growth for 2004 was nowexpected to surpass previous forecasts, with the

66

1 The new interest rate framework was implemented on 26 April2004. The OPR replaced the 3-month intervention rate as theindicator of monetary policy stance. To reflect the unchangedstance of monetary policy, the OPR was set at the prevailingaverage interbank overnight rate of 2.70%. See the white boxon New Interest Rate Framework, for details.

Table 2.1Monetary Policy Statements in 2004

The Monetary Policy Statement (MPS) which was introduced in August2003, was issued four times in 2004 to coincide with the release of thequarterly GDP data in February, May, August and November. Therespective MPS issued during the year stated the decision to leave thepolicy rate unchanged.

Policy Rate

3-monthIntervention Rate

Overnight PolicyRate (OPR)1

25 February 4.50%

26 May 2.70%

25 August 2.70%

30 November 2.70%

Date

strong first-half performance. CPI inflation remainedlow at 1.2% in the second quarter of 2004.Importantly, core inflation, reflecting price increasesdue to demand pressures, averaged less than 1% inthe same period. Over the period January to June,approvals for capital investment totalled RM7.2billion, paving the way for capacity expansion in theelectronics and electrical products sector, and insectors such as chemical and chemical products, andtransport equipment, where spare capacity haddeclined to low levels. Importantly, labour productivityin the manufacturing sector continued to outpace realwage growth. As the outlook for both growth andinflation remained favourable, the monetary policystance remained unchanged.

Towards the end of the year, indicators showed thatglobal economic activity had remained firm in the thirdquarter. However, expectations were for a slighttapering off in US economic expansion in the fourthquarter. In addition, the positive outlook for the USeconomy was dampened slightly by renewed concernsover the US current account deficit and the decliningstrength of capital inflows into the country. Theseconcerns also led to a sharp depreciation in the USdollar. Among regional countries, a more moderatepace of economic expansion was apparent, as exportgrowth eased, due largely to the gradual slowdown inthe global electronics cycle. Inflation trended upwardsin most regional countries due mainly to the highcrude oil prices, with some countries raising interestrates to contain inflationary pressures.

On the domestic front, a slightly slower but sustainedpace of growth was evident in the third quarter. In linewith the softening trend in the global electronics cycle,growth in the manufacturing sector moderatedsomewhat. Despite signs of moderating global growth,the near-term outlook for Malaysia remained favourable.The direct impact of higher crude oil prices was positivefor the economy in the short-term, contributing to thetrade surplus and to Government revenue.

In the last few months of the year, there wereheightened expectations that currencies in the Asianregion would be subject to realignments, followingspeculation of a revaluation of the Chinese yuan andthe continuing depreciation in the US dollar. Anincrease in net portfolio inflows into the domesticeconomy was registered from September, thoughthese inflows were manageable and had not causeddisequilibrating mispricing of asset prices nordistortions in resource allocation in both the financialand real sectors. There continued to be nofundamental pressures that warranted a review of theexchange rate policy (See Exchange RateDevelopments for a detailed discussion of the ringgitexchange rate). For the year as a whole, the Bank’sinternational reserves increased mainly due to tradeproceeds, and to a lesser extent, net capital inflows.The Bank’s monetary operations, including thesterilisation of these inflows, were intended to ensure alevel of interest rates consistent with domesticconditions. The cost of monetary policy operationscontinued to remain manageable during the year.

After averaging 1.5% in the third quarter, inflationedged up to 2.1% in October, reflecting mainlyhigher food prices, higher taxes for cigarette andtobacco as well as higher personal transportationcharges after the second increase of retail petrolprices in October, following the first increase in May.Nevertheless, on a historical basis, this inflation ratewas still relatively low. Core inflation remained at lessthan 1.5% in October and averaged less than 1% forthe first 10 months of 2004. Additionally, there wasno discernible evidence of a pass through from highercrude oil prices.

The fourth MPS for the year was released in lateNovember. The assessment was that there was littleevidence of demand-driven inflationary pressuresbuilding up in the medium-term, particularly giventhe moderation in the pace of growth expected in2005. Inflationary pressures would also be containedgiven the existence of adequate capacity, which waslikely to increase in the year ahead with sustained

67


private investment activity. The risk of stronginflationary pressures in the property market was alsolimited as the supply of residential units remainedample, with average prices and rentals having risenslowly. Meanwhile, growth in the broad moneymeasure, M3, had remained relatively stable, ataround 10% for most of 2004 and consistent withthe growth of nominal income. Preliminary forecastssuggested that the CPI was unlikely to breach 3% in2005. Monetary policy has the flexibility to respond tocontinue to support growth in 2005.

MONETARY DEVELOPMENTS IN 2004

Monetary developments in 2004 reflected the policy tosupport domestic economic activities. While somemoderation in economic growth occurred in thesecond half-year, monetary conditions remainedfavourable to support private sector activities.

Since the transition to the New Interest RateFramework, the OPR has been maintained at 2.70%. Inthe interbank money market, the overnight rateaveraged 2.70%, consistent with the OPR, and movedwithin a tight band of 2.65 – 2.74%.

With domestic interest rates unchanged, the interestrate differentials between domestic and US ratesnarrowed following the steady increase in US FederalFunds rates during the year. Notwithstanding thenarrowing interest rate differentials, the externalsector continued to inject liquidity into the system.These inflows reflected mainly long-term flows,including the repatriation of export earnings arisingfrom the strong trade performance. Inflows ofportfolio funds were also higher as internationalfund managers increased their exposure to Malaysia,following the continuous upward adjustments inratings and improved economic and earningsoutlook. Nonetheless, the larger capital inflows didnot create any significant destabilising conditions inthe domestic financial system. Bank Negara Malaysiacontinued to manage the excess liquidity to maintaininterest rates at the desired level.

The base lending rates (BLR) of banking institutionsremained steady given their relatively stable cost offunds structure. The BLR of commercial banksmoderated slightly to 5.98% per annum while the BLRof finance companies remained unchanged at 6.90%per annum. Five mergers between commercial banks

and their finance companies were effected during theyear, resulting in technical adjustments to their averagelending rates (ALR). With lower interest rates offered onnew loans, the ALR of commercial banks and financecompanies moderated to 5.98% per annum and 8.78%per annum respectively at end-2004 from 6.11% perannum and 9.11% per annum at end-2003.

While deposit rates were broadly unchanged from thelevels recorded at end-2003, depositors continued toenjoy positive real rates of return from their depositsamidst a low inflation environment. During the year,Bank Negara Malaysia created a new instrument, theMerdeka Savings Bond, to provide retirees with anadditional higher-yielding avenue for their savings. TheMerdeka Savings Bond, which was based on theIslamic principle of Bai’ Al-Inah, offered a profit marginof 5% per annum, which was higher than interestrates paid by the commercial banks for 12-month fixed

deposits. The bonds would be carried over in 2005with a total issuance of RM1.31 billion planned for2005 compared with RM1.94 billion issued in 2004.

The accommodative monetary conditions during theyear facilitated financing of private sector activity.Gross financing extended by the banking system andthe capital markets increased by 6.2% in 2004 (2003:9%). On a net basis, banking system loans and PDSoutstanding increased at an annual rate of 9% at end-2004 (end-2003: 10.3%).

Bank lending activity was robust in 2004 as reflected bya faster pace of growth in total loans outstanding of8.5% at end-2004 (end-2003: 4.8%). Stronger demand

Monetary conditions remained favourable to support privatesector activities.

MJ M J S N J M M J S N J M M J S N J M M J S N J M M J S N

%

Graph 2.1 Lending Rates: Commercial Banks and Finance Companies

5

6

7

8

9

10

11

12

ALR-FC ALR-CB BLR-CBBLR-FC

5.98

5.98

6.90

8.78

2000 2001 2002 2003 2004

68

for funds was also evident, with loan applicationsgrowing significantly by 20.1% compared to 4.8% in2003. Similarly, loan approvals were higher, amountingto RM173.6 billion, or an increase of 13.6%.

In line with the recovery in private investment, bankborrowings by the business sector strengthened afterthree years of decline in loans outstanding. In 2004,loans outstanding to businesses grew by an annualrate of 2.6% (end-2003: -2.4%). The growth in thedemand for bank loans was observed across mostbusiness sub-sectors, with total loan applications bybusinesses increasing at an annual rate of 20% in theyear (2003: -7.7%).

The annual growth rate of loan disbursements tobusinesses also expanded by 10.5%. Sectoral lendingdata showed that lending to the wholesale, retail,restaurants and hotel sector, predominantly SMEs,accounted for 25% of total business loandisbursements during the year, increasing from23.1% in 2003.

The confluence of stronger balance sheets, improvedprofitability and positive business sentiments placed

RM billion Annual growth

Graph 2.2 Private Sector Gross Financing through the Banking System and the Capital Market

5.8%11.9%

9.8%

9.0%6.2%

200

250

300

350

400

450

500

550

2000 2001 2002 2003 2004

Loans disbursed Gross PDS issuance Equity

Table 2.2Interest Rates and Liquidity

2001 2002 2003 2004

As at end-period (%)

3-month Intervention Rate 5.0 5.0 4.5 -Overnight policy rate (OPR) 1 - - - 2.70

Interbank ratesOvernight 2.76 2.71 2.72 2.691-month 2.97 2.99 2.99 2.77

Base lending rate (BLR)Commercial banks 6.39 6.39 6.00 5.98Finance companies 7.45 7.45 6.90 6.90

Average lending rate (ALR)Commercial banks 6.67 6.51 6.11 5.98Finance companies 10.24 9.75 9.11 8.78

Fixed deposit ratesCommercial banks3-month 3.21 3.20 3.00 3.0012-month 4.00 4.00 3.70 3.70Finance companies3-month 3.22 3.20 3.00 3.0012-month 4.01 4.00 3.68 3.70

Savings deposits ratesCommercial banks 2.28 2.12 1.86 1.58Finance companies 2.94 2.65 2.18 1.98

Average during the period (%)

Nominal interest rate differentialMalaysia – United States -0.49 1.31 1.66 1.16Malaysia – Singapore 1.31 2.23 2.27 1.93

As at end-period (RM billion)

Resource surplus (+) / gap (-) 67.4 76.2 106.0 133.4Adjusted resource surplus (+) / gap (-) 2 28.6 33.3 57.7 86.9

As at end-period (%)

Loan-deposit ratio 85.9 84.9 80.9 78.6Financing-deposit ratio 2 95.7 95.1 91.7 87.7

1 OPR replaced 3-month intervention rate as BNM’s policy rate from 26 April 2004.2 Adjusted to include holdings of Private Debt Securities.

69


large corporations in better positions for newinvestment activity. In this environment, the demandfor bank loans by large corporations rose during theyear with loan applications growing by 19.1%. Theamount of loans disbursed to large corporations alsogrew at an annual rate of 8.6% during the year.

In line with the pick up in private sector investment,almost half of the total funds raised in the PDSmarket were to finance new projects. The share ofPDS funds raised for new projects rose significantly to46.5% compared with 6.6% in 2003, mainly forpower generation and water supply services in theutilities sector and provision of highway infrastructurein the construction sector. This also reflected thegreater recourse of large corporations to the PDSmarket for long-term financing needs.

For the SMEs, the favourable macroeconomicconditions during the year increased their demand forfinancing. Banking institutions adopted a more

focused approach to SME lending with theestablishment of specific SME lending divisions toconcentrate on the promotion of loan packages tothis sector. The increased demand for funds by theSMEs, as reflected by the annual growth rate of loanapplications of 21.6%, was matched by loanapprovals, which rose by 21.9%. Outstanding loansof the SMEs grew at an annual rate of 7.7% (2003:10%), to account for 40.3% of total outstandingloans of the business sector (2003: 38.4%). Thedemand for funds by SMEs is expected to continue totrend upwards, with the sector emerging as animportant driver of growth in the economy.

Households’ willingness to spend improved during theyear, amidst rising consumer confidence, risingdisposable income and the positive monetaryenvironment. Given the positive sentiments andoutlook, household sector loans outstandingcontinued to grow strongly by 14.4% in the year(end-2003: 12.8%). At end-2004, the share of loans

Table 2.3Banking System1: Loan Indicators

During the year (RM billion) Annual growth (%)

2001 2002 2003 2004 2001 2002 2003 2004

TotalLoan applications 190.6 217.2 227.6 273.3 -8.7 14.0 4.8 20.1Loan approvals 125.6 137.6 152.8 173.6 -6.8 9.5 11.1 13.6Loan disbursements 373.5 411.6 441.6 488.2 3.5 10.2 7.3 10.6Loan repayments 365.4 402.7 430.4 461.6 5.3 10.2 6.9 7.2Change in loans outstanding2 16.1 19.8 21.6 40.2 3.9 4.6 4.8 8.5

BusinessesLoan applications n.a. 135.3 124.9 149.9 n.a. n.a. -7.7 20.0Loan approvals 63.5 68.5 77.3 84.9 -19.7 7.9 12.8 9.8Loan disbursements 270.4 282.0 303.4 335.3 0.1 4.3 7.6 10.5Loan repayments 276.8 275.8 299.5 319.8 2.8 -0.4 8.6 6.8Change in loans outstanding2 -5.6 -3.1 -5.2 5.6 -2.5 -1.4 -2.4 2.6

SMEsLoan applications n.a. 48.7 44.5 54.1 n.a. n.a. -8.6 21.6Loan approvals n.a. 30.7 25.9 31.6 n.a. n.a. -15.5 21.9Loan disbursements n.a. 49.5 87.1 100.4 n.a. n.a. 76.0 15.3Change in loans outstanding2 4.0 ... 7.4 6.3 5.7 … 10.0 7.7

Large corporationsLoan applications n.a. 86.6 80.4 95.7 n.a. n.a. -7.2 19.1Loan approvals n.a. 37.8 51.4 53.3 n.a. n.a. 35.8 3.8Loan disbursements n.a. 232.5 216.3 234.9 n.a. n.a. -7.0 8.6Change in loans outstanding2 -9.6 -3.1 -12.7 -0.7 -6.1 -2.1 -8.8 -0.5

HouseholdsLoan applications n.a. 81.9 98.4 120.2 n.a. n.a. 20.2 22.1Loan approvals 59.2 66.9 72.0 86.8 11.5 13.0 7.6 20.5Loan disbursements 87.0 105.1 114.4 130.3 14.5 20.8 8.9 13.8Loan repayments 71.5 83.7 94.1 107.0 9.9 17.0 12.4 13.7Change in loans outstanding2 23.1 26.2 26.2 33.3 14.8 14.7 12.8 14.4

1 Includes Islamic banks.2 The annual growth is for loans outstanding at end-period.n.a. Not available... Negligible

70

outstanding to the household sector relative to totalloans outstanding edged up further to 51.4%, from48.8% in the previous year. The increase in lending

Table 2.4Banking System1: Loans Outstanding

Annual change% share oftotal loans2003 2004

at end-

RM billion 2004

Banking system loans, of whichextended to:

Business enterprises -5.2 5.6 42.6Individuals 26.2 33.3 51.4

By sector:Agriculture, hunting, forestry and

fishing -1.1 0.4 2.1Mining and quarrying 0.1 -0.1 0.2Manufacturing -0.2 2.0 12.3Electricity, gas and water supply -1.7 0.1 1.0Wholesale and retail trade,

restaurants and hotels 2.1 4.3 8.5Broad property sector 14.6 19.8 40.6

Construction -2.7 1.3 6.0Purchase of residential property 16.2 16.4 25.9Purchase of non–residential

property 1.1 2.3 6.1Real estate ... -0.2 2.7

Transport, storage andcommunication 1.0 -0.8 1.9

Finance, insurance and businessservices -0.6 1.7 6.0

Consumption credit 8.9 14.6 20.2of which:

Credit cards 1.6 2.0 2.8Purchase of passenger cars 6.5 10.6 14.0

Purchase of securities -1.8 -0.4 3.8Purchase of transport vehicles 0.3 -0.8 0.5Community, social and personal

services -0.7 0.1 1.0Others 0.9 -0.7 2.0

Total loans outstanding2 21.6 40.2 100.0

1 Includes Islamic banks.2 Includes loans sold to Cagamas.... NegligibleNote: Numbers may not add–up due to rounding.

was also driven by supply-side factors, particularlyactive competition between banking institutions toenlarge their market share in retail lending.Household loan applications and loan approvals alsogrew during the year.

In terms of household sectoral loan growth, lendingfor the purchase of residential properties continued tobe the main driver of household loans, with loansoutstanding accounting for 49.3% of total householdloans at end-2004. The high loan growth for thepurchase of residential properties was especiallyevident in the first-half year, buoyed by the sustainedbuying interest for landed residential propertiesobserved since the second half of 2003, and by theimminent expiry of property-related incentivesannounced in the Economic Package of May 2003.

The growth in the demand for loans for the purchaseof passenger cars was significant during the year. Theannouncement by the Ministry of Finance on theframework for the levy of import and excise duties, inline with Malaysia’s commitment to the ASEAN FreeTrade Agreement (AFTA), removed the uncertaintyregarding prices and spurred consumers who hadheld back on purchases in 2003 and the first quarterof 2004. In addition, the release of new models byboth domestic and foreign carmakers also heightenedconsumer interest. As a result, the demand for loansfor passenger cars exhibited a strong uptrend sincethe second quarter. The annual growth of loandisbursements for the purchase of passenger cars roseby 18.8% in 2004 (2003: -4.9%).

In tandem with the improved economic performanceand growth in private consumption, credit card usage

Graph 2.3 Loan Disbursements by Sector: Value and Share

Wholesale & retailtrade, restaurants

and hotels(RM70 b; 16%)

Construction(RM27 b; 6%)

Finance,insurance and

business services(RM37 b; 8%)

Residentialproperty

(RM36 b; 8%)

Passenger cars(RM25 b; 6%)

Credit cards (RM31 b; 7%)

Others (RM106 b; 24%)

Manufacturing(RM110 b; 25%)

Wholesale & retailtrade, restaurants

and hotels(RM84 b; 17%)

Construction(RM30 b; 6%)

Finance,insurance and

business services(RM37 b; 7%)

Residential property

(RM39 b; 8%)

Passenger cars(RM29 b; 6%)

Credit cards (RM36 b; 7%)

Others (RM112 b; 23%)

Manufacturing (RM122 b; 25%)

2003 2004

71


increased in 2004. The number and value of creditcard transactions by Malaysian cardholders grew by12.3% and 18.8% respectively in 2004 (2003: 15.5%and 16% respectively). With the bulk of thetransactions mainly for the purchases of goods andservices, the share of cash advances to total creditcard transactions continued to decline to 7.5% (2003:8.2%). At end-2004, the NPL ratio for credit cardloans remained low at 4.7%, while credit card loansoutstanding accounted for 2.8% of total bankingsystem loans outstanding.

The financial position of the household sector remainedsound. During the year, indicators of household financialconditions showed that households were in a position tomanage their debts. The gross NPL ratio for thehousehold sector was lower at 7.2% in 2004 (2003:

7.9%). Similarly, the gross NPL ratio for residentialproperties was also lower at 8.5% at end-2004 (end-2003: 8.7%). In addition, the number of bad chequeoffenders declined by 6.5% from a year ago.

Following robust economic activity, money supplyexpanded during the year. Broad money, M3, grew byan annual rate of 12.4%, driven mainly by higher netinflows of RM82.2 billion, mostly in the form of foreigndirect investment, repatriation of export earnings andportfolio inflows. In addition, higher private sectorfinancing activity also contributed RM30.3 billion tothe increase in money supply during the year. Incontrast, fiscal consolidation by the Government had arestraining effect on money supply (-RM11.8 billion).

M1, an indicator of transaction activity, grew by11.9% in the year (2003: 14.6%) as the demand fortransaction balances by households and businesses,

0

50

100

150

200

250

300

2000 2001 2002 2003 20040

2

4

6

8

10

Total household loans

Share of household NPLs to total loans (RHS)

Share of household NPLs to household loans (RHS)

RM billion %

Graph 2.4 Banking System: Loans to Households (at end-period)

RM billion %

Graph 2.5 Aggregate Value of Credit Card Transactions

Cash advances Purchases

% of cash advances to total transactions (RHS)

5

10

15

20

25

30

35

40

2000 2001 2002 2003 2004-

2

4

6

8

10

12

14

Dec

01

Mar

02

Jun

02

Sep

02

Dec

02

Mar

03

Jun

03

Sep

03

Dec

03

Mar

04

Jun

04

Sep

04

Dec

04

Annual growth (%)

Graph 2.6 Monetary Aggregates

11.9 (M1)12.4 (M3)

0

5

10

15

20

25

M1

M3

Table 2.5Broad Money, M3

Change (RM billion)

2003 2004

M3 48.5 68.0

Currency 2.2 2.6Demand deposits 11.2 10.1Broad quasi money 35.1 55.3

Fixed deposits 17.1 24.7Savings deposits 5.6 6.1NIDs 2.0 8.2Repos 8.0 13.3FX deposits 2.4 3.0

Determinants of M3Net claims on Government 12.9 -11.8Claims on private sector 31.3 30.3

Loans 21.5 39.8Securities 9.8 -9.5

Net external operations 20.7 82.2Bank Negara Malaysia 27.1 75.0Banking system -6.4 7.2

Other influences -16.5 -32.7

72

Table 2.6Movements of the Ringgit

RM to one unit of foreign currency1 Annual change (%) Change (%)

1997 1998 2003 20042003 2004

End-June ’97- 2 Sep.’98 -

End-June2 Sept. 23 End-Dec.End-Dec. 2004 End-Dec. 2004

SDR 3.5030 5.1177 5.6264 5.8818 -8.5 -4.3 -40.4 -13.0US dollar 2.5235 3.8000 3.8000 3.8000 0.0 0.0 -33.6 0.0S$ 1.7647 2.1998 2.2342 2.3258 -2.0 -3.9 -24.1 -5.4100 yen 2.2088 2.7742 3.5546 3.7026 -9.9 -4.0 -40.3 -25.1Pound sterling 4.1989 6.3708 6.7678 7.3169 -10.0 -7.5 -42.6 -12.9Swiss franc 1.7368 2.6450 3.0632 3.3517 -10.6 -8.6 -48.2 -21.1Euro4 – – 4.7783 5.1729 -16.7 -7.6 – –100 Thai baht 9.7470 9.3713 9.5947 9.7636 -8.2 -1.7 -0.2 -4.0100 Indonesian rupiah 0.1038 0.0354 0.0449 0.0408 -5.3 9.8 154.1 -13.3100 Korean won 0.2842 0.2827 0.3180 0.3671 0.6 -13.4 -22.6 -23.0100 Philippine peso 9.5878 8.8302 6.8431 6.7706 4.4 1.1 41.6 30.4

1 US dollar rates are the average of buying and selling rates at noon in the Kuala Lumpur Interbank Foreign Exchange Market.Rates for foreign currencies other than US dollar are cross rates derived from rates of these currencies against the US dollar and the RM/US dollar.

2 End-June 1997 represents pre-Asian Financial Crisis levels.3 Ringgit was fixed at US$1 = RM3.8000 on 2 September 1998.4 The euro began to be traded on 4 January 1999 (EUR 1= RM4.5050).

3

2

4

5

6

7

8

2

3

4

5

6

7

8(Weekly average) RM/foreign currency RM/foreign currency

STG

EuroUS$

100 Yen

Ringgit fixed at US$1=RM3.80

Graph 2.7 Exchange Rate of the Malaysian Ringgit against Major Currencies

M J S D M J S D M J S D M J S D M J S D M J S D M J S D

1999 2000 2001 2002 2003 20041998

and provided strong support for the British currency.Concurrently, the yen strengthened on signs ofJapanese economic recovery.

The dollar weakness, however, was interspersed byrallies, noticeably in the second and third quarter ofthe year. The dollar was aided to some extent by thefive Federal Funds Rate increases in the second half ofthe year, which shifted the yield gaps more favourablyto the US, while the weaker performances ofGermany and France put some dampener on theeuro. Meanwhile, the strength of the yen wastempered by fears of official intervention. FromSeptember, the dollar, however, began to depreciatemarkedly as the foreign exchange market noted thatthe US was following a policy of a weak US dollar tomanage the country’s external imbalances.

including cash and demand deposits, increasedfurther in line with higher household spending andretail activity. The growth of M1 was notably higher inthe first half-year, while exhibiting some moderationin the second half-year, reflecting the trend registeredin the real economy.

EXCHANGE RATE DEVELOPMENTS

The fixed exchange rate regime of US$1 to RM3.80has been maintained since 2 September 1998. Thefixed parity of the ringgit continues to providesignificant benefits to the Malaysian economy byproviding predictability and relative stability for tradeand investment activities.

In 2004, developments in the ringgit were drivenmainly by the depreciation of the US dollar and theconsequent realignments of major and regionalcurrencies against the US currency. Due to the dollarweakness, the euro, pound sterling and yenappreciated by 8.3%, 8.1% and 4.2% respectively. Thedollar reached an unprecedented low of $1.3619against the euro on 30 December 2004, a 14-year lowof $1.9455 against the pound sterling on 21 December2004 and a 5-year low of 102.105 against the yen on6 December 2004.

For the year as a whole, the dollar depreciated mainlyon concerns over the widening current account andbudget deficits in the US. Among the major currencies,the primary adjustment was in the euro, as investorsacquired more euro assets. Against the British pound,sustained United Kingdom (UK) rate increases over theyear widened the yield differentials in favour of the UK

73


Under the pegged exchange rate regime, the ringgitdepreciated in lockstep with the US dollar against theeuro by 7.6%, against the pound sterling by 7.5%and against the yen by 4%. The ringgit depreciated in

for a prolonged period, or the current regime is nolonger consistent with macroeconomic fundamentalsdue to major structural changes in the internationalor regional financial system, there would be norevisions to the peg.

FISCAL POLICY AND OPERATIONS

Fiscal policy in 2004 was aimed at improving thefinancial position of the Government, as well asfacilitating the private sector in enhancing its role asthe main engine of growth. This objective was in linewith the overall macroeconomic strategy to stimulateand accelerate domestic sources of growth.Recognising the necessity for policy flexibility in timesof uncertainty, the strong commitment of theGovernment to fiscal consolidation policy wasevidenced by the narrowing of the fiscal deficit to4.3% of GDP in 2004, from 5.3% in 2003 and a highof 5.7% of GDP in 2000. The steady and gradualreduction in the fiscal deficit was necessary tominimise any negative impact on economic growth.

D F A J A O D F A J A O D F A J A O D F A J A O D

Index (Dec. 2000=100) Index(End-month)

Graph 2.8 Exchange Rate of the Malaysian Ringgit against Selected Regional Currencies

Note : An increase in the index represents an appreciation of the currency against the ringgit.

80

90

100

110

120

130

80

90

100

110

120

130

Peso

S$

Rupiah

Won

Baht

2001 2002 2003 2004

Fiscal consolidation remains on track. Budgetary operationscontinued to focus on providing an enabling environment forprivate sector activity and enhancing the economy’s long-termgrowth potential.

the range of 1.7 – 13.4% against most regionalcurrencies, with the notable exceptions being anappreciation against the Philippine peso andIndonesian rupiah, by 1.1% and 9.8% respectively.Regional exchange rate appreciations were mainlyinfluenced by the dollar weakness, strong exportgrowth and foreign equity inflows, which outweighedconcerns over higher oil prices and the possibility ofPR China’s policy tightening impacting the economymore strongly than expected.

The weakness of the US dollar underpinned somemarket expectations that the ringgit peg policy wouldbe reviewed and in particular in the light ofconsiderable speculation that PR China is consideringa more flexible regime. Speculation on the possibletiming and nature of adjustments to the ringgit peghad ebbed and flowed along with the intensity of thedebate pertaining to the Chinese yuan, andmovement of the US dollar against other majorcurrencies notably the yen and the euro. Despitethese bouts of speculation, the pegged exchange ratecontinued to function effectively. Bank NegaraMalaysia has consistently maintained that unless theringgit is expected to become significantly misaligned

Fiscal consolidation was achieved through bothenhancing revenue and improving spending efficiencyand effectiveness. Revenue enhancing measuresincluded intensifying efforts through stricterenforcement, tax audits and anti-smuggling measuresto minimise tax leakages and evasions.

In terms of expenditure management, concertedefforts were made to reduce wastage, optimise theuse of available resources and enhance the economicvalue of physical assets through productive use andmaintenance. While development expenditure waslower, emphasis was given to expenditure whichensured longer-term productivity and competitivenessof the economy. Special attention was placed onsmaller projects involved in agriculture and ruraldevelopment to spread the benefits of growth andbalanced economic development.

In order to ensure that social projects and ruraldevelopment remain a priority, the Governmentincreased the development expenditure ceiling underthe Eighth Malaysia Plan (2001-05) by RM10 billion toRM170 billion. This was necessary as a significantportion of the original development allocation was

74

utilised during 2001-03, following pro-growth strategiesand stabilisation measures taken to mitigate recessionarypressures. During this period, the implementation ofsocial and economic projects, especially in the educationand health sectors, were brought forward andaccelerated. Consequently, the higher ceiling reducedthe impact of a sharp fall in development spending onthe economy and thereby ensured that the growthmomentum was not disrupted.

At the same time, policies were targeted at ensuring amore efficient public sector. Among the improvementsmade to the public sector delivery system were thesimplification of existing rules and regulations as wellas work processes. In addition, a management reviewand revamp exercise among government-linkedcompanies were undertaken to drive a performancedriven culture and creation of shareholders’ value.These measures helped promote investor confidenceand resulted in a more favourable businessenvironment for the economy.

The Government also offered additional tax breaks,incentives and financing facilities for the private sectorto augment its role in spearheading growth. Thesemeasures included raising the threshold of 20%corporate tax rate for SMEs to RM500,000 (fromRM100,000), establishment of a one-stop agency topromote the services sector, tax incentives forcompanies providing cold chain facilities and servicesfor perishable agricultural produce, additionalincentives for hotels and tourism projects,enhancement of the size of the Micro-Credit Schemeby RM1 billion, allowing deductions on entertainmentexpenses incurred in sales promotions, reducing orabolishing import duties of selected goods such ascomputer batteries, wooden and plastic goods, as wellas reducing and abolishing export duties on severalagricultural produce and commodities. These strategiescontributed to creating an environment where privatesector activity gained momentum to contributetowards higher economic growth. The private sector’scontribution to economic growth rose to 6.2percentage points in 2004 (2003: 3.1%; 2002: 0.2%).

Given the ample liquidity situation in the economy, thebulk of the financing requirements of the Governmentwere raised from domestic sources without crowdingout the private sector. New issues of governmentsecurities with maturities of 3, 5 and 7 years wereraised at average yield rates ranging between3.14 – 4.55% and for those with maturities of 10 and15 years the average yield rates ranging between5.09 – 5.73%. The Government continued to ensure

prudence in its recourse to external borrowing tominimise exposure to external risks. During the year,recourse to external borrowings was limited to thedrawdown of project loans committed earlier.

Reflecting the strong commitment to fiscalconsolidation policy, the Government was able tocontain its debt at a manageable level. As at end-2004,the debt level was 48.4% of GDP, of which externaldebt accounted for 16% of total debt.

Consolidated Public SectorThe consolidated public sector’s financial positionimproved in 2004. Although revenue remainedfavourable, higher operating expenditure resulted in alower public sector current surplus position of 14.8%of GDP. However, lower development expenditure byboth the general government and the non-financialpublic enterprises (NFPEs) led to a smaller overall publicsector deficit of RM1.5 billion or 0.3% of GDP.

Federal Government FinanceReflecting its fiscal consolidation stance, the FederalGovernment registered a lower fiscal deficit ofRM19.4 billion or 4.3% of GDP in 2004 (2003: -5.3%of GDP). The improved fiscal position was due tobetter revenue collection and lower disbursements ofdevelopment expenditure.

Federal Government revenue increased by 7.3% toRM99.4 billion or 22.2% of GDP in 2004. The better

Table 2.7Consolidated Public Sector Finance

2003 2004e 2005f

RM million

Revenue1 107,055 116,663 115,760Operating expenditure 84,163 102,727 100,091Current surplus of NFPEs2 55,651 52,295 52,892

Current balance 78,543 66,231 68,560% of GDP 19.9 14.8 14.6

Net development expenditure3 83,315 67,772 63,523General government4 43,155 33,638 33,175NFPEs 40,160 34,135 30,348

Overall balance -4,772 -1,541 5,037% of GDP -1.2 -0.3 1.1

1 Excludes transfers within general government.2 Refers to 34 NFPEs in 2003 and 2004; 36 NFPEs in 2002.3 Adjusted for transfers and net lending within public sector.4 Comprises Federal Government, state governments, statutory bodies

and local governments.e Estimatef ForecastNote: Numbers may not add up due to rounding.

Source: Ministry of Finance, state governments and non-financial publicenterprises (NFPEs)

75


revenue performance was due to higher collectionsfrom both direct and indirect taxes. Non-tax revenuereceipts remained favourable.

The higher tax revenue collection reflected theimproved economic performance as well as the high oilprices in the previous year. The higher collections werealso the result of several measures implemented toenhance tax collection and minimise tax leakages andevasions. These measures included rationalising the taxstructure, intensifying collection efforts through stricterenforcement, tax audits and anti-smuggling measures.Income tax receipts increased sharply, accounting for alarger share of total revenue (46%). Of significance,receipts from the petroleum income tax registered asignificant growth of 35.6% following higher oil pricesthat averaged at US$30.30 per barrel in 2003 (the taxbase for 2004) and an increased production of crudeoil. Higher personal income and business earningscontributed to increases in personal and corporateincome taxes, despite tax concessions implemented inthe 2004 Budget to reduce the tax burden ofindividuals and SMEs. These tax concessions includedan increase in child relief from RM800 to RM1,000 for

children below 18 years and RM3,200 to RM4,000 forchildren above 18 years that are studying at localinstitutions of higher learning and an increase in thechargeable income threshold from RM100,000 toRM500,000 to be eligible for a lower corporate taxrate of 20% for SMEs.

Graph 2.9

p Preliminary

RM billion

Debt as% of GDP

Domestic debt

External debt

Overall balance (RHS)

Overall balance as% of GDP

Revenue

Federal Government Debt

Gross development expenditure

Federal Government Finance

0

20

40

60

80

100

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004p

-4.3%

-80

-60

-40

-20

0

20

40

60

80

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004p

-8

-6

-4

-2

0

2

4

6

8

Current accountOperating expenditure

Table 2.8Federal Government Finance

2003 2004p2005

Budget

RM million

Revenue 92,608 99,397 99,1021

Operating expenditure 75,224 91,298 89,141

Current account 17,384 8,099 9,961% of GDP 4.4 1.8 2.1

Net development expenditure 38,312 27,518 27,589Gross development

expenditure 39,353 28,864 28,304Less: Loan recoveries 1,041 1,346 715

Overall balance -20,928 -19,419 -17,628% of GDP -5.3 -4.3 -3.8

Sources of financing:

Net domestic borrowing 23,250 25,650 –Gross borrowing 41,850 45,850 –Less: Repayment 18,600 20,200 –

Net foreign borrowing -3,709 120 –Gross borrowing 3,144 1,136 –Less: Repayment 6,853 1,015 –

Special receipts 0 516 –

Realisable assets2 andadjustments +1,387 -6,867 –

Total 20,928 19,419 –

1 Includes net revenue gains.2 Includes changes in Government’s Trust Fund balances.

A positive (+) sign indicates a drawdown in the accumulated realisable assets.p Preliminary

Source: Ministry of Finance

Table 2.9Federal Government Revenue

2003 2004p 2003 2004p

RM million Annual change (%)

Tax revenue 64,891 72,050 -2.9 11.0% of GDP 16.5 16.1

Direct taxes 43,016 48,703 -3.0 13.2Companies 23,990 24,388 -2.6 1.7Petroleum 8,466 11,479 10.9 35.6Individuals 7,984 8,977 -19.3 12.4Stamp duties 2,008 2,381 15.9 18.6Others 568 1,478 26.0 160.0

Indirect taxes 21,875 23,348 -2.8 6.7Export duties 1,156 1,600 43.9 38.3Import duties 3,919 3,874 6.9 -1.1Excise duties 5,031 6,427 6.0 27.7Sales tax 7,965 6,816 -13.8 -14.4Service tax 2,038 2,349 -7.9 15.3Others 1,766 2,281 -3.8 29.2

Non-tax revenue 27,717 27,347 66.4 -1.3

Total revenue 92,608 99,397 10.9 7.3% of GDP 23.5 22.2

p Preliminary


76

Table 2.10Federal Government Operating Expenditure byObject

2003 2004p 2003 2004p

RM million % share

Emolument 21,721 23,779 28.9 26.0Supplies and services 13,968 16,633 18.6 18.2Asset acquisition 1,409 1,764 1.9 1.9Debt service charges 10,546 10,920 14.0 12.0Pensions and gratuities 5,870 6,060 7.8 6.6Subsidies 2,679 5,796 3.6 6.3Other grants and transfers1 16,323 21,264 21.7 23.3Other expenditure2 2,706 5,083 3.6 5.6

Total 75,224 91,298 100.0 100.0% of GDP 19.1 20.4

1 Includes grants and transfers to state governments as well as public agenciesand enterprises.

2 Includes refunds, grants to international organisations, insurance claims andgratuities and others.

p PreliminaryNote: Numbers may not add up due to rounding.


The sharp increase in oil prices resulted in significantlyhigher subsidies, largely for petroleum product. Underthe Automatic Pricing Mechanism, the Government isrequired to pay subsidies to oil companies in the eventthat the duty exemption provided is not adequate tocompensate for the loss of revenue arising fromincreases in oil prices but maintaining stable retail pricesof petroleum products. To mitigate some of the impactof further increases in oil prices on the payment ofsubsidy, the Government raised the retail prices ofpetroleum products by two sen with effect from 1 Mayand by five sen with effect from 1 October 2004. Higherexpenditure for supplies and services was mainly formaintenance and repairs, rent and payments forprofessional services to upgrade the quality andefficiency of Government services.

Companies 24.5%

Petroleum 11.5%

Service tax 2.4%

Others 2.2%Export duties

1.6%

Sales tax 6.9%

Excise duties 6.5%

Import duties 3.9%

Individuals 9.0%

Others 4.0%

Non-tax revenue 27.5%

Indirect taxes 23.5%

Total Revenue: RM99.4 billion

Graph 2.10Composition of Federal Government Revenue, 2004 (% share)

Direct taxes49.0%

Stronger domestic demand conditions during the yearresulted in higher collections of most major sources ofindirect taxes. In particular, the continued high demandfor motor vehicles combined with measuresannounced in the 2004 Budget contributed to highercollections of excise duties. Among the new measureswere higher excise duties on cigarettes and tobaccoproducts and measures to curb smuggling activitiesthrough the use of special stickers or banderole andsecurity ink. During the year, there was a rationalisationof the tariff structure on motor vehicles in line withMalaysia’s commitment to the ASEAN Free Trade Area(AFTA) agreement. With effect from 1 January 2004,under the new tariff structure, import duties for thecompletely knocked down (CKD) ASEAN passengercars were reduced to 25% (from 42-80%), whilehigher excise duties of 60-100% were imposed (from25-65%). Nevertheless, import duties collection wasonly slightly affected. Sales tax collections were alsolower due to the higher tax exemption given forpetroleum products. Under the Automatic PriceMechanism, a higher tax exemption would be providedto oil companies to minimise the impact of higher oilprices on the retail prices of petroleum products.

In line with the Federal Government’s fiscalconsolidation stance, the growth in total grossexpenditure of the Federal Government was lower at4.9% in 2004 (2003: 9.5%). The overall thrust ofGovernment expenditure was to continue to provide asupportive environment for the private sector and toenhance the productive capacity as well as the quality oflife for all Malaysians. The substantially higher subsidyfor petroleum products was the major reason foroperating expenditure increasing by 21.4% in 2004.

77


Higher payments were made in the form of grantsand transfers to government agencies, statutorybodies and state governments for development andmaintenance purposes. There was a sharp increase inthe payment of refunds on excess taxes collectedprior to 2004. The total wage bill, which was thelargest component of operating expenditure (26%),rose by 9.5%. During the year, the Governmentenhanced incentives for the teaching profession witha 20% pay rise for teachers with excellentperformance and also increased salaries for the armedforces. Debt service charges were slightly higher,reflecting the higher level of financing taken tofinance the Federal Government deficit. Nevertheless,the share of debt servicing expenditure to operatingexpenditure declined to 12% (2003: 14%).

Gross development expenditure declinedsubstantially by 26.7% to RM28.9 billion during theyear (2003: RM39.4 billion). As greater emphasis wasplaced on agriculture and rural development andpublic utilities projects, higher outlays were recordedfor these sectors.

In terms of sectoral distribution, the economicservices sector became the largest component of totaldevelopment expenditure with its share increasing to41%. Higher outlays on agriculture and ruraldevelopment and public utilities, such as rural roads,water and electricity programmes, reflected theGovernment’s efforts to further modernise the

agriculture sector and to enhance the standards ofliving in rural areas. Outlays for the transportationsub-sector remained favourable, in line with theGovernment’s objective of promoting a more efficientand effective integrated transportation network.Funding was channelled mainly towards constructingand upgrading roads and bridges, as well asimproving and increasing the capacity of the railroadsystem, ports and airports. Spending under the tradeand industry sub-sector was focussed on industrialresearch and technological development, promotionof SMEs and tourism development projects.

In the social services sector, priority continued to begiven to the education sub-sector. However,expenditure on the education sub-sector wassignificantly lower, as most projects in this sectorunder the Eighth Malaysia Plan had already beencompleted. As part of earlier fiscal stimulusprogrammes, implementation of single sessionschools and the construction of computerlaboratories, polytechnics and universities wereaccelerated during 2001-03. Expenditure for healthpurposes also remained high to provide better qualityhealthcare and medical services. The bulk of thisexpenditure was for the construction and upgradingof hospitals and the provision of rural health services.The Government also continued to undertake housingprojects for public sector personnel and the lowerincome groups. Spending for defence and internalsecurity purposes was mainly for the modernisationprogramme of the armed forces and police. Higherexpenditure for general administration was largely forInformation and Communications Technology (ICT)development as well as for the acquisition of fixturesand fittings for new Government buildings.

Total gross borrowings of the Federal Governmentin 2004 amounted to RM47 billion (RM45 billion in2003). Almost the entire financing requirement (98%of total) was sourced domestically as there was excessliquidity in the banking system. The regular issuanceof government securities helped to further developthe ringgit bond market by ensuring a more reflectivebenchmark yield curve.

During the year, fourteen issues of MalaysianGovernment Securities (MGS) totalling RM41.8 billionwere issued through open tenders and privateplacements. Out of this total, the Governmentreopened nine MGS issues to increase their respectiveissue sizes, which served to enhance liquidity in thebond market. The Government also made three newissuances of the Government Investment Issues (GIIs)

Table 2.11Federal Government Development Expenditureby Sector

2003 2004p 2003 2004p

RM million % share

Defence and security 6,029 4,133 15.3 14.3

Economic services 13,793 11,851 35.0 41.1Agriculture and rural

development 1,620 2,881 4.1 10.0Trade and industry 3,456 1,201 8.8 4.2Transport 7,354 6,630 18.7 23.0Public utilities 920 945 2.3 3.3Others 443 193 1.1 0.6

Social services 17,707 10,260 45.0 35.5Education 10,193 4,316 25.9 15.0Health 2,681 2,352 6.8 8.1Housing 1,928 1,593 4.9 5.5Others 2,905 1,999 7.4 6.9

General administration 1,824 2,620 4.7 9.1

Total 39,353 28,864 100.0 100.0% of GDP 10.0 6.4

p PreliminaryNote: Numbers may not add up due to rounding.


78

Domestic debt

Government Investment Issues 4.2%

Treasury Bills 2.0%

External debt accounted for only 16.0% of

the total Federal Government

debt

Housing LoansFund6.6%

Graph 2.11Federal Government Debt as at end-2004p (% share)

p Preliminary

Malaysian Government

Securities 71.2%

RM216.6 billionRM182.0 billionRM34.6 billion

Total debt : Domestic : External :

amounting to RM4.1 billion. By holders, the providentand pension funds and insurance companiescontinued to be the major holders. The bankinginstitutions raised their holdings of MGS to 15% oftotal outstanding MGS as at end-2004. The holders ofGIIs were mainly banking institutions (74% of totalamount outstanding).

In line with the Government’s prudent debtmanagement policy, the Government limited its accessto external borrowing to the drawdown on existing

project loans. A total of RM1.1 billion were disbursedfrom both bilateral and multilateral sources. During theyear, the Government novated two loans togovernment agencies. Hence, the external debt level ofthe Federal Government was lower at 7.7% of GDP atend-2004, compared to 9.5% at end-2003.

Total outstanding debt of the Federal Governmentincreased to RM216.6 billion due mainly to higherdomestic debt. In terms of the ratio of FederalGovernment outstanding debt to GDP, it was slightlyhigher at 48.4% as at end-2004 (end-2003: 47.9%).Despite the higher debt levels, the Government’s debtservicing capacity continued to remain within prudentand manageable levels. Debt servicing as a proportionof operating expenditure and revenue remained low at12% and 11% respectively in 2004. The external debtservice ratio of the Federal Government was also lowat 0.5% in 2004, given the low external debt exposureof 16% of total outstanding debt in 2004 (2003:19.8%). Active debt management also minimisedbunching of repayments, with about 60% of theexternal debt at end-2004 having remaining maturityof more than three years. The bulk of the loans (about95%) were raised at fixed interest rates, which reducedexposure to any interest rates fluctuations.

State GovernmentsBased on preliminary estimates, the consolidatedfinancial position of the state governments recordedan overall deficit of 0.3% of GDP. The slightdeterioration was due to higher operating anddevelopment expenditures despite the strongerrevenue performance. The overall deficit wasfinanced by the drawdown of accumulated financialassets of the state governments and loans from theFederal Government.

Table 2.12Federal Government Debt

Annual change As at end-

2003 2004p2004p

Nominal value in RM million

Domestic debt 22,803 30,487 181,970Treasury Bills 0 0 4,320Government Investment Issues 2,000 2,100 9,100Malaysian Government Securities 21,250 23,550 154,350Treasury Housing Loans Fund 2,628 4,837 14,200Market loans -3,075 0 0

External debt 1,001 -2,631 34,654Market loans -485 -3,259 24,930Project loans 1,486 629 9,724

Total 23,804 27,856 216,624% of GDP 48.4

p Preliminary


Table 2.13Holdings of Federal Government Domestic Debt

2003 2004p 2003 2004p

Nominal value in% share

RM million

Treasury Bills 4,320 4,320 100.0 100.0Insurance companies 67 17 1.6 0.4Banking institutions 3,266 481 75.6 11.1Others 986 3,822 22.8 88.5

Government InvestmentIssues 7,000 9,100 100.0 100.0Insurance companies 390 597 5.6 6.6Banking institutions 6,611 6,755 94.4 74.2Others 0 1,748 0.0 19.2

Malaysian GovernmentSecurities 130,800 154,350 100.0 100.0Social security and insurance

institutions 99,162 109,362 75.8 70.9of which:Employees Provident Fund 84,678 91,402 64.7 59.2Insurance companies 11,598 14,700 8.9 9.5

Banking institutions 19,008 23,427 14.5 15.2Others 12,630 21,560 9.7 14.0

p Preliminary

Note: Numbers may not add up due to rounding.

79


During the year, higher revenue was derived fromboth state and Federal sources. The states’ ownsources of revenue were enhanced mainly by higherreceipts of royalties on petroleum and gas, as well asbetter returns from investments. As in previous years,receipts from Federal sources were channelled toassist the states in providing infrastructure andessential amenities to improve the quality of life ofthe people.

The increase in operating and developmentexpenditures of state governments reflected effortsundertaken in improving public amenities and services.The higher operating expenditure was mainly due tohigher emoluments and payments for supplies andservices. A major portion of the rise in developmentexpenditure was directed towards agricultural and ruraldevelopment, expansion and upgrading of publicutilities and housing development.

Non-Financial Public Enterprises (NFPEs)Based on preliminary estimates, the consolidatedfinancial position of the 34 NFPEs continued to recordan overall surplus. The consolidated revenue of theNFPEs rose by 4.2% to RM162.3 billion, as a result ofhigher earnings from the oil and gas-related sector,telecommunications and utilities, manufacturing and

services sectors. The better revenue performance wasattributable to higher economic activity and higherprices of crude oil and gas. To a lesser extent,extraordinary gains from sales of assets alsocontributed to an increase in revenue. Nevertheless, asmaller current account surplus of 11.7% of GDP wasrecorded due to the higher current expenditure. Theincrease in current expenditure resulted from thehigher costs arising from business expansion andhigher prices of raw materials and inputs, especiallyfor crude oil.

Development expenditure was sustained at a highlevel. Capital expenditure was channelled towards theexpansion of capacity, both at home and abroad. Thebulk of the development projects were undertaken bythe larger NFPEs, such as Petroliam Nasional Berhad(PETRONAS), Tenaga Nasional Berhad (TNB) andTelekom Malaysia Berhad (TMB). During the year,PETRONAS continued its domestic and internationalinvestments in both upstream and downstreamactivities. Acquisition of equity shares in the EgyptianLiquefied Natural Gas (LNG) Project and the DragonLNG terminal in Milford Haven, UK were significantinroads made by PETRONAS to enter into the AtlanticBasin LNG market. The year also saw a formalisationof Pars LNG, a joint venture with the National IranianOil Company and TOTAL S.A, in which PETRONASholds a 20% equity that established PETRONAS’supply position in the Middle East. Other projectsundertaken included the on-going enhancement ofLNG and petroleum tanker fleet, and construction ofthe remaining government buildings, quarters,commercial buildings and infrastructure works.Meanwhile, international projects undertaken byPETRONAS included exploration and productionprojects in Egypt, Vietnam, Sudan, Iran and Indonesia.

Table 2.15Consolidated NFPEs Finance1

2002 2003 2004e

RM million

Revenue 126,562 155,867 162,337Current expenditure 80,951 99,429 109,980

Current balance 45,611 56,438 52,358% of GDP 12.6 14.3 11.7

Development expenditure2 32,297 40,160 34,135

Overall balance 13,314 16,278 18,223% of GDP 3.7 4.1 4.1

1 Refers to 34 NFPEs in 2003 and 2004; 36 NFPEs in 2002.2 Includes grants from the Federal Government.e EstimateNote: Number may not add up due to rounding.

Source: Ministry of Finance and non-financial public enterprises

Table 2.14Consolidated State Government Finance

2003 2004e2005

Budget

RM million

Revenue 8,541 10,085 10,183State sources 7,217 8,277 7,448Federal grants

and transfers 1,324 1,808 2,735

Operating expenditure 5,307 6,796 6,787

Current surplus 3,234 3,289 3,396% of GDP 0.8 0.7 0.7

Net development expenditure 3,817 4,739 4,852

Gross developmentexpenditure 4,362 4,856 4,969

Less: Loan recoveries 545 117 117

Overall balance -583 -1,451 -1,456% of GDP -0.1 -0.3 -0.3

Sources of financing:

Net Federal loans 1,033 440 385Realisable assets1 -450 +1,011 +1,071

Total 583 1,451 1,456

1 A positive (+) sign indicates a drawdown in the accumulated realisableassets.

e EstimateNote: Numbers may not add up due to rounding.

Source: State governments

80

A large portion of capital expenditure by TNB wasconcentrated on the expansion and upgrading ofpower generation, transmission and distributionnetworks which were needed to ensure adequateand reliable supply of electricity in meeting theincreasing demand from commercial, industrial andresidential users. Projects undertaken included theRehabilitation of Tuanku Jaafar Power Station Phase I

and II in Port Dickson, Yan Power Station, GelugorCombined Cycles Power Plant and Power QualityMonitoring System. TMB continued with itsupgrading and expanding of telecommunicationinfrastructure and services, which included thesubmarine cable network connecting the Asia Pacificregion, lease line of Internet protocol and the virtualprivate network for Government.

82-87 The International Economic Environment87-93 Malaysian Economy in 200593-94 Monetary Policy in 200594-95 Fiscal Policy in 200595-97 Financial Sector Policy in 2005

98-100 White Box: Liberalisation of the Foreign Exchange Administration Rules

Outlook and Policy

82

THE INTERNATIONAL ECONOMIC ENVIRONMENT

Developments in 2004In 2004, the global economy expanded at its strongestpace of 4.8% since 1984, led by the United States (US),reinforced by strong growth in the Asian region and revivalof growth in Japan and Europe. Above-trend growth in thefirst half-year reflected the strong rebound from the lowerbase of 2003 due to economic uncertainties related to thewar in Iraq and the outbreak of Severe Acute RespiratorySyndrome (SARS) in Asia. In the second half-year, despitethe dampening effects of sharply higher oil prices and thereversal of interest rate trends, the growth momentum wasmaintained, reflecting sustained strong consumer spendingand the revival in investments. Overall, the global economyexhibited greater resilience to energy shocks.

Robust global growth was reflected in significantimprovements in international trade and financialflows. World trade grew by 8.8% in 2004, supportedby the global electronics up-cycle, higher commodity

prices and rising import demand, notably in the US andPeople’s Republic of China (PR China). In the Asianregion, these developments in tandem with strongerdomestic demand contributed to further expansion inintra-regional trade. In the financial markets, majorequity market indices rose strongly, buoyed byimproved investor optimism amidst higher corporateearnings. In the foreign exchange markets, growingconcerns on the large and widening US currentaccount imbalances, and the sustainability of capitalinflows to finance the deficit led to the depreciation ofthe US dollar against the other key currencies.

Among the major industrial countries, the USregistered above-trend growth in 2004. Growth wasbroad based, with sustained expansion in consumptionand strength in investment expenditure supplementedby inventory rebuilding. Household spending remainedstrong throughout the year. Despite the tapering off intax cuts, increases in household wealth supported byrising house prices and historically low mortgage rates

Outlook and Policy

Table 3.1World Economy: Key Economic Indicators

Real GDP Growth (%) Inflation (%)

2003 2004e 2005f 2003 2004e 2005f

World Growth 3.9 4.8 4.0 – – –World Trade 5.1 8.8 5.8 – – –

Major Industrial Countries 2.0 3.4 2.6 1.8 2.0 2.1

United States 3.0 4.4 3.5 2.3 2.7 3.0

Japan 1.4 2.6 1.3 -0.3 0.0 -0.1

Euro area 0.5 2.0 1.5 2.1 2.2 1.9

United Kingdom1 2.2 3.1 2.1 1.4 1.3 1.9

East Asia 6.4 7.5 6.3 ~ 6.5 1.8 3.4 2.9 ~ 3.2

Asian NIEs 3.0 5.8 4.1 ~ 4.2 1.2 2.3 2.3 ~ 2.4

Korea 3.1 4.7 4.0 3.6 3.6 3.0

Chinese Taipei 3.3 5.7 4.2 -0.3 1.6 1.9

Singapore 1.4 8.4 3.0 ~ 5.0 0.5 1.7 1.0 ~ 2.0

Hong Kong China2 3.2 7.5 4.5 -2.6 -0.4 1.5

The People’s Republic of China 9.3 9.5 8.5 1.2 3.9 3.0

ASEAN3 4.8 6.3 5.0 ~ 5.9 3.8 4.5 3.9 ~ 5.1

Malaysia 5.3 7.1 5.0 ~ 6.0 1.2 1.4 2.5

Thailand 6.9 6.1 5.3 ~ 6.3 1.8 2.8 2.5 ~ 3.5

Indonesia 4.9 5.1 5.0 ~ 6.0 6.6 6.1 5.0 ~ 7.0

Philippines 4.7 6.1 5.3 ~ 6.3 3.1 5.9 5.0 ~ 6.0

1 Inflation refers to the Retail Price Index excluding mortgage interest.2 Refers to composite prices.3 Includes Singapore.e Estimatef Forecast

Source: International Monetary Fund, Datastream, OECD Economic Outlook, National Sources

83

Outlook and Policy

continued to provide significant stimulus toconsumption expenditure. The pick-up in labourmarkets, particularly evident in the second half-year,led to improved household incomes and consumerconfidence. Meanwhile, strong investment expenditurewas supported by healthy corporate balance sheetsand rising demand, and further reinforced by aninvestment tax incentive. The stronger-than-expectedsurge in demand in 2004 after a period of leaninventories in the preceding year led to a significantrebuilding of inventories, contributing to growth. Thestrong demand amidst higher oil prices, however, ledto further deterioration in the current account deficit.

Economic recovery in Japan was better-than-expectedin the first half-year, underpinned by export growthand mild improvement in private consumption. Growthin the euro area improved mainly due to strongerdemand for exports but remained below-trend. In theUnited Kingdom (UK), strength in both consumptionand investment spending continued to sustain growth.

In the Asian region (excluding Japan), growthaccelerated to 7.5% in 2004, the strongest since 2001.PR China led the expansion with strong growth in fixedinvestment, robust consumption and exports. Overall,the strong growth in the region was driven mainly by acombination of rapid increase in exports as well ascontinued strength in domestic demand. The pick-up indomestic demand emanated from higher privateinvestment activities and rising consumer spending inmost parts of the region. Export growth acceleratedto 26.2% (2003: 19.7%), despite some easingtowards the second half-year. Intra-regional trade,measured by exports to regional countries as ashare of total exports of the region, rose further toexceed 40% (2000: 36%).

Growth in consumption was supported by lowinterest rates, continued growth in consumerfinance and higher incomes from strongeremployment conditions. In Korea, however,consumer spending continued to contract since thesecond quarter of 2003, with householdsconsolidating from the unwinding of the credit cardboom in 2002. Fixed investment grew at lowdouble-digit rates for most of the regionaleconomies, driven by the revival in demand for

technology goods, progress in corporaterestructuring, improved corporate profitability andample liquidity in the financial systems.

Stronger external payments positions weresupported by sustained current account surplusesand strong private capital inflows, which haveresulted in a continued build-up of foreign reserves.The improved macroeconomic fundamentals andstronger banking sectors led to sovereign ratingsupgrade in several countries in the region.

Prospects for 2005Going forward, the outlook for 2005 remainsfavourable. World output and world trade areprojected to expand at a steady pace of 4% and5.8% respectively in 2005. The pace of slowdownin the US and PR China is expected to be modest,on the basis that adjustments of the imbalances inthese economies would be gradual. The scenarioassumes that the US dollar weakness would be

Global growth would be sustained at a steady pace in 2005. The paceof slowdown in the United States and PR China is expected to bemodest with gradual adjustment in the current account imbalances.Monetary conditions are expected to remain supportive of growth.

orderly and that the US fiscal deficit narrows, albeitmoderately. In addition, as oil prices recede from itspeak in October 2004, inflationary pressures areexpected to remain manageable, providingflexibility for gradual increases in interest rates inthe US to a neutral level. Monetary conditions are,therefore, expected to remain supportive ofgrowth. Meanwhile, PR China is expected tomanage some softening of the economy.

Industrial CountriesIn 2005, growth in the US economy is expected to benear-potential, with real GDP expanding by 3.5%. Whilethe stimulus arising from wealth effects of higher houseprices and mortgage refinancing would taper off, higherincomes through continued job creation and lowerunemployment would lend support to consumptionspending. On the corporate front, prospects are forcontinued growth in investment expenditure, albeit at amore moderate pace, stemming from diminishing excesscapacity, favourable corporate financial positions andincentives under recent legislation to encourage profitrepatriation for domestic investment. Meanwhile, the USfiscal deficit is expected to narrow modestly. Moderatedomestic demand is expected to reduce the currentaccount deficit, amidst a weaker US dollar.

84

In Japan, the expected lower growth in 2005 reflects to alarge extent the slowdown in external demand. Capitalexpenditure would be affected by the lower exportdemand for capital goods, particularly as measures tomoderate China’s investment boom take effect.

In the euro area, the recovery is uneven, with finaldomestic demand likely to grow more strongly in Franceand Spain, but weaker in Germany and Italy. In Germany,growth is expected to be dampened by sluggish growthin household income amidst ongoing labour marketadjustments and some increase in savings by householdsin response to social security reforms. The strongappreciation of the euro would also impact the largerexporting countries, such as Germany and France wherenon-European Union (EU) exports account for about 40%

of total exports. However, some improvement ininvestment spending is expected due to the effects ofongoing corporate balance sheet restructuring, which haslagged behind the US and Japan.

In the UK, real GDP growth in 2005 is expected tomoderate to 2.1%, as household consumptiongrowth trends to a more sustainable pace inresponse to previous interest rate increases and lessfavourable wealth effects from the housing market.The labour market is still close to full employment,

sustained by private sector hiring. Investmentexpenditure would continue at a more modestpace, supported by the declining excess capacity.Although the housing market has been slowingsteadily thus far, a sharp correction in house priceswould remain a concern.

While global growth could be sustained at a steadypace in 2005, several risks could adversely affect theoutlook. Inflation could rise more than expected,resulting in higher interest rates globally. In thefinancial markets, a disorderly realignment of themajor currencies could dampen trade andinvestments. As a supportive engine of global growth,a significantly slower growth in China would lowergrowth prospects in the rest of Asia.

East Asian EconomiesWith the external environment and domestic demandprojected to remain favourable, growth in the East Asianregion is expected to expand at a reasonably high rate of6.3 – 6.5%. The economic impact of the tsunami disasteris estimated to be minimal, with short-term impact on thetourism and fishery industries in the affected countries.Among the regional countries, China will remain thedriver of growth. In the other Asian economies, growthwill vary across countries, depending on their exposure tothe downturn in the global electronics cycle.

In 2005, growth in the US economy is expected to be near-potential. Economic expansion would be sustained byimproving labour market conditions and the strong financialposition of the corporate sector.

PR China

Annual change (%)

Korea

Hong Kong China

Chinese Taipei

Singapore

e Estimatef Forecast

Thailand

Philippines

Indonesia

Malaysia

2005f2004

Graph 3.2Regional Countries: Real GDP Growth

9.5

4.0

4.5

4.25.7

7.5e

4.7e

8.4

6.1

5.1

7.1

6.1

3.0~5.0

5.0~6.0

5.0~6.0

5.3~6.3

5.3~6.3

8.5

0.0 2.0 4.0 6.0 8.0 10.0

2005f2004e

Graph 3.1 Major Industrial Countries: Real GDP Growth (2004-2005)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Annual change (%)

e Estimate f Forecast

4.4

2.6

2.0

3.1

3.5

1.31.5

2.1

US Japan Euro area UK

85

Outlook and Policy

In the external sector, the global electronics industry isconsolidating from its cyclical peak in mid-2004. Unlikethe previous cycles, where both demand and supplycontracted simultaneously (in 2001), the current down-cycle is characterised by some inventory accumulationdue to overproduction in the first half of 2004. Thus,the current down-cycle is expected to be modest, giventhat world demand continues to hold up and theinventory levels are still relatively low.

On the domestic front in the East Asian region,favourable fundamentals amid continued strong overallgrowth and progress in economic restructuring wouldcontinue to support growth in domestic spending.Consumption will be sustained by rising disposableincome and increases in employment. Another key

The East Asian region is expected to expand at a reasonably highrate. The current electronics down-cycle is expected to be modestgiven that world demand continues to hold up and the inventorylevels are still relatively low compared with the 2001 period. In thedomestic sector, favourable economic fundamentals and progressin restructuring efforts are expected to support domestic demand.

contributing factor is the rising young age groups in thelabour force in an increasingly urbanised environmentwith higher propensity to consume. Private demandwould also benefit from the accommodative monetarystance. While interest rates have been rising in somecountries, the rise has been gradual and from historicallows. Domestic demand is also likely to remain resilient,given increasing contribution of intra-regional trade, thebulk of which is for final consumption within the Asianregion. Meanwhile, progress in corporate restructuring,improved corporate profitability and ample liquidity areexpected to underpin the rise in investment. The fiscalstance of consolidation remains on track, with newmeasures to increase tax revenues, reform publicenterprises and reduce fuel subsidies.

Promotion of new growth areas in various countries hasalso been effective in diversifying sources of growth andenhancing resilience. The broadening of the economicbase to cover the promotion of SMEs, agro-business andservices industries has contributed to enhancing growth.

The Asian Newly Industrialised Economies (NIEs) asa group is expected to register a growth of 4.1 – 4.2%,sustained by intra-regional trade and domestic demand.

PR China is still expected to lead the region’s growthby registering real GDP growth of 8.5% in 2005, above

the earlier target of 7%. Continued high growth ratesin investment and credit in 2004 raised the concern ofoverheating and longer-term sustainability of growth.However, policy measures taken to address the concernin 2004 have led to some realignments of growth infixed investment and credit expansion.

In Korea, real GDP is projected to increase by 4% in2005. Private consumption is expected to turn aroundafter two consecutive years of negative growth with theGovernment’s introduction of a 10 trillion won (US$10billion) fiscal stimulus package, aimed at supportinggrowth in 2005 and creating 400,000 jobs. Investmentin the construction sector is projected to slow down.Export performance would, however, be affected by thedownturn in the global electronics industry.

Supported by the strong economic link with mainlandChina, Hong Kong China is expected to grow by 4.5% in2005. The close economic relationship between HongKong and the mainland as well as the expectation of aRenminbi revaluation has encouraged a continued inflowof funds. The strong inflow and ample liquidity haveallowed the commercial lending rates to remain low,notwithstanding the increase in Hong Kong MonetaryAuthorities (HKMA)’s overnight discount rates whichfollows US interest rate trends very closely. In ChineseTaipei, growth is expected to moderate to 4.2%,following slower exports after a strong expansion in 2004.

Growth is expected to range between 3 – 5% inSingapore, depending on the performance of theelectronics sector. However, its increasing diversificationinto biomedical as well as financial and educationservices would cushion the impact of the electronicscycle. Furthermore, the improvement in theunemployment situation and higher asset prices wouldprovide some support for domestic consumption.

The ASEAN economies as a group is expected to grow at5 – 5.9% in 2005. In Thailand, real GDP growth isexpected at around 5.3 – 6.3%. Elections andinfrastructure spending during the year would provideadded support to domestic demand. Real GDP growth inthe Philippines is projected to range between 5.3 – 6.3%.

86

The fiscal gap is projected to narrow further in 2005following the introduction of tax reform measures.Growth in Indonesia is expected to be 5 – 6%, thefastest pace in nine years, with private consumption asthe primary source of growth. The outlook for investmentis also improving, with recovery already apparent in thesecond half of 2004 and likely to gather strength.

On the global inflation front, price increases areforecast to rise gradually, stemming mainly from thepass-through effects of high commodity prices and thenarrowing output gap in some countries. The inflationpass-through effects in some economies may accelerateas producer price indices have risen faster thanconsumer price indices for some time, while decliningcorporate profit margins have eroded the capacity toabsorb higher costs of production. Nonetheless, the risein inflation is expected to be gradual as labourproductivity continues to exceed real wage growth.

In 2005, inflationary pressures are expected to trendupwards in the regional countries except in Korea. In HongKong China, deflationary pressures have begun to ease,while in Indonesia, price pressures are expected to increasein view of the Government’s plan to remove fuel subsidies.In Korea, however, inflation is projected to moderate,reflecting a stabilisation in oil prices and domestic wagegrowth as well as continued lacklustre domestic demandand the continued strengthening of the won.

Interest Rates and Exchange RatesIn 2004, monetary policy in the major industrialcountries remained accommodative. In view of robusteconomic growth and a mild upturn in inflation, severalcentral banks began raising interest rates from low levelstowards a more neutral stance.

In the US, after keeping official interest rates stable in thefirst half-year, strong domestic demand and some supplyside factors (higher energy prices) prompted the USFederal Reserve Board (Fed) to start raising interest ratesin June 2004, marking the first increase in four years. Thismove signalled the Fed’s intent to return monetary policy toa more neutral stance at a measured pace. Interest rateswere increased in six consecutive Fed meetings, by 25 basispoints each, bringing the Federal funds rate to 2.50% byearly-2005. Meanwhile, in the UK, in view of the continuedstrength in the housing market and rapid consumerborrowing, the Bank of England (BOE) raised its baselending rate twice in 2004, by 25 basis points each inFebruary and August, to 4.75%.

In the euro zone, despite some increase in inflation duemainly to higher oil prices in 2004, the European

Central Bank (ECB) maintained its benchmark reporate at 2% throughout the course of the year to supportdomestic demand and fragile growth outlook in theeuro area. Throughout 2004, with official short-terminterest rates (uncollateralised overnight call rate) inJapan at around zero percent, the Bank of Japan (BOJ)continued to use quantitative easing measures,introduced four years ago, to inject liquidity into thebanking system in order to counter deflationarypressures. As at end-2004, the quantitative easingtarget for current account balances of the commercialbanks and financial institutions held at the BOJ stoodbetween 30 – 35 trillion yen.

During the second half-year, to contain risinginflationary pressures emanating from higher globaloil prices and rising food prices, several regionaleconomies such as Thailand, Chinese Taipei and PRChina raised their interest rates. Korea, on the otherhand, reduced interest rates twice to supportdomestic demand.

In 2005, the timing and magnitude of monetary policyactions would depend on country-specific factors,including the strength of economic growth,inflationary expectations, movements in exchange ratesand the performance of the financial markets.

In the foreign exchange markets, the US dollarcontinued to depreciate against all major currencies in2004, extending its decline which began in early2002. Measured on a trade-weighted basis1, thedollar has declined by about 17% from its peak inMarch 2002 to end-December 2004. While the

United Kingdom (Base lending rate)

United States (Fed funds rate)

Euro area (Repo rate)

Japan (Overnight rate)

2.00

4.75

2.50

0.0

Graph 3.3 Major Industrial Countries: Official Interest Rates

Rate, %

0

1

2

3

4

5

6

7

200120001999 2002 2003 2004 2005

1 US Federal Reserve Board’s broad nominal index.

87

Outlook and Policy

cumulative depreciation has been most prominent againstmajor currencies, such as the euro (36%), sterling (24%)and the yen (23%), of significance is that the dollar hasrecently begun to depreciate against several Asiancurrencies in the last quarter of 2004. On a cumulativebasis since March 2002,the dollar has depreciated byabout 21% against the Korean won and about 10%against both the Singapore dollar and Taiwan dollar.Against the backdrop of a weaker dollar, the euroappreciated in 2004 and ended the year at a record highof E1=US$1.3538, while several Asian currencies alsoappreciated against the US dollar at end-2004.

A combination of factors contributed to the dollar’sdecline. Underlying the depreciating trend has been thepressure from structural problems in the US, namely awidening and large current account deficit and to alesser extent, the fiscal deficit. The relatively orderlypattern of dollar depreciation has been related to trends

0.80

1.00

1.20

1.40

1.60

1.80

2.00

euro, sterling yen

Graph 3.4 Movement of the US Dollar against Major Currencies

1999 2000 2001 2002 2003 2004 2005100

105

110

115

120

125

130

135

140

US$/£

US$/euro

¥/US$

In 2005, the movement of the dollar against othermajor currencies is expected to be influenced by anumber of factors. These include global assetreallocation among the major currencies, the path ofadjustment in global imbalances, investors’ perceptionon growth and interest rate differentials and theperformance of equity and bond markets. In addition,country-specific issues that relate to inflationarytrends and geo-political risk premiums could alsoaffect sentiments on the major currencies.

MALAYSIAN ECONOMY IN 2005

The prospects for the Malaysian economy in 2005remain sound. Real GDP is expected to expand by5 – 6%. The sustained global growth, the modestdownturn in the global semiconductor industry aswell as relatively favourable prices for primarycommodities are expected to provide support to

Real GDP is expected to expand by 5 – 6% in 2005. The catalyst togrowth would originate from the private sector, as theGovernment remains committed to optimising expenditure.Monetary policy remains supportive of the further expansion inprivate sector activities.

in the financing of the current account deficit. Since2002, large official flows namely from the Asian region,have become an important source of financing for thecurrent account deficit, in contrast to 2000 whenforeign direct investment flows were more significantdue to the technology related boom in the US. Onbalance, conditions exist for a further weakening dollar.The dollar is still, however, expected to receive somelonger-term support given its status as a vehicle currencyfor trade and international financial transactions.

export growth. While the global electronics industry isconsolidating after reaching a peak in mid-2004, thecyclical downturn is forecast to be modest in view ofthe strong Asian demand, the rapid inventoryadjustments and relatively low inventory levels. Currentindications point to an expected upturn in the globalelectronics cycle in the second half-year. In thedomestic economy, the private sector would remain asthe main driver of growth, as the Government remainscommitted to optimising expenditure in order tostrengthen the fiscal position. With the core inflationprojected to remain low in 2005 (1.8%), monetarypolicy is able to remain supportive of the furtherexpansion in private sector activities.

Domestic DemandAll demand components, except public investment, areexpected to register positive growth in 2005. Inparticular, private sector expenditure is projected tosustain a strong expansion of 8.7% (11.1% in 2004).Both household consumption and business outlays areprojected to remain resilient, thereby cushioning someof the effects of lower public investment spendingarising from the Federal Government’s gradual fiscalconsolidation programme. Public consumption isexpected to increase moderately mainly on account ofhigher expenditure for supplies and services.

88

place the necessary infrastructure and providingboth fiscal and non-fiscal incentives as well asfinancing facilities. The improvement in the publicsector’s delivery system and the lower cost of capitalwill contribute to further enhancing the investmentclimate, which in turn will promote new FDIs andreinvestment to support domestic investment.

The manufacturing sector, which accounts for abouta third of total private sector investment, is projectedto record a strong positive growth for the thirdconsecutive year. Capital expenditure for projectsalready committed to would extend into 2005. Inperiods of favourable business operating conditions,manufacturers are expected to continue to replacetheir old or obsolete machinery and equipment toimprove their efficiency and enhance flexibility tomeet changing demand.

The strongest growth in capital spending is expectedin the services sector, particularly in the utilities andtelecommunications sub-sectors. Capital expenditurein the utilities sub-sector is expected to be largelyconcentrated on the ongoing development of a coalfired power plant and water projects. In the

Private consumption is expected to increase by8.5%. Stable labour market conditions, a supportivecredit environment and high commodity priceswould continue to provide support to consumptionexpenditure. Therefore, given the prospects forrelatively strong income growth, privateconsumption expenditure would remain a significantsource of stimulus for GDP growth in 2005. In

telecommunications sub-sector, capital spending isexpected to be channelled towards the integration,enhancement and upgrading of the efficiency andcapacity of cellular networks. The upgrading of theexisting infrastructure would allow the cellularoperators to migrate to more advanced technologies,particularly third generation (3G) roaming. Significantefforts are being undertaken not only to develop newapplications for these standards but also to ensure theolder wireless application protocol (WAP)-based andmultimedia messaging services are integrated into theimproved technologies. In addition to higherexpenditure in the telecommunications sector, ITspending is also expected to increase as a result ofefforts by financial institutions and businessenterprises to improve their operating efficiencythrough the adoption of faster and moresophisticated business applications.

Private sector activity would again drive domestic demand in2005 as the Government continues to pursue a policy ofgradual fiscal consolidation. Private consumption would besupported by sustained income growth and an accommodativecredit environment, while private investment outlays wouldprovide additional capacities in an environment of strongdemand conditions.

Table 3.2Real GDP by Expenditure (1987=100)

2004p 2005f

Annual change (%)

Domestic Demand1 7.3 4.3Private sector expenditure 11.1 8.7

Consumption 10.1 8.5Investment 15.8 9.6

Public sector expenditure 1.0 -4.0Consumption 6.6 4.5Investment -3.5 -11.6

Net exports of goods and services -22.3 43.1Exports 15.6 8.1Imports 19.8 5.6

Gross Domestic Product 7.1 5.0 ~ 6.01 Excluding stocks.p Preliminaryf Forecast


addition to the current favourable economicconditions, long-term factors also are positive forsustained consumption growth. Malaysia presentlyhas one of the lowest private consumption-to-GDPratios (45.4%) in the world as well as low levels ofhousehold indebtedness by international standards.As a result, the scope for sustained growth in privateconsumption remains high.

Private investment spending is also expected toremain resilient. The projected increase of 9.6% isbased on the assessment of higher capital outlays inall sectors except construction. Forward-lookingindicators based on demand and growth of newindustries suggest a continued upward trend inprivate investment activities. The Government hasprovided the enabling environment for the privatesector to invest in new areas of growth by putting in

89

Outlook and Policy

With the discovery of new oil fields in 2003 and2004, capital outlays in the oil and gas sector areprojected to be higher, driven by exploration anddevelopment activities.

largely on account of higher spending on suppliesand services.

Sectoral OutlookOn the supply side, growth would be supported byexpansion in all sectors, except construction. Followingthe strong output expansion in 2004, the manufacturingsector is expected to grow at a moderate pace of 4.5%in 2005, in tandem with developments in the globalsemiconductor industry. The services sector wouldremain firm supported by consumption and tourismactivities as well as strong expansion in thetelecommunication, finance and business servicesactivities. The primary commodity sector would continueto benefit from higher production of crude palm oil,rubber, natural gas and crude oil, as well as increasingcontribution from other miscellaneous agriculture,mainly food-related activities. Meanwhile, theconstruction sector is expected to remain weak due to adecline in activities in the civil engineering segment.

In the manufacturing sector, strong externaldemand for chemical and rubber products as well assustained growth in the output of domestic-orientedindustries, led by the transport equipment and

Table 3.3Contribution of Demand Components to RealGDP Growth

2004p 2005f

% point ofcontribution

Domestic Demand1 6.6 3.9Private sector expenditure 6.2 5.1

Consumption 4.7 4.1Investment 1.5 1.0

Public sector expenditure 0.3 -1.3Consumption 1.0 0.7Investment -0.6 -1.9

Change in stocks 2.9 -2.3

Net exports of goods and services -2.4 3.4Exports 17.0 9.6Imports 19.5 6.1

Gross Domestic Product 7.1 5.0 ~ 6.0

Note: Figures may not necessarily add up due to rounding.1 Excluding stocks.p Preliminaryf Forecast


Growth would be supported by expansion in the manufacturing,services and commodity sectors. The diversified base of themanufacturing sector would provide support to moderate theimpact of the ongoing consolidation in the electronics industry.

Meanwhile, ongoing mechanisation and automationof food production methods would continue tosupport outlays in the agriculture sector. In theconstruction sector, capital expenditure would besustained in the residential segment.

In 2005, public sector expenditure is expected todecline by 4% due to the Federal Government’sfiscal consolidation programme. Publicinvestment is estimated to register a decline of11.6%. While Federal Government developmentexpenditure will be lower, spending will bereprioritised to focus on smaller-sized projects withlower costs, including projects to revitalise theagriculture sector and higher spending oneducation and training; health; and housing. Thiswould benefit a larger section of the population,especially the lower income group, therebyensuring a more balanced distribution of thebenefits of development among the differentsegments of society. Public consumption isexpected to increase, albeit moderately by 4.5%,

Table 3.4Real GDP by Sector (1987=100)

2004p 2005f

Annual change (%)

Agriculture 5.0 3.3

Mining 4.1 5.0

Manufacturing 9.8 4.5

Construction -1.9 -1.0

Services 6.7 5.7

Real GDP 7.1 5.0 ~ 6.0

p Preliminaryf Forecast

Source: Department of Statistics, MalaysiaBank Negara Malaysia

fabricated metal industries, would provide support forgrowth in the sector. The diversified base wouldmoderate the impact of the ongoing consolidation inthe electronics industry.

In the electronics industry, the latest assessment isthat the global semiconductor down-cycle would bemodest, with the impact mainly felt in the first half of

90

2005. Forward-looking indicators in the US includingnew orders, unfilled orders and the inventory-to-shipment ratio for electronics support the view of amodest downturn. Taking cognisance of the increasein inventories of electronics arising from some over-production in the first half of 2004, manufacturershave responded early to rationalise and reduce theirinventories. However, the speed in inventoryadjustment varies across the segments. The personalcomputer (PC)-related segment is positioned toresume growth sooner than the other segments asmajor global PC producers have succeeded inreducing their inventories significantly since thefourth quarter of 2004.

Meanwhile, global demand for electronics isexpected to remain favourable in 2005 supported bythe relatively strong global growth. The PC segmentwould also continue to benefit from the strongdemand in the Asia-Pacific region. The growth in theelectronics sector would be further reinforced by thecontinued trend towards increased application ofchips in consumer appliances due to the increasingconvergence in computing, digital media andwireless technology. Malaysia is therefore expectedto benefit from these positive factors, given thediversity in the electronics and electrical productsmanufactured in the country. More importantly,major multinational companies have beenmigrating production lines for some of the highvalue-added products to Malaysia to leverage on thecost-efficiencies in production.

Growth in the services sector is projected to besustained at 5.7%, reflecting expansion across allsub-sectors. The increased resilience is a result ofthe services sector becoming more diversified overthe years. The sector has shifted from depending ona narrow range of activities related to trade andmanufacturing to a broader range of activitessupported by domestic consumption and growth innew services activities related to tourism andbusiness support services.

The wholesale and retail trade, hotels andrestaurants sub-sector is expected to remain strong,in line with the relatively strong consumptionactivities as well as higher tourist arrivals. Thehigher travel activities and strong growth in thetelecommunications industry is expected to drivegrowth in the transport, storage andcommunication sub-sector. Growth would befurther supported by port-related activities,including transhipment, in line with the moderate

increase in trade. In the telecommunicationsindustry, growth will be driven by a further increasein the subscriber base and introduction of newproducts and services in the cellular segment. Theexpansion of the cellular services coverage to theentire country by major cellular providers andincreasing convergence of technologies betweenthe cellular and other IT and Internet services willalso benefit the industry. The finance, insurance,real estate and business services sub-sector isexpected to see another year of strong expansion,led mainly by increased bank lending, continuedexpansion in fee-based income and robustinsurance activities. The pick-up in momentum inICT-related services and shared services such asbusiness process outsourcing and insourcingactivities should see an increase in the businessservices segment.

The agriculture sector is projected to expandfurther by 3.3% in 2005 following two successiveyears of strong growth. Growth would besupported by higher palm oil and rubberproduction as well as miscellaneous agriculture.The increase in palm oil production would bedriven by both higher yields and expansion inmature areas, particularly in East Malaysia. Farmersare also envisaged to continue with GoodAgriculture Practices, reflecting utilisation ofagricultural inputs to increase productivityencouraged by the relatively favourable prices.Following the strongest output growth in morethan 30 years to 1.19 million tonnes in 2004,natural rubber production is projected to increasemarginally to 1.2 million tonnes in 2005, withsmallholders continuing to account for the bulk ofthe production amidst the firm prices. Growth inthe agriculture sector is also expected to emanatefrom newly promoted areas, such as food crops andfood-related activities, particularly fisheries,livestock, fruits and vegetables.

Growth in the mining sector meanwhile isexpected to strengthen to 5% in 2005, supportedmainly by higher production of natural gas in viewof the anticipated rise in capacity utilisation of theMLNG plants in Sarawak to meet the increasingglobal demand. Despite already achieving relativelyhigh production levels in 2004, crude oil production(including condensates) would continue to increaseby 1.5% to reach 776,250 barrels per day in 2005(2004: 762,300 bpd) amidst the strong globaldemand and relatively high crude oil prices forecastfor the year.

91

Outlook and Policy

The construction sector is expected to remain weak(-1%) due to lower civil engineering activityfollowing the completion of several privatised projectsas well as lower public spending on infrastructureprojects. Nevertheless, activities in the residential andnon-residential segments are expected to remain firm.Growth in the residential segment is expected tocontinue to be driven by sustained demand forhouses, encouraged mainly by the continuedfavourable economic conditions. In the non-residential segment, growth is envisaged to besupported by rising demand for office and retailspace, amidst the strong expansion in service-relatedbusiness activities.

Prices and EmploymentHeadline inflation is projected to average 2.5% in2005. Inflation is expected to edge up in the first halfof the year, reflecting the continuing one-off impact of

inflationary pressures. Given the lack of significantgeneral demand pressures, core inflation is projected toincrease to 1.8%.

The favourable economic growth environment willprovide greater employment opportunities acrossmost major sectors of the economy in 2005.Unemployment is, therefore, forecast to remain low at3.5%. Meanwhile, efforts to develop human capital asa catalyst of productivity growth would continue to bepursued. The training opportunities provided wouldcontinue to lay emphasis on developing skills andenhancing the value-added contribution from thelabour force.

Balance of PaymentsOn the external front, the current account surplus isprojected to remain large at 14.9% of GNP as a resultof the sustained large surplus in the trade account and

Graph 3.5 Consumer Prices

Annual change (%)

2001 2002 2003 2004 2005f

2.5

1.8CPI Inflation

Core Inflation

0.0

0.5

1.0

1.5

2.0

2.5

3.0

f Forecast

The surplus in the current account of the balance of payments isexpected to remain large due to the large trade surplus andsmaller services deficit. FDI inflows would be mainly fromreinvested earnings by multinational companies, and channelled tohigher value-added activities in Malaysia.

price adjustments to retail petroleum products as wellas higher taxes on cigarettes and tobacco that wereimplemented in 2004. There may also be some pass-through from higher commodity prices and otherdevelopments in the external sector. However, theimpact of these factors on headline inflation isexpected to be transitory and once the effects wearoff, inflation is expected to moderate in the secondhalf of 2005. The continued improvements inproductivity and the capacity expansion that have beentaking place are also likely to mitigate any build-up of

the smaller deficit in the services account. The tradesurplus is expected to remain large as the moderationin export growth (7%) would be offset by slower

Table 3.5Balance of Payments

2004e 2005f 2004e 2005f


Goods 104.5 114.8 27.5 30.2Trade account 81.1 89.5 21.3 23.6

Exports(% annual change) 20.8 7.0 20.8 7.0Imports(% annual change) 26.3 6.3 26.3 6.3

Services -8.8 -8.0 -2.3 -2.1

Balance on goods and services 95.7 106.8 25.2 28.1

Income -24.5 -26.4 -6.4 -6.9Current transfers -14.6 -14.1 -3.9 -3.7

Current account balance 56.6 66.3 14.9 17.4(% of GNP) 13.4 14.9 13.4 14.9

Financial account 15.4 4.0

Errors and omissions 11.1 2.9of which:

Exchange revaluation gain 8.0 2.1

Overall balance 83.1 21.9

e Estimatef ForecastNote: Numbers may not necessarily add up due to rounding


92

growth in imports (6.3%). In the services account,receipts are expected to increase with the continuinggrowth in tourist arrivals. In the financial account,sustained inflows of long-term capital, particularlyforeign direct investment (FDI) would also strengthenthe overall balance of payments.

In line with the consolidation in the globalsemiconductor sector, growth in manufacturedexports is expected to expand at a more moderatepace of 8.6% (2004: 19.7%). Electronics exports areprojected to expand by 4.5% in 2005 (2004: 12.7%),with some segments growing at a faster rate,particularly the PC sector, thus providing support tothe overall performance of the sector. Exports of non-electronic goods would continue to register a stronggrowth (12.5%; 2004: 27%), supported by continueddemand from PR China, mainly for resource-basedproducts, particularly for petroleum, chemical andrubber products, as well as metal products.

Mineral exports are projected to register a positivegrowth of 2.2%, as receipts from liquefied naturalgas (LNG) and crude petroleum exports would behigher amidst the higher export volume, offsettingthe effects of declining prices. Export prices ofMalaysian crude oil are expected to stabilise at

around US$40 per barrel (2004: US$40.81).Malaysian crude oil prices would be largelyinfluenced by trends in the global oil markets in2005, as global supply and demand remain finelybalanced amidst bullish sentiment supported bygeopolitical concerns. Export volume of LNG isprojected to increase as the MLNG Tiga plantcontinues to expand its capacity utilisation on theback of higher offtake from major buyers in 2005.

Following two successive years of strongperformance, exports of agriculture products areforecasted to decline by 15.2%, as lower pricesmore than offset the increase in volume. Exportprices of major agriculture commodities are expectedto consolidate in line with global developments aftertwo years of strong performance. In particular, theexport price of palm oil would be lower at RM1,200per tonne (2004: RM1,706 per tonne) due to theexpected increase in harvests of competing oilseeds,especially soybean oil, as well as higher domesticstocks of palm oil carried over from 2004. Whilerubber prices are also expected to soften to 440 senper kilogramme in 2005, this remains a relativelylucrative price level for rubber producers and is inline with expectations of continued demand growthin the international markets. The exports of palm oiland rubber account for the bulk of agriculturalexports (63% of total agriculture exports).

Growth in imports of 6.3% is expected to besupported by the continued growth in imports ofintermediate and capital goods. Intermediate importgrowth will stem from continued demand forimported components for expansion in manufacturingproduction, in response to the growth in externaldemand. Growth in capital imports will be supportedby ongoing investment activity and will emanate fromupgrading of equipment for new technology andcapacity expansion in the manufacturing and servicessectors. Higher capital imports in the services industryis expected to be led by capacity expansion in powergeneration and improvements in network capacityand quality by telecommunication companies.Increased exploration in the oil and gas industry in thewake of discoveries of new fields will also inducegrowth in capital imports.

The services account deficit is envisaged to improvefurther to 1.8% of GNP. Attractive promotionalcampaigns targeted at medium- and long-haultourists are expected to enhance tourism earnings.Capacity expansion by the airlines is expected tocontribute to higher export earnings from cargo and

Table 3.6Exports and Imports

2004p 2005f

RM billion

Gross exports 480.7 514.4(% annual change) 20.8 7.0

Manufactures 390.4 424.2(% annual change) 19.7 8.6of which:

Electronics 188.6 197.2(% annual change) 12.7 4.5Electrical products 68.4 73.3(% annual change) 23.4 7.1Chemical & chemical products 27.8 32.9(% annual change) 31.0 18.6

Minerals 41.2 42.1(% annual change) 38.2 2.2

Agriculture 36.2 30.7(% annual change) 7.4 -15.2

Gross imports 399.6 424.9(% annual change) 26.3 6.3

Capital goods 55.5 57.3(% annual change) 36.1 3.1

Intermediate goods 287.2 305.0(% annual change) 22.0 6.2

Consumption goods 23.2 25.4(% annual change) 24.1 9.4



93

Outlook and Policy

passenger services. The expansion in the sharedservices industry and new products in the ICT sectorwill continue to underpin the growth in exports ofcomputer and information and financial services.Meanwhile, payments for transportation are expectedto be higher, in line with the higher volume of tradeand increases in the freight rate. Higher outflows areexpected for royalties and licence fees, reflecting theacquisition of new technologies by companies for theproduction of higher value-added products.

The income account deficit is projected at 5.9% ofGNP, reflecting larger profits and dividends accruing tomultinational companies (MNCs). Profits and dividendsaccruing to Malaysian companies operating abroad arealso expected to be higher. The higher contribution toincome is expected mainly from Malaysian companiesparticipating in the oil and gas, plantation andinfrastructure sectors.

The financial account is expected to remainfavourable, supported by long-term capital inflows,in particular FDI. Based on the potentialinvestments announced by MNCs, FDI is anticipatedto be channelled to higher value-added activity inthe manufacturing sector. The bulk of the FDI willcontinue to be in the form of reinvestment by theMNCs. Inflows into the services sector, such as thewholesale and retail trade and business andsupport services are likely to remain high, givenMalaysia’s advantages in terms of excellentinfrastructure, educated and skilled humanresources as well as customised fiscal incentives. Inthe oil and gas sector, recent discoveries of new oilfields are likely to spur greater investment inexploration and extraction activities as well asinvestment in downstream activities.

Overseas investment by Malaysian companies isexpected to remain large, with investment decisionscontinuing to be driven by companies’ desire to gainaccess to new markets and natural resources, todiversify their earnings and to support domesticactivities through vertical integration. In 2005,investments abroad will continue to be broad based,involving both greenfield investments andacquisitions of foreign interests, particularly in the oiland gas, services and manufacturing sectors.Investment abroad by companies in the constructionsector is expected to increase following the award ofseveral contracts for large-scale infrastructureprojects as well as customised housing andcommercial projects to Malaysian companies,particularly in India, Africa and West Asia.

MONETARY POLICY IN 2005

The accommodative monetary policy stance, amidstthe low and stable inflation, has positively supportedthe stronger expansion of domestic economicactivity. The stability of the exchange rate, accordedby the pegged exchange rate regime, has alsoensured strong external performance and reinforcedthe expansion in domestic economic activity. Againstthe prospect of sustained growth in domesticdemand and the continued positive externaloutlook, domestic monetary conditions remainconducive for a sustained expansion in householdconsumption and provide support for businessactivity and capacity expansion. On the inflationfront, consumer prices are expected to edge up inthe early part of the year because of the one-offeffect of changes in administered prices, taxes ontobacco and alcoholic products, and possibly somepass-through from the external sector. However,these factors are expected to have a transitory effectand inflation is expected to moderate during the restof the year. Of importance, the continued sustainedgrowth in productivity, capacity expansions, and thelack of significant general demand pressures wouldmitigate any inflationary tendencies.

The monetary policy stance in 2005 will continue totake into consideration both global and domesticdevelopments. On the external front, sustainedglobal growth will ensure that the external sectorcontinues to contribute positively to domesticgrowth. While the pace of global growth is expectedto moderate, it will, nonetheless, remain strong.Indicators of economic activity in the major andregional economies continue to remain positive andpoint towards further expansion in global economicactivity. Of importance, the adverse effects from thehigh crude oil prices on both global growth andinflation have been modest and have not threatenedthe prospect for continued global growth. Whileseveral major and regional countries have pre-emptively tightened their monetary policies, thepace of tightening has been gradual and overallmonetary conditions continue to support growth.The inflation outlook in most of these countries hasstabilised and any further monetary tightening islikely to be gradual and modest.

On the domestic front, economic fundamentals havestrengthened further and there is greater resilience ofdomestic demand. Consumer spending remainsstrong amidst the continued increase in householddisposable income, stable employment conditions and

94

low borrowing costs. While this has led to higherhousehold debt levels, the ability of the householdsector to service its debt remains strong. There hasbeen a continued downtrend in the non-performingloans ratio of the household sector. Therefore,household spending is expected to continueexpanding and contribute towards the sustainabilityof domestic economic activity.

Meanwhile, the current expansion of productivecapacity by businesses is expected to continue.While the capacity expansion and new businessactivity of the corporate sector have so far beenfinanced largely through internal funds, signs ofstronger demand for external financing are alsoemerging. In particular, demand for long-term bankfinancing by the small and medium enterprises hascontinued to increase at strong growth rates inrecent months. Similarly, while there are strongindications that large corporations would continueto raise large amount of funds from the private debtsecurities and equity markets, long-term financingsourced from the banking institutions is also likely toremain important. With the steady improvement inthe corporate sector’s financial position, bankinginstitutions have actively responded to the financingrequirements of the business sector. These positiveunderlying developments are expected to supportfurther expansion in business investment activity,while providing the flexibility for fiscal consolidationto take place without any adverse effects on thelevel of economic activity. The continued expansionin productive capacity and improvements inproductivity would enable businesses to better meetgrowing demand, and help mitigate upwardpressures on wages and prices.

A key development in the international financialmarkets has been the gradual and sustaineddepreciation of the US dollar against major andregional currencies on account of the growing deficitsin the current and fiscal accounts of the US. While theringgit has depreciated along with the US dollar, itsoverall undervaluation, taking into account theperformances of the currencies of Malaysia’s majortrading partners, has been relatively small.Consequently, the pass-through effect into domesticprices from the depreciation of the ringgit is likely tobe modest. In the absence of any substantialmisalignment of the ringgit, due to external ordomestic changes in fundamentals, the peggedexchange rate regime continues to accord significantbenefits to the Malaysian economy by providing astable environment to support trade and investment.

To ensure price stability and sustainable growth,monetary policy will remain flexible and responsive toemerging trends in macroeconomic conditions. Whileprevailing circumstances continue to warrant themaintenance of the current accommodative monetarystance, pre-emptive action will be taken ifdevelopments indicate a significant shift in growthand inflation prospects. Policies will always aim toensure that the levels of interest rates and marketliquidity remain appropriate and continue to supportprivate sector activity.

FISCAL POLICY IN 2005

With the private sector assuming the role as themain driver of growth, fiscal consolidation is oncourse to further strengthen the Government’sfinancial position in 2005. The thrust of fiscal policyin 2005 will be to progress forward with a furthergradual reduction of the fiscal deficit throughprudent financial management, while efforts tosupport private sector initiatives will focus onproviding a strong enabling environment to supportincreasing productivity and reducing the cost ofdoing business. As announced in the 2005 Budget,strategies were aimed at developing human capital,increasing productivity, enhancing research anddevelopment capabilities, supporting new sources ofgrowth and improving the quality of life for allMalaysians. The Government will emphasiseefficiency in its delivery system and effectiveness inits financial management. Fiscal consolidation in2005 will move forward through revenueenhancement and expenditure reduction.

In terms of revenue enhancement, the focus will beon streamlining tax measures, improving taxadministration and enforcement. A newconsumption tax will be introduced in 2007, with ashift away from the present narrow based sales andservices taxes to a more comprehensive goods andservices tax, based on a value-added concept. Thenew tax is expected to be more efficient, transparentand broad based.

Total Federal Government expenditure (excludingcontingency reserves) was budgeted to be lower atRM117.4 billion, declining by 4.2% from theestimated 2004 expenditure, with developmentexpenditure falling by 9.1% to RM28.3 billion. Overallgovernment spending will be reduced in a prudentmanner without creating adverse implications for theeconomy. Efficiency of expenditure will be pursued bymeans of cost effectiveness and the re-prioritisation

95

Outlook and Policy

of projects to benefit a larger segment of thepopulation, especially the lower income groups andthe rural population. Hence, projects aimed atreducing the rural-urban socio-economic gap andrevitalising the agriculture sector will be prioritised.Special attention will also be given to developing therural infrastructure and promoting the developmentof small and medium enterprises (SMEs).

Reflecting its fiscal prudence and consolidationstance, the Federal Government is expected toregister a lower fiscal deficit of RM17.7 billion or3.8% of GDP in 2005. In addition, after taking intoaccount the potential net revenue gain of RM72million arising from the tax measures in the 2005Budget, the overall fiscal deficit will be marginallylower at RM17.6 billion. The bulk of financing will beraised from the domestic market given the ampleliquidity in the financial system.

Key strategies in the 2005 Budget are aimed atsupporting private sector activity, raising productivepotential and widening the export base to supportlong-term sustainable growth. Towards this end,various tax and non-tax incentives were directed ataccelerating the shift towards higher value-addedgrowth in niche areas, with greater emphasis onagriculture as the third engine of growth, enhancingthe services sector (especially Information andCommunications Technology, Islamic banking andfinance, and tourism) and strengthening themanufacturing sector. In the agriculture and agro-based sectors, tax incentives and measures wereintroduced to further modernise and commercialisethe sector. The measures for the manufacturing sectorincluded incentives for outsourcing manufacturingactivities, relocating investments to promoted areas,especially the Eastern Corridor of Peninsular Malaysia,Sabah and Sarawak, and the development andpromotion of halal products. In addition, incentiveswere provided to develop the SMEs as a key growthcatalyst. Two special funds under the administrationof Bank Negara Malaysia were enhanced, while newfunds were established to increase technologicalcapability, market penetration and training toenhance the management of SMEs.

Measures also continued to focus on enhancing thecountry’s efficiency and productivity and overallcompetitiveness to enable Malaysian companies tocompete globally. These incentives were directed atreducing the cost of doing business, enhancinghuman capital development with emphasis onincreasing skilled manpower and creating capable

and dynamic entrepreneurs. Incentives were alsotargeted at increasing innovation through greaterfocus on research and development (R&D) andspearheading the commercialisation of local R&D.Several measures were introduced to furtherstrengthen the capital market.

FINANCIAL SECTOR POLICY IN 2005

In an increasingly competitive and dynamicoperating environment, the thrust of financial sectorpolicy for 2005 will continue to be directed atenhancing the competitiveness of the financialsector, as well as promoting a sound and robustfinancial system that is able to support economicgrowth and development. Emphasis would alsocontinue to be accorded to further strengthen theconsumer education and protection framework.Ensuring continuous access to financing for allsegments of the economy will remain as animportant endeavour in 2005. There will also befurther deregulation and liberalisation withprogressive infusion of competition into the financialsector. This is so as to not disrupt the system and theoverall policy objectives.

For the banking sector, policy measures will continueto focus on enhancing the capacity and capability ofdomestic banking institutions, to prepare them forgreater liberalisation and competition as outlined inthe second phase of the Financial Sector Masterplan.Capacity building measures implemented over thepast few years have yielded positive results and theseefforts will continue to be pursued in 2005 to ensurecontinuous improvement in the performance of thedomestic banking institutions. This includes thebenchmarking initiative, which began in 2000 thathas provided banking institutions with the ability toassess their performance against their peers andidentify the areas of opportunities to betterthemselves. With the narrowing of the gap in theperformance between the domestic and foreignbanking institutions, policy measures will also focuson enhancing competition in the banking system.Greater operational flexibility will be accorded to thelocally incorporated foreign banks to enable them tocontribute more effectively to the development of thefinancial sector and economy as a whole.

The year 2005 will see further rationalisation withinthe financial sector, with more mergers ofcommercial bank and finance company entitieswithin a domestic banking group taking place. Thecapital and regulatory, as well as the legal

96

framework governing investment banks will befinalised. With the advent of investment banks,similar activities carried out by various entitiesinvolved in capital market activities will be integratedunder one roof. This will result in synergies andeconomies of scale, and consumers would be able toenjoy a wider range of financial services at a ‘one-stop’ centre. An investment banking industry that isdynamic and competitive will act as a catalyst to thedevelopment of a vibrant and efficient capitalmarket that can contribute towards economictransformation and growth.

Maintaining financial stability remains a priority.During the year, a number of major policies will beimplemented to further enhance the prudentialframework and to safeguard the soundness ofbanking institutions. A second concept paper will beissued on the consolidated supervision framework offinancial conglomerates, the objective of which is toprovide regulators with a holistic approach inassessing the financial health of the conglomerates. Itwill also facilitate monitoring of the activities offinancial conglomerates such that the non-depositoryinstitutions within the group will not introduceexcessive risk to the depository institutions inparticular, and to the financial system in general.Extensive discussions with the industry will take placeon the implementation of the new Basel CapitalAccord in 2008 as it is critical to ensure that thenecessary skills and expertise are harnessed andsystems infrastructure is in place to facilitate asmooth transition to the new Basel Capital Accord.Risk management of banking institutions will befurther improved with the inclusion of market risk inthe Risk Weighted Capital Ratio framework that thebanking institutions are required to fully comply withfrom April 2005.

In response to the changing financial landscape andto provide a more flexible operating environment,policies pertaining to the extension of credit bybanking institutions to a single customer andconnected parties, as well as guidelines on non-performing loans, are being reviewed. Theshareholding policy will be further refined toencourage corporate shareholding and promoteshareholder activism. Shareholders are expected tobe more proactive and play a more diligent role inmonitoring performance of banking institutions andthe effectiveness of the board of directors andmanagement. A review of the guidelines on anti-money laundering and ‘Know Your Customer’ policywill also be carried out to incorporate measures on

anti-terrorism financing. It is critical to ensure thatthe integrity of the banking system, as the mobiliserof funds, remains intact by determining that fundsflowing through the system are derived fromlegitimate sources and are used for legitimatepurposes. In addition, effective corporategovernance practices are critical to ensure theproper management of an institution. In this regard,Bank Negara Malaysia will be issuing acomprehensive guideline on corporate governanceto replace the current Guidelines on Directorship inBanking Institutions (BNM/GP1), covering amongstothers, the broad principles of corporate governanceand minimum standards and specific requirementson the role and structure of the Board andmanagement, as well as ensuring checks andbalances. Efforts would also be focused ondeveloping additional tools to enhance the bankingsystem’s surveillance framework. These tools wouldfacilitate the identification of emergingvulnerabilities and state of resilience both in thesystem and at individual institution level.

Another primary thrust for the year will be tocontinue enhancing access to financing by allsegments of the economy. Banking institutions willcontinue to be the main provider of funds in theeconomy through continued expansion in lendingactivities and remain as an important contributor toeconomic growth and development. Efforts willcontinue to encourage banking institutions tochannel funds to the small and medium enterprises(SMEs), as well as to increase financing to theagriculture and agro-based industries and tomicroenterprises, which are potential growth areas. Measures to enhance and further strengthen theconsumer education and awareness framework, aswell as the consumer protection infrastructure, willcontinue to be a priority in our efforts to develop anefficient, dynamic and competitive financial sector.Additional booklets and fact sheets will be issuedunder the consumer education programme and theprogramme will adopt a more targeted approach bytailoring information for specific groups. Also, witheffect from 1 February 2005, banking institutionswill be required to adhere to the framework on basicbanking services. Another milestone that took placein January 2005 was the launching of the FinancialMediation Bureau, to serve as a one-stop centre forthe resolution of a broad range of retail consumer’scomplaints against financial institutions regulated byBank Negara Malaysia. It is also vital that consumersrealise their growing role and responsibility in taking

97

Outlook and Policy

control of their financial decisions. Bankinginstitutions should facilitate this process by providingconsumers with accurate information regarding theirproducts and services so that they are able to makeinformed decisions. In this regard, further guidelineswill be issued to require product-specific andinstitutional transparency and full disclosure.Emphasis will also be given to the development of astructured and comprehensive framework on fairmarket practices that will foster greater competitionand promote equitable market practices amongstbanking institutions. In addition, as part of theefforts to strengthen the consumer protectioninfrastructure, a deposit insurance system is beingestablished. The framework on the system has beenfinalised and the Deposit Insurance Bill will be tabledin the Parliament this year.

The focus for the payment systems in 2005 is tofurther improve accessibility to electronic paymentsystems, enhance efficiency and improve securitymeasures to spur the migration to electronicpayments. Arising from the major accomplishmentsthat were achieved by the financial institutions in2004, efforts will be continued to enhance theaccessibility to electronic payment systems byutilising convenient delivery channels such asinternet banking and ATMs, and through extensivedeployment of card acceptance devices. BankNegara Malaysia will facilitate an industry-widecollaboration to further improve the securitymeasures in internet banking transactions, enhancecross-border payments mechanisms, promotepayment related standards to facilitate paymentreferencing and improve efficiency and services ofthe inter-bank giro system to increase its usage. Theconsumer protection framework in payment relatedservices, such as measures to promote responsiblelending in credit cards and to avoid over-indebtedness, will also be enhanced.

As for the Islamic banking sector, the major policythrust in 2005 will focus on further strengtheningthe Islamic banking system as an integral componentof the Malaysian financial system. The policy thrustwill centre on the enhancement of institutionalstructure, regulatory and prudential structure, legaland Shariah framework, product and marketdevelopment, and human capital development andconsumer education. In terms of the institutionalstructure, it is envisaged that there will be greaterdynamism in the Islamic banking market followingthe issuance of Islamic banking licences to foreignfinancial institutions and the establishment of Islamic

subsidiaries by the domestic banking groups. Theexercise is expected to stimulate more competitionand product innovation in the market. To meet theincreasing manpower requirements, an initiative isalso being taken to enhance the intellectual capitaland expertise with the objective of creating a largerpool of experts and high calibre professionals inIslamic banking and finance.

To enhance the effectiveness of the regulatory andprudential structure, efforts will be directed atstrengthening the provisioning and liquidityframework to meet the specific requirements of theIslamic banking operations. The development of anIslamic reference rate to act as a benchmark for thepricing of Islamic banking products will be pursued.To promote sound development of the legalinfrastructure, the review of the Islamic Banking Act1983 will be accelerated and undertaken on acomprehensive basis to keep pace with thedevelopment of the Islamic banking market.Transparency in banking practices will be animportant focus for the year as part of the efforts toincrease customer awareness and satisfaction.

Policy thrust for the development financialinstitution (DFI) sector in 2005 will continue to focuson further enhancing the capacity and capability ofDFIs in providing financial and non-financial supportto the targeted sectors of the economy. Inparticular, efforts are being undertaken toimplement the merger of the Export-Import Bank ofMalaysia Berhad and Malaysia Export CreditInsurance Berhad, and the rationalisation of lendingactivities of Bank Industri & Teknologi MalaysiaBerhad and Bank Pembangunan dan InfrastrukturMalaysia Berhad. The rationalisation exercise aims toenable these institutions to operate in a morefocused manner, and facilitate the transformation ofthese institutions as specialists in rendering financialand advisory support to their respective targetedsectors. The project to enhance the advisorycapability of selected DFIs for the SMEs is targetedto be completed in 2005. The expected improvedcapability of these DFIs to provide quality non-financial services would increase their effectivenessin serving the SMEs. To complement strategies oncapacity building, continuous efforts will also bepursued in 2005 to further strengthen the financialand operational soundness, corporate governanceand risk management practices, in order to create agroup of sound, dynamic and efficient DFIs thatsupports the Government’s development objectivesat minimal cost.

98

Liberalisation of the Foreign Exchange Administration Rules

The foreign exchange administration rules are aimed at providing an appropriate framework that willinfluence capital flows and facilitate currency risk management to promote financial and economicstability of the country. The rules complement the overall macroeconomic policies and are reviewedregularly in line with the changing environment.

On 1 April 2004, in conjunction with the release of the Bank’s Annual Report 2003, several majorforeign exchange administration policies were liberalised to promote the efficiency of businessoperations in Malaysia and better risk management of investments.

With effect from 1 April 2005, the Bank announced further relaxations to the foreign exchangeadministration rules as part of its ongoing initiatives towards reducing cost of doing business, improvingregulatory delivery system and encouraging better risk management activities by residents and non-residents as well as promoting the development of domestic foreign exchange market to promote stabilityin the financial system and economy of the country. The liberalisations are in the following areas:

(i) Forward Foreign Exchange Contracts by Residents and Non-residents

To allow businesses and individuals to effectively manage their risks, residents and non-residents mayenter into forward foreign exchange contracts with licensed onshore commercial and Islamic banks(licensed onshore banks) and approved merchant banks without prior permission of the Controller ofForeign Exchange (the Controller) to buy or sell foreign currency against ringgit or another foreigncurrency as follows:

• Residents are now allowed to enter into forward foreign exchange contracts to hedge thefollowing:(a) Foreign currency exposures of permitted overseas investments;(b) Payment for permitted overseas investments;(c) Repayment of principal and payment of interest for foreign currency credit facilities (onshore

or offshore) which are payable within 24 months; and(d) Anticipatory receipts from exports and anticipatory payments for import of goods and services,

based on the value of export receipts and import payments of the preceding 12 months.

With the above flexibility, residents may now effectively hedge all committed and anticipatoryinflows and outflows of their current account transactions (i.e. payments for export and importof goods, services and income) and committed inflows and outflows for capital accounttransactions (e.g. payments for overseas investments and extension of credit facilities to non-residents or repayments of credit facility from non-residents) as well as safeguarding the value oftheir overseas investments.

• In addition, non-residents are now allowed to enter into forward foreign exchange contracts forthe following committed flows of funds:(a) Repatriation of investment proceeds from Malaysia; and(b) Purchase of ringgit assets in Malaysia.

(ii) Maintenance of Foreign Currency Accounts (FCA) by Residents and Conversion of Ringgit intoForeign Currency for Credit into FCA

The rules on the maintenance of FCA by residents are also liberalised further to facilitate effectivecash flow management and to promote business efficiency.

99

Outlook and Policy

• Residents are now free to open FCA with licensed offshore banks in Labuan and overseas banksfor any purpose, except for the retention of export receipts. With this flexibility, residents mayretain their foreign currency receipts (other than export proceeds) in FCA maintained withlicensed onshore banks, licensed offshore banks in Labuan and overseas banks with no overnightlimits imposed on these accounts.

• Resident companies maintaining FCA with licensed offshore banks in Labuan and overseas banksare required to submit monthly statement, Statement OA, to the Controller.

• Residents may also convert ringgit into foreign currency for credit into these FCA maintained withlicensed onshore banks, licensed offshore banks in Labuan and overseas banks as follows:(a) Any amount for residents (companies and individuals) without any domestic credit facilities;(b) Up to RM10 million per calendar year on a corporate group basis by resident companies

with domestic credit facilities; and(c) Up to RM100,000 per calendar year by resident individuals with domestic credit facilities.

• Residents are now free to retain any amount of export receipts in FCA maintained with licensedonshore banks. The limits imposed on export FCAs are, accordingly, uplifted.

With the removal of the limits, effectively all FCA maintained with licensed onshore banks (except forFCA for overseas education and employment purposes by residents with domestic credit facilities) arefree from any overnight limits.

• The aggregate overnight limits on FCA for overseas education and employment purposesmaintained by residents with domestic credit facilities remain as follows:(a) US$150,000 for FCA maintained with licensed onshore banks or licensed offshore banks in

Labuan respectively; and(b) US$50,000 for FCA maintained with overseas banks.

(iii) Domestic Credit Facilities to Non-resident Controlled Companies (NRCCs)

The RM50 million limit on extension of credit facilities to a NRCC by residents as well as the 3:1gearing ratio requirement imposed on NRCC for its domestic borrowing exceeding RM50 million areabolished. With the abolishment, residents are now free to extend any amount of ringgit creditfacilities to NRCCs.

(iv) Investment Abroad

As part of efforts to further enhance management of funds and provide diversification of businessopportunities, the rules on investment abroad by residents have also been liberalised.

• Residents with no domestic credit facilities are now free to invest any amount abroad. Theinvestment may be made through the conversion of ringgit or from foreign currency fundsretained onshore or offshore. Overseas investment funded by foreign currency borrowing will belimited to only RM10 million equivalent at any one time.

• Residents with domestic credit facilities are also free to invest abroad their foreign currency fundsmaintained onshore or offshore. In addition, they are allowed to convert ringgit into foreigncurrency up to the following limits for overseas investments:(a) Up to RM10 million per calendar year by companies on a per corporate group basis; and(b) Up to RM100,000 per calendar year by individuals.

100

For companies converting ringgit for overseas investments, they must have a minimumshareholders’ funds of RM100,000 and must be operating for at least one year.

In addition, they may finance overseas investment with foreign currency borrowing up to RM10million equivalent at any one time.

• The limit that can be invested abroad by unit trust management companies is also increased to30% from 10% of the Net Asset Value (NAV) attributed to residents. Fund/asset managers maynow invest abroad any amount of investment of resident clients without any domestic creditfacilities and up to 30% of investments by resident clients with domestic credit facilities. Thefunds may be pooled for investment abroad. Such investments must be in line with the SecuritiesCommission’s prudential guidelines.

• Resident insurance companies and takaful operators may also invest abroad up to 30%, increased from10%, of the NAV of the investment-linked funds that they market. These investments are subject tocompliance with prudential insurance and takaful regulations issued by Bank Negara Malaysia.

• The above flexibilities are subject to prior registration of any overseas investments exceeding theequivalent of RM50,000 with the Controller.

(v) Foreign Currency Credit Facilities

To enhance expediency in managing business in Malaysia, the limit for residents to obtain foreigncurrency credit facilities from non-residents, licensed onshore banks and licensed merchant banks inMalaysia is increased from the current limit of RM5 million equivalent.

• Resident companies on a corporate group basis may now obtain foreign currency credit facilityup to an equivalent of RM50 million in aggregate.

• Resident individuals are allowed to obtain foreign currency credit facility up to an equivalent ofRM10 million in aggregate.

• The above flexibilities are subject to prior registration of any foreign currency credit facilityexceeding RM1 million equivalent with the Controller.

• Residents may prepay their foreign currency credit facilities subject to the registration of suchprepayments with the Controller prior to effecting the payments.

• Residents may also utilise up to an aggregate of RM10 million equivalent of their foreign currencycredit facilities to finance overseas investment activities.

(vi) Activities by Approved Operational Headquarters (OHQs)

In line with the relaxation on residents for retention of export proceeds and overseas investments aswell as freedom to obtain domestic credit facilities by NRCC, OHQs may now:

• Retain any amount of export receipts in their FCA maintained with licensed onshore banks;

• Obtain any amount of ringgit credit facilities from domestic sources; and

• Finance their overseas investment activities, including extension of credit facilities to non-residents, by converting up to RM10 million into foreign currency per calendar year if they havedomestic credit facilities.

The Financial System

102-106 Sources and Uses of Funds of the Financial System

102

Sources and Uses of Funds of the FinancialSystemIn line with the overall improvement in economicactivity, total assets of the financial system expandedsignificantly by 12.8% to RM1,762.6 billion in 2004(2003: 12% to RM1,563.1 billion). As at end-2004,total assets of the financial system were equivalentto 394% of GDP (end-2003: 397%).

Assets of both the banking system and the non-bankfinancial intermediaries (NBFIs) grew at a higher ratethan in 2003. Assets of the banking systemincreased by 13.6% (2003: 13.2%), while assets ofthe NBFIs expanded by 11% (2003: 9.7%).

Following the completion of the merger exercisebetween three commercial banks and three financecompanies in the third quarter of 2004, thecommercial banks’ share of total financial systemassets rose to 41.8% (2003: 39%), while the shareof finance companies declined to 3.9% (2003:9.1%). Meanwhile, the Islamic banks’ share of totalassets of the financial system rose to 1.4% (2003:1.3%), reflecting the steady expansion of the Islamicbanking industry in 2004.

All major segments of the NBFIs continued toexpand strongly in 2004. Assets of the provident andpension funds (PPFs), which accounted for 16.5% of

Bank Negara Malaysia 16.1%

Commercial banks 41.8%

Life insurance funds 4.2%

Provident, pension and insurance funds

21.7%

Other provident and pension funds

2.9%

Discount houses 1.8%

Development financial institutions

5.1%

Islamic banks 1.4%

Merchant banks 2.4%

Finance companies 3.9%

General insurance

funds 1.0%

Employees Provident Fund 13.6%

Other financial intermediaries 5.7%

Total Assets: RM 1,762.6 billion

p Preliminary

Graph 4.1 Assets of the Financial System as at end-2004p (% share)

Table 4.1Assets of the Financial System

Annual change

RM billion

Banking system 122.4 142.9 1,189.9Bank Negara Malaysia 38.6 84.0 284.9Commercial banks 66.3 128.1 737.1Finance companies 11.2 -73.5 68.4Merchant banks 2.8 -1.3 42.8Islamic banks 0.8 3.9 24.9Discount houses 2.8 1.7 31.9

Non-bank financial intermediaries 45.5 56.6 572.7

Provident, pension and insurancefunds 30.6 35.4 383.2

Employees Provident Fund 18.0 20.0 240.2Other provident & pension funds 1.6 4.7 51.1Life insurance funds 9.8 10.1 74.1General insurance funds 1.2 0.6 17.8

Development financial institutions1 6.6 11.2 90.3Other financial intermediaries2 8.3 10.0 99.2

Total 168.0 199.5 1,762.6

1 Includes Bank Simpanan Nasional (National Savings Bank), Bank KerjasamaRakyat Malaysia Berhad, Bank Pertanian Malaysia, Malaysian IndustrialDevelopment Finance Berhad (MIDF), Borneo Development Corporation,Sabah Development Bank Berhad, Sabah Credit Corporation, Export-ImportBank Malaysia Berhad, Bank Pembangunan dan Infrastruktur MalaysiaBerhad, Bank Industri dan Teknologi Malaysia Berhad, Malaysia ExportCredit Insurance Berhad, Credit Guarantee Corporation Malaysia Berhad(CGC) and Lembaga Tabung Haji (Pilgrims’ Funds Board).

2 Includes unit trusts run by Amanah Saham Nasional Berhad (ASNB) andAmanah Saham Mara Berhad, cooperative societies, leasing and factoringcompanies and housing credit institutions (comprising Cagamas Berhad,Borneo Housing Mortgage Finance Berhad and Malaysia BuildingSociety Berhad).

p Preliminary

2003

As atend-

2004p2004p


103


Table 4.2Sources and Uses of Funds of the FinancialSystem

Annual change As atend-

2003 2004p 2004p

RM billion

Sources:Capital and reserves 14.1 15.0 164.0Currency 2.3 2.9 32.4Deposits 74.7 126.2 835.6Borrowings 3.8 2.5 51.2Funds from other financial institutions1 16.7 -15.5 72.0Insurance, provident and pension funds 31.3 33.6 339.2Other liabilities 25.0 34.9 268.2

Total 168.0 199.5 1,762.6

Uses:Currency -1.8 0.5 6.1Deposits with other financialinstitutions 38.4 21.3 247.6Loans and advances2 38.8 56.3 655.6Securities 48.4 20.3 429.8

Treasury bills -2.1 -3.1 0.4Commercial bills 0.1 -5.1 8.4Malaysian Government (MGS) 20.8 14.6 139.8Corporate3 27.5 14.0 268.2

Private Debt Securities (PDS) n.a. 7.0 129.2Equities n.a. 7.0 139.0

Foreign 0.2 1.2 4.6Others 1.8 -1.3 8.4

Gold and foreign exchange reserves 38.6 83.6 249.7Other assets 5.5 17.6 173.9

1 Includes statutory reserves of banking institutions.2 Excludes loans sold to Danaharta.3 Breakdown of Corporate Securities between Private Debt Securities (PDS) and

Equities available only from 2003.

n.a. Not available.

p Preliminary

9.8%

14.2%

24.4%

37.2%

14.1%

0.3%Currency

Deposits with other financial institutions

Loans and advances

Securities

Gold and foreign exchange reserves

Other assets

p Preliminary

Graph 4.2 Sources and Uses of Funds of the Financial System as at end-2004p (% share)

15.2%

19.2%

4.1%

2.9%

47.4%

1.8%

9.3% Capital and reserves

Currency

Deposits

Borrowings

Funds from other financial institutions

Pension, provident and insurance funds

Other liabilities

USES

SOURCES

Total: RM1,762.6 billion

p Preliminary

Graph 4.3 Loans and Advances by Institution (% share)

2000Total Loans and Advances: RM512.4 billion

2004pTotal Loans and Advances: RM655.6 billion

Banking institutions81.2%


5.7%

Housing Credit Institutions

5.5%

Others3.5%


4.1%


8.6%

Housing Credit Institutions

5.1%

Others2.5%


5.8%

Banking institutions78.1%

the total assets of the financial system as atend-2004, rose by 9.3% during the year. Higherreturns from investments in private debt

securities and equities, as well as from lendingactivity contributed significantly to the growth in thePPFs’ asset portfolio in 2004.

Assets of the insurance sector, which accounted for 5.2%of the total assets of the financial system as at end-2004,rose by 13.1% in 2004 (2003: 15.7%). Growth in theinsurance sector was driven mainly by the life insurancesegment, which registered a 15.7% growth in 2004(2003: 18%), while the general insurance segmentexpanded at a more moderate rate of 3.4% (2003: 7.8%).

In terms of asset composition, loans and advancesremained the largest class of asset owned by the

104

financial system in 2004, with a 37.2% share of totalassets (2003: 38.3%). While the banking institutions(comprising commercial banks, finance companies,merchant banks, Islamic banks and discount houses)remained the largest provider of loans and advances,with a 78.1% share in 2004, the development financial

institutions (DFIs) and the provident, pension andinsurance funds have increased their share of lendingactivities in recent years.

In 2004, loans and advances grew by RM56.3 billion, or9.4% (2003: 6.9%). The household sector continued tobe the main driver of loan demand, as indicated by thesignificant share (62.9%) of the increase in total loansand advances that was extended for the purchase ofresidential properties and consumption credit. Withinthe business sector, loans extended to the small andmedium enterprises continued to grow strongly,registering an increase of 7.7% in 2004 (2003: 10%).

Investment in securities by the financial systemexpanded by 5% in 2004 (2003: 13.4%). The lowergrowth was mainly due to the decline in thefinancial system’s holdings of Treasury andcommercial bills, as well as the smaller increase inholdings of Malaysian Government Securities andcorporate securities (comprising private debtsecurities and equities). The banking institutionsreduced their holdings of securities in 2004 by11.6% or RM12.2 billion, reflecting the shift of moreresources towards direct lending activity. The lowerholdings of securities by the banking institutionswas, however, offset by the RM23.6 billion, or 9.7%increase in investments in securities by theprovident, pension and insurance funds.

Meanwhile, gross holdings of gold and foreignexchange reserves recorded a significant increase of

Table 4.3Direction of Credit1 to the Non-Financial PrivateSector

Annual change As atend-

2003 2004p 2004p

RM billion

Loans and advances 35.6 54.3 611.9Agriculture -0.8 0.7 14.0Mining and quarrying 0.1 -0.1 1.0Manufacturing 1.2 2.5 58.5Construction and real estate -0.6 3.9 79.7Purchase of residential properties 19.0 19.1 169.2Retail, wholesale, restaurants and

hotels -0.5 3.2 24.0Transport, storage and

communications 1.3 0.0 15.4Business services 0.6 1.6 22.1Electricity, gas and water supply -1.1 0.7 6.2Consumption credit 9.9 15.0 111.2Purchase of shares -1.8 -0.4 18.8Others 8.3 8.0 91.8

Investments in corporatesecurities 26.0 14.2 266.4

Total 61.6 68.5 878.3

1 Excludes credit to non-financial public enterprises.

p Preliminary

Purchase of residential property 19.3%

Construction and real estate 9.1%

Manufacturing 6.7%

Agriculture, mining and quarrying 1.7%

Retail, wholesale, hotels and restaurants 2.7%

Transport, storage and communications 1.8%

Consumption credit 12.7%

Electricity, gas and water supply 0.7%

Purchase of shares 2.1%

Business services 2.5%

Others 10.5%

Investment in corporate securities

30.3%

Total Credit: RM878.3 billion

p Preliminary

Graph 4.4 Direction of Credit within the Non-Financial Private Sector as at end-2004p (% share)

Loans and advances 69.7%

105


Table 4.4Non-Financial Private Sector Deposits1 with theFinancial System2

Annual changeAs at end-

2003 2004p2004p

RM billion

Deposits3 with:Commercial banks 36.0 87.9 433.9Finance companies 0.2 -35.4 28.7Merchant banks 2.4 0.8 14.7Islamic banks 1.3 2.1 11.4Discount houses 2.3 1.8 12.6National Savings Bank 0.2 1.6 9.9Others4 7.8 5.3 36.3

Total 50.2 64.2 547.4

Demand deposits 13.5 10.3 87.9Saving Deposits 4.5 5.5 74.1Fixed deposits 25.8 34.8 342.8of which:

Up to 1 year 37.3 33.7 314.9More than 1 year -11.5 1.1 28.0

NIDs5 0.3 5.2 7.9Repos6 6.1 8.3 34.8

1 Refers to deposits placed by business enterprises (excluding NFPEs) and individuals.2 Excludes provident and pension, insurance and unit trust funds.3 Refers to demand, savings and fixed deposits, negotiable instruments of

deposits and repos.4 Includes development financial institutions, cooperative societies and housing

credit institutions.5 Refers to negotiable instruments of deposits.6 Refers to repurchase agreements.

p Preliminary

RM83.6 billion, or 50.3% in 2004 (2003: RM38.6billion or 30.3%). The increase reflected the markedlystronger export performance as well as substantialinflows of foreign direct investment and portfolio flowsin tandem with improved investor confidence.

Deposits remained as the largest source of funding forthe financial system in 2004. Deposits mobilised by thefinancial system grew by RM126.2 billion, or 17.8%, in2004 (2003: 11.8%), of which, 59% were contributedby the banking institutions. Deposits placed with thebanking institutions accounted for 78% of the totaldeposits of the financial system as at end-2004(end-2003: 81.4%).

In terms of holders, the non-financial private sector(comprising individuals and businesses) continued toaccount for the bulk (71.8%) of the deposits placedwith the banking system and development financialinstitutions (DFIs). Deposits placed by individuals withthe banking system and DFIs increased by 9.3% in2004 (2003: 9%), while deposits placed by businessesgrew by 17.2% (2003: 13.8%). The strong growth indeposits is reflective of the higher disposable incomeand financial wealth of households and businessenterprises, in line with the strengthening economy.

Apart from deposits, other major sources of fundsfor the financial system also increased in 2004.Provident, pension and insurance funds grew by11% (2003: 11.4%), while capital and reserves roseby 10.1% (2003: 10.5%). The latter reflected the

p Preliminary

Graph 4.5 Non-Financial Private Sector Deposits with the Financial System as at end-2004p (% share)

Finance companies 5.2%

Merchant banks 2.7%

Islamic banks 2.1%

Discount houses 2.3%

Bank Simpanan Nasional 1.8% Others

6.6%

Commercial banks 79.3%

By Institution Total Deposits: RM547.4 billion

Demand deposits 16.1%

Savings deposits 13.5%

NIDs 1.4%

Repos 6.4% Up to 1 year

57.5%

More than 1 year 5.1%

Fixed deposits 62.6%

By Types of Deposits Total Deposits: RM547.4 billion

improved financial performance of the bankinginstitutions and DFIs, as well as higher undistributeddividends of the unit trust funds.

108-109 Management of the Banking System110-111 White Box: ICLIF Forging Ahead to Realise its Vision120-124 White Box: Banking Measures Introduced in 2004 125-133 White Box: Financial Sector Masterplan125-133 White Box: Financial Sector Masterplan134-136 White Box: Financial Services Liberalisation Measures Since 2000136-139 Supervision of the Banking System136-143 White Box: Malaysia’s Anti-Money Laundering and Combating

the Financing of Terrorism (AML/CF) Programme144-156 Performance of the Banking System

The Banking System

108

MANAGEMENT OF THE BANKING SYSTEM

Significant progress was achieved in strengtheningthe capacity and capability of domestic bankinginstitutions in 2004. With the financial sectorrestructuring programme effectively completed andthe foundation for an efficient, effective and resilientbanking system firmly in place, the domestic bankinginstitutions are well positioned to operate in a morederegulated and liberalised environment, as envisagedin the second phase of the Financial SectorMasterplan (FSMP). In addition to capacity building,policy measures in 2004 also focused on wideningaccess to financing by key economic sectors,strengthening the consumer protection frameworkand preserving overall system resilience.

The banking sector exhibited a strong performance in2004, with risk-weighted capital ratio (RWCR)sustained at levels above 13% throughout the year,while the net non-performing loan (NPL) ratio reacheda record low of 5.9% at the end of the year, the lowestlevel since the Asian financial crisis. The strengthenedbalance sheet enabled the banking system to continueto support the economic needs of the nation. Totalnew loans approved and disbursed grew by 13.6%and 10.6% respectively, resulting in 8.5% growth intotal outstanding loans in 2004.

Progress of DanahartaOf the three agencies established to spearhead thefinancial sector restructuring in the wake of the Asianfinancial crisis, only Danaharta remained in operationin 2004. Over its lifespan, Danaharta acquired adjustedloan rights amounting to RM52.4 billion, with anexpected recovery rate of 59%. As at 31 December2004, RM29 billion or 94% of the expected recoveries

Banking policies in 2004 were focused on providing an enablingenvironment for banking institutions to improve their efficiencyand increase access to financing, while preserving overallfinancial stability.

of RM30.8 billion have been received by Danaharta, ofwhich RM23.6 billion have been realised in cash whilstthe balance are held in the form of restructured loans,securities, properties and other non-cash assets.Danaharta has cumulatively distributed RM16.4 billion incash and 66,472,341 units of securities to the

Government and the respective financial institutions, inaccordance with the 80:20 surplus recovery sharingagreements it has with these institutions.

To date, Danaharta has successfully redeemed 12 tranchesof its zero-coupon bonds with aggregate face value ofRM10.3 billion. With a cash and cash equivalent balance ofRM1 billion as at 31 December 2004, Danaharta is wellpositioned to redeem the remaining three tranches ofbonds with a total face value of RM0.8 billion, maturing inMarch 2005. Given this progress, Danaharta is on track tounwind its operations in 2005 and close the final chapterof the financial sector restructuring exercise.

Thrust of Policy Measures in 2004The main thrust of policy measures in 2004continued to focus on enhancing the performanceand competitiveness of the domestic banking

Table 5.1Danaharta: Loan Recovery as at 31 December 2004

Adjusted loan Expectedrights acquired1 recovery rate

(RM billion) (%)

Acquired Managed Acquired ManagedNPLs NPLs NPLs NPLs

Plain loan restructuring 1.4 4.1 91 97Settlement 3.4 8.0 82 75Schemes of arrangement 2.6 7.5 72 76Schemes under Special

Administrators 2.3 2.7 46 27Foreclosure 9.8 4.4 28 49Others 1.9 3.2 49 47Legal action 0.2 1.0 9 4

Total 21.6 30.8 50 65

Overall 52.4 59

1 Comprising total loan rights acquired of RM47.7 billion and accrued interestof RM4.7 billion.

Note: Total may not add-up due to rounding.

Source: Pengurusan Danaharta Nasional Berhad

institutions and on ensuring that these institutionsare ready for a more liberalised operatingenvironment. In particular, efforts were directed atfacilitating further improvements in the domesticbanking institutions’ operational efficiency andflexibility. These initiatives were implemented

The Banking System

109

The Banking System

together with the introduction of strengthenedprudential regulations to preserve financial stabilityand sustain public confidence.

Other key policy thrusts during the year includedenhancing access to financing by key economic sectorsand continued efforts at strengthening consumereducation and protection. As financial productsbecome more complex, the focus was to ensure thatconsumers have access to the necessary information tomake well-informed decisions as well as introducingmeasures designed to enhance consumer protectionand redress mechanism.

Enhancing Domestic CapacityBuilding on the momentum of earlier capacity buildinginitiatives, policy direction continued to focus on furtherenhancing structural and operational efficiencies of thedomestic banking institutions. This was to enable thedomestic banking institutions to remain competitive andrespond to rapidly changing customer requirements inan effective and efficient manner. Consequently, furtherenhancements to the benchmarking exercise were made

The survey indicated general satisfaction with theproducts and services offered, but a high degree ofmobility among retail customers accentuates the needfor banking institutions to continuously improvecustomer relationships by identifying and respondingto customer needs. Retail customers cited qualityinterface with bank staff, better complaintmanagement, and efficient delivery channels, loanapplication and approval processes as their coreneeds. Emerging needs include higher productinnovation and flexibility, as well as improvedinformation and greater transparency on the termsand conditions of financial products and services. Thesurvey also indicated an even higher degree ofmobility among SMEs and corporate customers. Thesecustomers also highlighted the need for relationshipmanagers to be more proactive in introducingproducts and services packages to suit their businessneeds. Complaint management, hotline accessibility,efficient and transparent loan application andapproval process and, in particular, reasons forrejection, were cited as important to the SMEs andcorporate customers.

The establishment of the legal infrastructure for the Bafinframework allowed banking institutions to streamline retailoperations, enhance efficiency and meet customers’ demand forcomprehensive product packages and integrated delivery channels.

in 2004. The spectrum of financial performance andservice quality indicators monitored, analysed andshared with the banking institutions was expanded toprovide a wider range of information, particularly on thedata, ratio and trend analysis pertaining to bankinginstitutions’ profitability, productivity and asset qualityvis-à-vis their peers.

Bank Negara Malaysia had also completed a study toassess customers’ expectations and satisfaction on thequality of products and services offered by bankinginstitutions. The study involved a nationwide survey ofmore than 3,000 retail, small and medium enterprises(SMEs), and corporate customers of banking institutions.To complement the survey, a business process reviewwas also conducted to gauge banking institutions’ levelof customer-centricity, their ability to captureinformation relating to service performance andcustomer satisfaction levels, as well as the use of theseinformation in quality enhancement initiatives. Thedetailed results were shared with banking institutions toenable them to measure their performance relative tothe industry and formulate measures to improvecustomer satisfaction and retention.

Overall, the results of the study combined with findingsfrom the business process review highlighted the needfor banking institutions to identify and respond tocustomer needs in order to retain customers andremain competitive. The key is to increase investmentin staff training and promote customer-centric cultureto support the alignment of organisational structureand business models towards meeting customers’needs and expectations. Given the importance ofenhancing service quality in ensuring sustainablefinancial performance of the institution, commitmentof management is vital in driving efforts towardsbuilding customer-centric institutions.

As domestic banking groups attained critical size andgained economies of scale from consolidation, effortswere directed at further creating the enablingenvironment for domestic banking groups to streamlinetheir operations, attain operational efficiency and meetincreasing customer demand for a comprehensive rangeof financial products and integrated delivery channels.Policy in this area culminated in the formulation of anintegrated commercial bank and finance company (orBafin) framework. The legal infrastructure for the Bafin

110

framework, as incorporated in the Banking and FinancialInstitutions (Amendment) Act 2003, came into force on15 January 2004. It provides the option for domesticbanking groups to conduct commercial banking andfinance company business through a single lendingentity that holds both licences. To facilitate Bafinmergers, exemptions from stamp duty and real propertygains tax were provided by the Minister of Finance formergers completed before 15 January 2006.

In 2004, five out of ten finance companies, accountingfor 55% of the total finance companies assets,successfully merged with their respective commercialbank. The new Bafin entities are Alliance Bank Berhad,EON Bank Berhad, Hong Leong Bank Berhad, MalayanBanking Berhad and Public Bank Berhad. The mergedentities have undergone the processes of capitalrationalisation, staff redeployment and reorganisation,branch relocation and delivery channel consolidation to

gain economies of scale and scope post-mergers. It isenvisaged that further cost-savings and operationalefficiencies will emerge in the near future as themerged entities complete their adjustment andrationalisation of resources.

Human intellectual capital plays a pivotal role in drivingthe performance and competitiveness of bankinginstitutions. The International Centre For Leadership InFinance (ICLIF) and Institut Bank-Bank Malaysia (IBBM)provide the avenues for banking institutions to ensurecontinuous learning and competency building amongall levels of their workforce. In 2004, ICLIF conductedtwo sessions of its flagship Global LeadershipDevelopment Programme, a Directors’ Forum and aseminar on scenario planning for senior managementof banking institutions, while the ICLIF AlumniAssociation was launched to provide a platform forprofessional networking.

ICLIF Forging Ahead to Realise Its Vision

Bank Negara Malaysia established the International Centre For Leadership In Finance (ICLIF) with theobjective of providing a focused and coordinated approach towards the development of world-classleaders in finance to cater for the needs of the rapidly transforming Asian region. ICLIF, officially launchedon 28 October 2003, is entrusted with the role of developing excellent leaders with keen regional andinternational insights. ICLIF provides leading-edge learning opportunities and experiences through effectiveleadership development programmes.

Development of ICLIF’s Leadership Competency Model (LCM)One of the key initiatives of ICLIF during the year was to develop LCM. The model supports ICLIF’sinitiatives by crystallising and articulating the essential skills and behaviours required by leaders to navigateand successfully manage challenges in a fast changing regional and global environment.

The LCM was formulated through a participatory process involving strategic insights from interviews withindustry leaders and benchmarked against the best practices adopted by renowned regional and globalcompanies. The preliminary Model was validated by a panel of global experts and subsequently furtherrefined in a Validation Seminar attended by 42 Malaysian Leaders from both the public and private sectors.

Leadership Development Programmes Conducted in 2004In 2004, ICLIF commenced its Leadership Development Programmes which are broadly divided intothree categories:

• The Structured Advanced Leadership Programme is ICLIF’s core programme on LeadershipDevelopment which encompasses the Global Leadership Development Programme or GLDP. Theprogramme aims to grow and nurture talent across the financial industry and the corporate sector withstrong emphasis on leadership and leadership development.

The design of the GLDP is based on the High Impact Leadership Model jointly developed by LinkageIncorporated and renowned leadership guru, Professor Warren Bennis of the Marshall School ofBusiness – University of Southern California. It focuses on Leadership Competencies, Skills and

111

The Banking System

Responsibilities. In addition, broader leadership issues such as globalisation, global marketing issuesand macro-economic trends are also covered. The programme also provides an opportunity for theparticipants to strengthen their networking and participate in shared learning experiences anddiscussions with leaders of other organisations.

To date ICLIF has successfully conducted a summer and a fall session of the GLDP for 2004. Atotal of 42 participants comprising 31 from the finance industry from Malaysia, the Asian regionand Africa and 11 from the corporate sector attended the two sessions. Resource persons forthe programme are drawn from prestigious institutions including Peter F. DruckerGraduate School of Management – Claremont Graduate University, Marshall School ofBusiness – University of Southern California, Harvard Business School and Stanford GraduateSchool of Business.

• The Specialised Learning Programmes are designed to provide learning on focused andtechnical issues confronting leaders in promoting excellence in their organisations. Theprogrammes offered under this category are:

(i) The Scenario Planning Programme, which aims to provide leaders with the capability toassess the current developments in their business environment, draw the implications of suchdevelopments and to act strategically to stay ahead. In particular, participants review currenttechnological changes and explore medium and long-term impact of such changes on theindustry, corporations and their own businesses.

(ii) The Directors Forum, which is conducted in association with INSEAD, is designed totranscend the normal coverage of compliance and legal requirements. Participants are givengood insights into best practices to improve Board effectiveness, Board’s relationship withmanagement, shareholders and regulators and Board’s role in the strategy, performance andvalues of its organization. The rights and responsibilities of shareholders with particular focuson minority shareholders as well as factors which facilitated or blocked Board effectivenesswere also discussed.

• ICLIF’s Seminars and Workshops, in particular its ‘Saturday Seminar Series’ are designed toprovide the platform for corporate leaders, regulators and academicians to meet and exchangeviews on current and emerging issues. It also provides opportunities for participants toexchange views with leading experts and industry leaders. In 2004, the Human ResourceSeminar was also conducted to discuss the role of leadership development in nation buildingwith particular focus on ICLIF’s Vision and Mission and its linkage to the Financial SectorMasterplan and Vision 2020. A Banking Seminar on ‘Deposit Insurance’ was also organised incollaboration with Bank Negara Malaysia.

Official Launch of ICLIF Alumni Association (IAA)With the rapid changes taking place in the financial and corporate landscape in the country and thegreater integration in the region and the world, networking among leaders and captains ofindustries is most valuable in contributing towards greater understanding and in increasing thepotential for collaborative efforts that are of mutual interest.

In November 2004, the IAA was officially launched. The establishment of the IAA represents animportant part of ICLIF’s commitment to provide a platform for members to maintain activenetworking and productive collaborative alliances. It is also in line with the philosophy thatleadership development is a continuous journey.

112

A key policy initiative to enhance access to financing wasthe introduction of the New Interest Rate Framework inApril 2004. In addition to enhancing the effectiveness ofmonetary policy transmission through the introduction ofthe Overnight Policy Rate as a rate that reflects monetarypolicy stance, the new framework was also aimed atpromoting efficient pricing of interest-based products bybanking institutions. Towards this end, the policy of settinga ceiling base lending rate (BLR) by Bank Negara Malaysiawas removed and, instead, banking institutions are free toset their own BLR to reflect their funding and other coststructures, as well as business strategies. The maximumlending spread of 2.5 percentage points above BLR wasalso removed. The removal of these limits providedflexibility for the banking institutions to price theirinterest-based products, allowing greater use ofdifferentiated pricing strategies to match risk profile ofdifferent customers and market segments. In addition,flexibility to price products was key in ensuring continuousinnovation by the banking institutions to meet the growingdemands for customised and complex financial products.To ensure fair pricing and safeguard consumers’ interest,attention is also given to having a comprehensiveconsumer protection framework in place.

Since its introduction, there has been no change in theBLRs quoted by banking institutions (except one),reflecting that the respective BLRs were already at a

competitive level. The average lending rates charged onnew loans approved since April 2004 did not exhibit anyincreasing trend, while average lending rates on newloans for certain customer segments continued to decline.It was also noted that following the introduction of thenew interest rate framework, a number of bankinginstitutions have introduced new innovative interest-based products, such as unsecured personal loans forindividuals and SMEs.

Efforts taken in these recent few years to enhance accessto financing by SMEs have yielded positive results. In2004, RM31.6 billion of loans were approved to morethan 92,000 SME accounts, while loan disbursements toSMEs grew by 15.3%. Loans to SMEs accounted forabout 40% of total outstanding loans to businesses(27% in 1998). At the same time, the SME Special Unit inBank Negara Malaysia had received a lower number ofenquiries and complaints related to financing and loanrestructuring from SMEs in 2004.

During the year, efforts to reposition IBBM as an effectivetraining provider and adviser for the industry gainedmomentum with the formulation of a strategicdevelopment plan that identified strategic areas to beprogressively implemented to enhance the traininginfrastructure of IBBM. One key initiative is theenhancement of IBBM’s educational and qualificationportfolios, which included the development of an industrycompetency framework and the restructuring of itsexisting Continuing Professional Developmentprogramme. This would place IBBM in a position todesign and offer relevant and customised managementand technical programmes to meet current and futureneeds of the banking industry. Forging strategic allianceswith related parties has been identified as a possible wayof strengthening the capacity and capability of IBBM. Inthis regard, IBBM has entered into a collaborativearrangement with a local public university to produce apool of banking and finance graduates equipped with therelevant knowledge and exposure to the industry.

Ensuring Continuous Access to FinancingThe strong financial position has enabled the bankingsystem to continue supporting economic growth throughlending expansion. During the year, both households andbusinesses, especially the SMEs, gained increased accessto financing. Total outstanding loans grew by 8.5% in2004, with loans to households and SMEs increasing by

14.4% and 7.7% respectively. Given the important roleof the banking system as the main provider of funds inthe economy, policy initiatives during the year werefocused on ensuring that lending activities weresupportive of private sector economic activity and that allsectors of the economy has access to financing. Thesewere complemented by safeguards to maintain financialstability by ensuring observance of prudential lendingnorms and effective risk management.

Continued focus on lending to the household sector hasled to further increase in the share of loans to the sectorto 51.4% of total outstanding loans as at end-2004(end-2003: 48.8%). Strong lending to this sector wasaccompanied by rising income levels and stableemployment conditions which enhanced the capacity ofhouseholds to continue accumulating net financial assets.The household balance sheet remained healthy, while theexposure of the banking system to the sector was withinprudential levels.

The New Interest Rate Framework allows greater use ofdifferentiated pricing strategy, promotes efficient risk-pricematching and innovation, and enhances access to financing bycertain customer segments.

113

The Banking System

During the year, initiatives focused on strengthening theoverall infrastructure to promote the development of SMEsand ensure enhanced access to financing by them. Asignificant milestone was the establishment of the NationalSME Development Council, in August 2004. Thisrepresented an achievement of a two-year effort by BankNegara Malaysia in collaboration with a number ofgovernment agencies to effectively promote thedevelopment of SMEs. The roles, structure andachievements of the National SME Development Councilare set out in more details in the White Box entitledReport on Small and Medium EnterpriseDevelopment Framework.

The Small Debt Resolution Committee was established byBank Negara Malaysia in 2003 to support viable SMEs thatare constrained by NPLs. The Small Debt ResolutionScheme has received 228 applications involving NPLstotalling RM180.2 million, of which 116 cases have beensuccessfully resolved. Additional financing ofRM10.5 million was approved to eligible borrowers as partof the NPL resolution package to assist these viable SMEsto overcome short-term cashflow problems and ensurecontinuation of their businesses. As part of the initiatives toenhance access to financing by SMEs, the allocations forthe Fund for Small and Medium Industries 2 (FSMI2) andthe New Entrepreneurs Fund 2 (NEF2) were increased byRM2.5 billion and RM850 million respectively in 2004 tosupport the higher demand for loans under these specialfunds. This brought the total allocations for the FSMI2 andNEF2 to RM4.5 billion and RM2 billion respectively. As atend-2004, a total amount of RM6.1 billion or 93.2% ofthese two funds has been approved to more than 9,000SME accounts. As part of the efforts to promote lending toSMEs, banking institutions submitted their lending targetsto Bank Negara Malaysia. In cases where the targets weredeemed insufficient, the banking institutions wereencouraged to review those targets. For the period fromJuly 2003 to December 2004, the banking system as awhole approved RM44.8 billion loans to SMEs, exceedingtheir collective target of RM26.7 billion by 67.4%.

Bank Negara Malaysia also uplifted the restrictions on theprovision of bridging finance for property development inSeptember 2004. These restrictions, which include totalban on provision of bridging finance for development ofoffice buildings, shop houses and shopping complexes,were imposed in 1999 to address oversupply situation andhigh property sector exposure by the banking system.Considering the stable and positive outlook for theproperty market, these restrictions were uplifted and underthe new Guidelines, the Board of Directors of each bankinginstitution is now responsible for ensuring that anyproposed development projects to be financed would not

contribute to a worsening of property overhang situation.This is in line with the move to accord greater responsibilityand accountability to the Board of Directors in the overallbusiness strategies of the institutions.

During the year, work was initiated to increase access tofinancing by agriculture and agro-based industries. Theagriculture sector has been identified as the third engine ofgrowth, and a comprehensive set of policies have beenoutlined in the Third National Agriculture Policy (NAP3) todevelop and promote the sector. It is estimated that a totalof RM32 billion of investment would be required in thesector over the period 2000-2010, of which RM21 billionwould involve investment by the private sector. Therefore,financing is vital in ensuring the success of theGovernment’s aspiration to promote the sector. As thebanking system is the largest provider of credit to thesector, additional financing to this sector would involveimproving the utilisation of funds of the banking system.Government policy initiatives in the pipeline encompassenhancing the viability of the agriculture sector andagro-based industries, including through riskmitigation efforts such as guarantee and insuranceschemes. Focus will also be placed on improving accessto financing for start-ups and new ventures in newgrowth areas such as biotechnology and aquaculture.

Promoting Active ConsumerismBank Negara Malaysia continued to place priority onensuring that consumers are better able to make informedchoices and achieve fair deals in their financialarrangements. In meeting this objective, efforts have beendirected at enhancing financial literacy levels of thebanking public as well as to strengthen the regulatoryinfrastructure. Efforts to enhance financial literacy levelscontinued to be aimed at improving consumers’ ability tomake financial decisions with confidence and, in particular,empower consumers to make wise savings and investmentdecisions. The consumer education programme, known asBankingInfo, which has now entered into its third year,continued to provide pertinent information to facilitateinformed decision-making. The booklets are beingtranslated into Mandarin and Tamil to enable largersegments of the population to have access to key financialinformation. BankingInfo has also leveraged on a diversedistribution network via existing branches of bankinginstitutions, complaint and consumer bureaus, officialwebsites as well as via participations in seminars andconferences organised by various organisations throughoutthe year to enhance the outreach of the programme. TheBankingInfo website, to-date, has received an encouragingresponse of more than 17 million hits and about 3 millionbooklets were taken up by the public (end-2003: 6.4million hits and 1.2 million booklets ).

114

and specific disclosure requirements at key stages offinancial arrangements, and disclosure requirements inrelation to advertisements. Effective 1 February 2005,banking institutions are required to comply with thefollowing:• Banking institutions shall make available at all their

branches and websites, the fees and charges imposedon retail products and services for individuals andSMEs; and

• The conditions and effects of any changes to theterms and conditions of the products and services,including fees and charges, shall be communicated tothe relevant customers at least 21 days before thechanges occur to allow customers to make anyadjustment they deem necessary to their bankingarrangements.

To minimise the cost of information search amongstconsumers, Bank Negara Malaysia has in 2004,developed comparative tables on key rates, namely BLRs,fixed deposit rates for balances up to RM1 million andexceeding RM1 million, long term fixed deposit rates andnegotiable instrument of deposit rates. These comparative

tables are published in the BankingInfo website, providingconsumers with up-to-date information on the ratesoffered by different institutions and thus allowing for‘comparative shopping’. Moving forward, comparativetables on commonly offered deposit and credit productswould be developed in the immediate term.

Ensuring that Malaysians have access to basic bankingservices is an issue of fundamental significance instrengthening the consumer protection infrastructure. InDecember 2004, Bank Negara Malaysia announced theframework on basic banking services which aims atensuring that the banking public has access to basicbanking services at minimal costs. Effective 1 February2005, commercial banks and finance companies arerequired to offer a basic savings account (BSA) and abasic current account (BCA), without an overdraftfacility, to all Malaysians including permanent residents.The BSA and BCA will allow access to services such ascheque and cash deposits, account enquiries,withdrawals, fund transfer within the same bankinginstitution, bill payment facility, as well as Interbank-GIRO.These accounts entitle accountholders to have access toat least 16 monthly transactions per account of which

The full impact of any financial literacy initiative will onlybe seen over the medium and long-term period. As such,future generations become an important target forpersonal finance education so that the benefits of sucheducation can be realised in the future. In this connection,since 1996, Bank Negara Malaysia together with theEducation Ministry has embarked on a School AdoptionProgramme to inculcate smart financial managementhabits among students by providing simple and practicaleducation about basic money management. Through thisprogramme, about 7,000 schools have been adopted bybanking institutions which play a leading role ineducating school children on basic financial knowledgethrough student financial clubs using Students PocketMoney Book as a teaching tool. In October 2004, theonline version of the Pocket Money Book was launchedto enhance the distribution of the pocket book. Theprogramme to inculcate smart financial managementhabits has also been extended to cover a wider targetaudience, including women, teachers and workersthrough the use of Household Account Books to assistfamilies in the management of household income,savings and investments.

Given the wide use of financial services and thatconsumers do not have access to the same level ofinformation or requisite understanding and bargainingpower, it is vital for consumers to be given access toinformation in a clear and transparent manner and aretreated fairly in their dealings with financialinstitutions. Towards this end, Bank Negara Malaysiahas implemented a consumer protection framework,comprising four main areas, namely, providingconsumers with adequate information; ensuringconsumers have access to basic financial products andservices; strong regulatory oversight to ensure fairpractices by banking institutions; and establishing aneffective redress mechanism.

Access to reliable, relevant and timely information is acritical pre-condition to facilitate informed decisions.Significant attention has, therefore, been given topromote a higher level of disclosure and transparency inthe financial system. A concept paper on the proposed‘Guidelines on Product Transparency and Disclosure bythe Banking Institutions’ was issued to the bankingindustry in 2004. The proposed Guidelines set out theminimum standards for the banking sector on general

Bank Negara Malaysia has implemented a comprehensiveconsumer protection framework in the areas of disclosure,access to basic financial services, regulatory oversight andredress mechanism.

115

The Banking System

14 are free and 2 (namely Interbank-GIRO transactions)will be charged a minimal fee of not more thanRM0.50 per transaction. Details of the BSA and BCAare as per the table below. For banking institutionswithout either ATM and/or GIRO facilities,consumers will be able to perform their transactionsover-the-counter (OTC) subject to the overall limit.

In addition, Bank Negara Malaysia has also introduced aframework governing the imposition of fees and chargeson retail banking products and services. Under thisframework, banking institutions are required to obtainBank Negara Malaysia’s approval prior to any upwardrevision of existing fees and charges or for anyintroduction of new fees and charges imposed on

No. Parameters

1 Eligibility

2 Features

• Must be Malaysian citizens or permanent residents. For BCA, the requirement foran applicant to be at least 18 years old and to have an introducer remainunchanged.

• Entitled to 1 BSA and 1 BCA per individual per banking institution.

Basic Current Account (BCA)• Initial deposit requirement to open a

BCA is not more than RM500.

• No charges on the issuance of chequebook except for stamp duty incurred.

• Service charge of RM10 half yearly forbalances less than RM1,000 as perexisting ABM rules.

• Free monthly statement.

Basic Savings Account (BSA)• Initial deposit requirement to open a

BSA is not more than RM20.

• Should earn interest irrespective ofaccount balance.

• No service or maintenance charge.

• Minimum balance requirement of notmore than RM20.

• Free mini statement.

3 MinimumNumber ofMonthlyTransactions

4 InternetBankingFacility

5 Other Feesand Charges

Accountholders are entitled to at least 16 transactions per month per accountcomprising:

a) Six free OTC visits for account enquiries, withdrawals, fund transfers within thesame banking institution and bill payments. OTC visit is defined as one visit to thebank’s counter irrespective of the number of transactions performed;

b) Eight free ATM cash withdrawal transactions. There is no limit on ATMtransactions that are not cash withdrawals (e.g. balance enquiry or fund transferwithin the same banking institution); and

c) Two Interbank-GIRO transactions for which a maximum fee of RM0.50 pertransaction may be charged.

Note: For banking institutions without ATM and/or GIRO facilities, accountholders willbe able to perform these transactions OTC.

BSA and BCA accountholders of banking institutions which have internet bankingservices are entitled to unlimited online account enquiries, fund transfers within thesame banking institution and payment of bills, at no charge.

a) Replacement of ATM/bankcard (not more than RM12).

b) Closure of BSA and BCA within 3 months of account opening (not more thanRM20).

individuals and/or SMEs. For existing fees and charges,banking institutions have been required to providerationale and justification for imposing such charges. Inthis regard, Bank Negara Malaysia will ensure thesecharges are appropriate, reasonable and adequatelyreflect cost and cost savings.

Access to appropriate redress mechanisms is key topreserving consumers’ confidence. This is critical toenable consumers to resolve conflicts through anequitable process. In Malaysia, the Banking MediationBureau and the Insurance Mediation Bureau have longbeen in existence to provide consumers with an avenueto resolve disputes without entailing lengthy andexpensive legal action. These mechanisms were further

Summarised Features of the BSA and BCA

116

enhanced with the establishment of a Financial MediationBureau (FMB) to expand the scope of arbitration, increaseaccessibility by consumers and improve efficiency. TheFMB, which was launched on 20 January 2005, serves asa one-stop centre for the resolution of a broad range ofretail consumer complaints against financial institutionsregulated by the Bank. The scope of the FMB has beenexpanded to cover Islamic banks, takaful operators,development financial institutions, as well as selectedpayment system operators and non-bank issuers of creditand charge cards. This will provide increased access to theBureau as an avenue for redress for a wider spectrum ofthe public. To ensure nationwide accessibility, the FMBplans to progressively establish five regional offices in thenear future.

The FMB is governed by a Board of Directors andchaired by an independent Chairperson. Five of thenine directors are independent members representingthe public interest with the balance from the bankingand insurance industries. The Bureau is staffed byindependent mediators who are experienced in judicialmatters. The framework and governance structure isaimed at ensuring that consumers have access to a fairand equitable resolution process.

Maintaining Financial StabilityPreserving financial system stability is a key policyobjective of the Bank. The resilience of bankinginstitutions and stability of the system is important insafeguarding depositors’ interest, and in ensuringuninterrupted intermediation process, a critical elementfor macroeconomic stability. Bank Negara Malaysiaadopts a comprehensive approach in preserving financialstability, which encompasses surveillance at bothindividual institution and system levels; regulations toensure prudent practices by banking institutions; andsupervisory activities. This is complemented by marketdiscipline, as a tool to act as check and balance to themanagement of banking institutions. In addition,concerted efforts were also accorded to put in place anddevelop relevant financial safety nets in reinforcing publicconfidence in the financial system.

During the year, efforts were directed at furtherstrengthening the effectiveness of the surveillance of thebanking system. The aim is to develop a comprehensiveand effective banking system surveillance framework thatis capable of detecting emerging vulnerabilities andweaknesses that can undermine financial stability as wellas assessing the capacity of the banking system towithstand shocks. Initial work has started towardsdeveloping additional tools to enhance ongoingsurveillance and analyses of banking system resilience.

This includes forward-looking surveillance tools both atthe system and institution levels to identify, measure,assess and predict emerging vulnerabilities. Additionally,focus was also placed on enhancing existing stress testmethodology to ensure its effectiveness and relevance.

In the area of prudential regulations, work in 2004focused on several aspects, including enhancements tothe existing capital framework and the strengtheningof corporate governance. These were complementedby the improvement made in the disclosurerequirement and the development of a depositinsurance system. The year 2004 saw intensified effortsat the global front as both regulators and the bankinginstitutions prepare to implement the new regulatorycapital framework, Basel II. The framework that wasfinalised by the Bank for International Settlements inJune 2004, will be adopted by the Group of Ten (G-10)countries by end-2006, except for the advancedapproaches which will be implemented by end-2007.The final framework introduced significant changesfrom the third Consultative Paper issued in April 2003,with respect to the treatment for expected losses (EL)and unexpected losses (UL), treatment for securitisationexposures, credit risk mitigation and treatment forqualifying revolving retail exposures.

In Malaysia, the earlier assessment conducted by BankNegara Malaysia on the readiness of banking institutionsfor Basel II, had provided the basis for the implementationof the new framework. Four key principles are adoptedby the Bank to determine Basel II implementationstrategies, namely:• Ensuring that risk management standards amongst all

banking institutions are enhanced over time;• Adoption of a more flexible timeframe that allows for

the implementation of capacity building measures.This is based on the recognition that domestic playersare at different levels of sophistication, thus moretime should be accorded to institutions intending toadopt the more advanced approaches;

• Implementation should not be based on regulatorymandate. The adoption of advanced approaches shouldbe supported by strong business justification; and

• Ensuring a more effective supervisory process for theadoption of more advanced approaches. This will beachieved through the use of an enhanced supervisorymethodology to assess internal models and advancedrisk management systems.

The adoption of Basel II in Malaysia is in tandem with theoverall policy agenda to promote higher standards of riskmanagement amongst Malaysian banking institutions asthe banking sector progresses with greater competition

117

The Banking System

and liberalisation. While the potential capital savings maybe one of the main attractions of Basel II, the real benefitto be gained is the integration of risk managementpractices within the banking institution. Under the newframework, key decision making such as on productpricing, portfolio management and new businessdevelopment eventually will have to be made based onrisk-adjusted returns and capital considerations. Theconvergence of risk management practices with dailybanking operations would also facilitate the nurturing ofa strong risk culture within the banking industry overtime.In the longer term, the objective is to promote greaterconvergence between regulatory capital and economiccapital employed by banking institutions.

While both options for credit risk, namely theStandardised and Internal Ratings Based (IRB) approacheswould be allowed in Malaysia, banking institutions wouldneed to determine the most appropriate approach basedon their cost and benefit analysis and ability to meet allminimum supervisory requirements set by the Bank for

International Settlements and Bank Negara Malaysia.Banking institutions that choose to adopt theStandardised Approach for credit risk would be requiredto comply with the new framework by January 2008. Atthe same time, these banking institutions are alsoexpected to comply with the Basic Indicator Approach forthe operational risk. Subject to prior approval of the Bank,the Standardised Approach for operational risk, underwhich the capital charge will be determined based onspecific risk factors attached to eight pre-determinedbusiness lines, may also be adopted by such bankinginstitutions. While most banking institutions may consideradopting the Standardised Approach for credit risk as amore reasonable interim strategy before the adoption ofthe more advanced approaches, the emphasis wouldnevertheless be on the development of a sound and wellfunctioning internal rating systems that would ensure amore natural progression towards more advancedapproaches in the future.

For banking institutions intending to adopt the IRBapproaches, the compliance deadline is January 2010.These banking institutions would be given the flexibility tomigrate to the advanced approaches directly from theexisting capital accord, provided they can demonstrate tothe Bank their ability to meet and comply with all the

The real benefit to be gained from Basel II is the integration of riskmanagement practices within the banking institution as keydecisions will have to be made based on risk-adjusted returns andcapital considerations.

requirements and regulatory expectations for theimplementation of the more advanced approaches.Banking institutions that comply with the IRB approachesfor credit risk from January 2010, are also required toprovide capital for the operational risks based on any ofthe three approaches, namely the Basic IndicatorApproach, the Standardised Approach or the AdvancedMeasurement Approach, subject to prior approval of theBank. All banking institutions would be required toconduct a one-year parallel capital adequacy calculationunder the new approaches prior to their respective yearof migration to Basel II.

The more flexible time frame for the implementation ofthe advanced approaches for both credit and operationalrisks takes into account the need to minimise disruptionto the capacity building initiatives that are currently beingundertaken by the banking institutions. The progressiveapproach recognises the greater challenges with respectto meeting the more stringent minimum requirements forthe advanced approaches. One of the challenges for the

adoption of the Advanced IRB approach would be therequirement for banking institutions to provide robustloss estimates that reflect domestic market experience.The longer time frame will provide sufficient time forbanking institutions to enhance their data managementinfrastructure, collect the necessary data required toestimate the risk parameters and improve their analyticalskills. On data collection, the more flexible timelinewould also allow banking institutions to accumulate theinternal loss data on defaulted loans, for the retail andqualifying SME portfolios, that is required even for theFoundation IRB approach.

Given the wide-ranging impact of Basel II on the businessconducted by banking institutions, well-coordinatedstrategies and a structured approach to implementationwould be critical in ensuring a smooth rollout byindividual institutions. Therefore, a key success factor forthe banking institutions is to have in place a propergovernance structure and implementation taskforce tospearhead their Basel II initiatives to ensure projects arenot conducted in isolation. It is imperative that all relevantstakeholders and business units within the bankinginstitutions recognise the implications of the new capitalframework and are involved in the implementationprocess. Having a well-defined role for and the proactive

118

involvement of the Board of Directors and seniormanagement of banking institutions in the overall processis critical. Effective Board oversight, and the commitmentand continuous support of senior management, is crucialtowards ensuring that Basel II-related initiatives areconsistent with the long term risk management agendaof the banking institutions.

To ensure that banking institutions adopt a proactiveattitude in addressing the various challenges arisingfrom Basel II, Bank Negara Malaysia has issued a setof fundamental requirements to the bankingindustry in September 2004 that highlights keyregulatory expectations on banking institutions andthe requirement for banks to put in place a formalgovernance framework, conduct gap analysis andengage in discussions with the Bank on theirrespective Basel II initiatives.

In line with Bank Negara Malaysia’s prime objective ofcontinuously enhancing the banking system’s financialstability through the promotion of sound riskmanagement practices, the Market Risk CapitalAdequacy Framework (MRCAF) was implemented tointroduce more risk sensitivity to the existing regulatorycapital requirements by explicitly providing for potentiallosses arising from market risk. The MRCAF is inconformity with international regulatory standards byadopting the Bank for International Settlements’recommendation on ‘Amendment to the CapitalAccord to Incorporate Market Risk, January 1996’. Theimplementation of the MRCAF is timely as the bankinginstitutions emerge from the Asian financial crisis andget increasingly involved in treasury and capital marketactivities, particularly in innovative and financiallycomplex products, that are sensitive to movements inmarket rates. With the implementation of the MRCAF,all banking institutions and discount houses mustincorporate their market risk capital requirements intothe existing risk-weighted capital adequacy frameworkand be subject to the overall minimum risk-weightedcapital ratio requirement of 8%.

Following efforts to strengthen corporate governance inbanking institutions, coupled with increasing demand forgreater public disclosure and enhancement of financialreporting by investors, the ‘Guidelines on FinancialReporting for Licensed Institutions’ (GP8) was revised inOctober 2004. In addition to setting out the minimumdisclosure requirements, licensed institutions are alsoencouraged to disclose additional information in theirfinancial statements to ensure that all material activitiesare reported and well understood by users of the financialstatements. Among the major changes in the revised

Guidelines are the adoption of fair value accounting,the requirement for interim financial reports to beprepared on a quarterly basis and the extension ofthe application of the revised Guidelines to discounthouses, money brokers and financial holdingcompanies. These enhancements would furtherimprove the transparency, comparability, relevanceand timeliness of information relating to licensedinstitutions’ operations and financial condition,which are critical elements for effective applicationof market discipline. By aligning disclosurerequirements to international standards, the revisedGP8 would also enhance the comparability offinancial statements. This will enable stakeholders tobenchmark licensed institutions’ performance andfinancial condition against their international peers,thereby further enhancing market discipline ondomestic financial institutions.

As part of concerted efforts outlined in the FSMP tofurther strengthen the existing depositor protectioninfrastructure, work on the establishment of a depositinsurance system in Malaysia proceeded during theyear. A key objective of the system is to provide areasonable level of explicit protection to depositors ontheir deposits held with the commercial banks, Islamicbanks and finance companies. The concept paperissued to the industry in November 2004 proposes theestablishment of a statutory body responsible for theadministration of the deposit insurance system, as wellas to undertake the resolution of banking institutionsdeemed no longer viable by Bank Negara Malaysia. Atthe same time, the statutory body will also bemandated to strengthen the incentives for sound riskmanagement in the banking system in promoting thestability of the financial system.

The deposit insurance system will provide separatedeposit insurance coverage for the conventional andIslamic banking systems. All commercial banks andfinance companies currently licensed under the Bankingand Financial Institutions Act 1989, as well as all Islamicbanks currently licensed under the Islamic Banking Act1983 are required to become members of the system soas to prevent adverse selection that would underminethe viability of the deposit insurance system. Therationale for separate deposit insurance coverage for theIslamic banking system is to ensure similar treatmentwith conventional deposits coupled with the requiredconsistency of administration of the deposit insurancesystem with Shariah tenets in respect of Islamic deposits.Deposit insurance coverage in both systems would beextended to all depositors, whether corporate orindividuals, up to a prescribed coverage limit. One of the

119

The Banking System

underlying principles governing the coverage limit of thedeposit insurance system is that it should be sufficient topromote confidence among the large majority ofdepositors, particularly those who are not in the positionto effectively assess and monitor the financial conditionof banking institutions. The relationship between thecoverage limit and moral hazard is also accorded carefulconsideration given the need to maintain sufficientincentives for large depositors to effectively exert marketdiscipline over member institutions.

The deposit insurance system will be funded by annualpremiums received from member institutions, where aflat rate will be imposed for the initial two years of theimplementation of the system. Thereafter, a riskdifferential premium framework will be implemented,consistent with the mandate of the deposit insurer tostrengthen incentives for sound risk management of itsmember institutions. The framework would bedesigned to encourage member institutions to improvetheir risk management systems and business practicesin order to qualify for the lower premiums after theinitial two-year interim period. The deposit insuranceframework is in the final steps of preparation and isexpected to be operational in 2005.

In an effort to further improve the level of InformationSecurity (IS) management amongst bankinginstitutions, Bank Negara Malaysia had issued the‘Guidelines on Management of Information TechnologyEnvironment’ (GPIS 1) in May 2004. The Guidelinesoutline the minimum responsibilities and requirementsfor planning and managing the banking institutions’ ISenvironment, as well as for establishing preventivemeasures to mitigate the risks pertaining to theenvironment. The Guidelines also include therequirements and best practices in the areas of boardand management oversight, system security, systemdevelopment, operations, communications networkand business resumption and contingency plans. Theimplementation of these minimum requirements andbest practices would enable the institutions tominimise the risks associated with service interruption,unauthorised access to customers’ information, fraudand loss of customers’ confidence.

In July 2004, Bank Negara Malaysia conducted a surveyon the disaster recovery capabilities of all commercial andIslamic banks to assess their readiness in ensuring theavailability of essential banking services during a disastersituation. The information from the survey shows that allbanking institutions have already put in place thenecessary business resumption and contingency plans fortheir critical business functions, although there are areas

for improvement in some of these institutions.Subsequently, the banking institutions also benefitedfrom the assessment as they were provided with abenchmark comparing their performance with the rest ofthe industry. In this regard, banking institutions areexpected to make further improvements in disasterrecovery readiness thus ensuring the availability of criticalbanking services with minimal interruptions to the publicin the event of a disaster.

Fraud prevention is another critical area in maintainingstability and public confidence in the banking andpayment systems. During the year, a number ofmeasures were put in place to enhance fraudprevention mechanisms. In July 2004, Bank NegaraMalaysia issued the ‘Guidelines on Minimum SecurityStandards for Cheques’ which set out, among others,the minimum standards for security features oncheques, cheque fraud detection facilities and securitymanagement in cheque printing. Following the successof the migration to chip-based Automated TellerMachines (ATM) cards in eliminating ATM card forgery,a similar initiative is currently being undertaken by thecredit card industry where magnetic strip credit cardsare being replaced by the Europay-Mastercard-Visa(EMV) credit cards during the year. Full conversion toEMV environment, which include converting all creditcard terminals to be EMV-compliant, is expected to becompleted by end-2005.

Moving forwardGreater competition in the banking sector is likely toensue as the domestic financial landscape evolves overtime. This is particularly the case in the second phase ofthe FSMP, where greater operational flexibility will beaccorded to the incumbent foreign banking institutions.In this more liberalised environment, continuedenhancements of operational efficiency, and productand services innovation are necessary to ensure thecompetitiveness of domestic banking institutions. Interms of business focus, it is envisaged that as theeconomy transforms and consumers grow moreaffluent, banking institutions would need to strengthencapabilities in the areas of personal financial advisoryservices, wealth management, consumer banking andSME financing. In addition, the domestic bankinggroups would increasingly expand their presence in theregion to further diversify their earnings and enhanceperformance. The policy directions in this environmentwill focus on strengthening the efficiency, effectivenessand resilience of the banking sector with a carefulbalance made on promoting efficiency andmarket-driven system, with the objective of maintainingfinancial stability and consumer protection.

120

Banking Measures Introduced in 2004

In 2004, further initiatives were undertaken to strengthen the safety and soundness of the financial systemand promote competition and efficiency in the banking industry. In addition, measures were implementedto ensure continuous access to financing as well as to enhance consumer protection and confidence in thebanking sector.

Measures to Enhance Safety and SoundnessIncorporation of Market Risk into the Risk-Weighted Capital RatioThe market risk capital adequacy framework was issued for implementation in September 2004. Thecommercial banks, merchant banks, finance companies and discount houses, collectively known as thelicensed institutions, are now required to incorporate their market risk positions into the risk-weightedcapital ratio (RWCR) and comply with the minimum RWCR by the second quarter of 2005. Even with theincorporation of market risk, the minimum RWCR requirement remains at 8%.

Under this framework, only interest rate risk and equity risk in the trading book are included, while forforeign exchange risk, both trading and banking book positions are incorporated. Nevertheless, licensedinstitutions are expected to have in place adequate measures to manage their interest rate and equity riskexposure in the banking book. In line with Bank Negara Malaysia’s efforts to enhance corporategovernance in licensed institutions, the Board is charged with the responsibility of approving policies andstrategies on market risk management and ensuring that adequate measures are in place to monitor andcontrol such risks.

Capital Treatment on Holdings of Other Licensed Institutions’ InstrumentsThe capital framework issued in 1989 required holdings of other licensed institutions’ capital instrumentsto be deducted from the capital base. In tandem with the development of the domestic capital market andinternational regulatory practices, Bank Negara Malaysia revised the capital treatment to facilitate tradingand market making activities of capital instruments issued by licensed institutions. The revised capitaltreatment, issued in July 2004, specified that the holdings of other licensed institutions’ capital instrumentswould be exempted from capital deduction if it does not exceed 10% of the licensed institution’s capitalbase. However, the capital treatment for the holdings of capital instruments issued by related companies orcompanies within the same banking group remains unchanged.

Regulatory Treatment for Residential Mortgage-backed SecuritiesThe regulatory treatment, issued on 17 September 2004, accorded a 20% risk weight for the firsttranche of residential mortgage-backed securities issued by Cagamas MBS Berhad, a wholly-ownedsubsidiary of Cagamas Berhad, under the RWCR framework. In addition, holdings of subordinatedresidential mortgage-backed securities are required to be deducted from capital base. Holdings ofresidential mortgage-backed securities issued by Cagamas MBS Berhad together with other creditfacilities granted to Cagamas MBS Berhad are subjected to the single customer credit limit oflicensed institutions.

Regulatory Treatment for Ringgit-denominated Bonds Issued by Multilateral InstitutionsIssued in October 2004, ringgit-denominated bonds issued by Multilateral Development Banks andMultilateral Financial Institutions were accorded a 0% risk weight under the RWCR framework andclassified as liquefiable assets under the New Liquidity Framework.

Implementation of Basel IIIn April 2004, Bank Negara Malaysia announced the implementation approach and timeline of the newBasel Capital Accord (Basel II). Basel II would be implemented in two phases. In particular, as a minimum,banking institutions will be required to implement the Standardised Approach for credit risk and basic

121

The Banking System

indicator approach for operational risk under Basel II in 2008. However, banking institutions whichmeet the requirements set by Bank Negara Malaysia will be allowed to adopt the Internal RatingsBased approach in January 2010 without having to comply with the Standardised Approach forcredit risk in 2008. The decision whether to migrate directly to the Internal Ratings Based approachin 2010 rests entirely with the Board of Directors based on the banking institution’s gap and impactanalysis as well as cost-benefit considerations. In September 2004, the minimum requirements ongovernance structure, gap analysis and development of implementation plans with regard to Basel IIwere issued to the banking institutions.

Guidelines on Minimum Security Standards for ChequesAs part of Bank Negara Malaysia’s continuing efforts to combat rising cheque frauds and tomaintain consumers’ confidence in using cheques, various measures were undertaken to detercounterfeiting and fraudulent alterations of cheques as well as to facilitate easier detection of suchactivities. Bank Negara Malaysia issued, in July 2004, the Guidelines on Minimum Security Standardsfor Cheques which specify the minimum requirements with regard to the role of bankinginstitutions in payment and collection of cheques drawn by or paid in by customers. In addition, theGuidelines set the minimum standards for security features on cheques, cheque fraud detectionfacilities and security management in cheque printing. Banking institutions are also expected toeducate consumers on the risks involved in the use of cheques and the safeguards to be adopted tohelp prevent cheque fraud.

Guidelines on Management of IT Environment (GPIS 1)To strengthen and enhance the level of information technology (IT) management in banking institutions,Bank Negara Malaysia issued GPIS 1 in May 2004. The Guidelines place the responsibility on the Board andsenior management in implementing good IT governance and risk management practices. The Guidelinesset the minimum requirements on system security, system development and operations in an ITenvironment to ensure appropriate controls are in place to safeguard the institution’s systems, data andinformation. To ensure timely resumption of critical IT operations in the event of a disaster, bankinginstitutions are required to establish an appropriate business resumption and contingency plan. Theimplementation of the requirements and best practices would enable the institutions to minimise the risksassociated with service interruptions, unauthorised access to customers’ information, fraud and loss ofcustomers’ confidence.

Disaster Recovery Capabilities of Banking InstitutionsIn July 2004, Bank Negara Malaysia initiated a survey covering 25 institutions to assess the state ofreadiness of banking institutions’ disaster recovery capabilities and to gather information on recoverystrategies. The findings of the survey were shared with the industry to further improve their IT disasterresumption arrangements. Bank Negara Malaysia will continue to review the business resumptioncontingency plans of banking institutions during its on-site IT audit and monitor the testing of disasterrecovery plans through reports submitted by banking institutions.

Measures to Enhance Competition and Efficiency in the Banking IndustryNew Interest Rate FrameworkTo enhance the effectiveness of the monetary policy transmission process and the efficiency offinancial market operations, Bank Negara Malaysia introduced a new interest rate framework inApril 2004. The framework also aims to facilitate more efficient pricing of financial products.Effective 26 April 2004, the ceiling on Base Lending Rate (BLR) and the maximum lending spread of2.5 percentage points above the BLR or cost of funds were removed. Banking institutions weregiven the flexibility to determine the BLR based on their own cost structure and lending strategies.This flexibility is expected to facilitate greater product innovation and customisation within thebanking industry to meet the differentiated needs of the growing economy.

122

Revised Regulatory Treatment for New Cagamas Debt SecuritiesAs a measure to further improve the efficient functioning of the domestic bond market, Bank NegaraMalaysia revised the regulatory treatment for new Cagamas debt securities issued after 4 September 2004.The risk weight for holdings of new Cagamas debt securities was increased from 10% to 20% under theRWCR framework. In addition, holdings of new Cagamas debt securities together with other credit facilitiesgranted to Cagamas Berhad are subjected to the single customer credit limit of licensed institutions.

Single Customer Credit Limit – Discount HousesWith effect from 1 October 2004, the Single Customer Credit Limit (SCCL) requirement was extended tothe discount houses to ensure excessive exposure in holdings of Private Debt Securities (PDS) to a singleissuer is avoided. The SCCL imposed on a single issuer is set at 35% of the approved capital funds of therespective discount houses for all new investments in PDS.

Deduction of Ringgit Debt Securities from Eligible LiabilitiesIn October 2004, commercial banks and merchant banks were allowed to deduct their holdings of thefollowing ringgit-denominated debt securities in the trading book from eligible liabilities in thecomputation of Statutory Reserve Requirement (SRR):• Specified RENTAS securities issued through the Principal Dealers network;• All corporate debt securities including Cagamas securities; and• Ringgit-denominated securities issued by Multilateral Development Banks and Multilateral

Financial Institutions.

The deduction would reduce the holding cost of these papers for the commercial banks and merchantbanks. This aims at promoting secondary trading of such securities in the bond market and levelling theplaying field for commercial banks and merchant banks with that of the other players in the bond market.

Innovative Tier-1 Capital InstrumentsEffective December 2004, licensed institutions are allowed to issue innovative Tier-1 capital instruments forinclusion in Tier-1 capital under the RWCR framework. The issuance of such instruments is, however,subject to the prior approval of Bank Negara Malaysia and the fulfilment of minimum requirementsspecified in the Guidelines.

Measures to Enhance Consumer ProtectionFinancial innovation and innovative developments in technology have increased the range andcomplexity of products and services offered by a myriad of service providers. This in turn, has providedconsumers with a wider range of options to manage their personal finances. To ensure that consumersare equipped to make financial decisions that meet their needs and are given a fair deal by financialinstitutions, Bank Negara Malaysia has put in place a long-term and structured consumer education andprotection framework.

Basic Banking Services FrameworkTo ensure that consumers have access to basic banking services and that these services are provided atminimal costs, Bank Negara Malaysia implemented a basic banking services framework with effect fromFebruary 2005. Under this framework, all banking institutions are required to offer at least one basicsavings account (BSA) and one basic current account (BCA) to all Malaysians, including permanentresidents. The framework provides an account holder with at least 14 free transactions per month,including eight ATM cash withdrawals. In addition, BSA and BCA account holders can perform at least twoInterbank GIRO transactions per month at not more than RM0.50 per transaction, while those whosubscribe to internet banking services are entitled to unlimited online account enquiries, fund transferswithin the same banking institution and payment of bills, at no charge. The basic savings account earnsinterest irrespective of the account balance.

123

The Banking System

Imposition of Fees and Charges on Banking Products and ServicesIn an effort to ensure that consumers and small and medium enterprises (SMEs) have access to financialproducts and services, apart from the BSA and BCA, at reasonable costs, Bank Negara Malaysia issuedGuidelines to govern the imposition of fees and charges by banking institutions in December 2004. Bankinginstitutions are required to obtain the prior approval of Bank Negara Malaysia for any upward revision ofexisting fees and charges or for any new fees and charges to be imposed on products and services offered toindividuals and SMEs. In this regard, banking institutions are required to justify the imposition of or increase infees and charges as well as the conditions under which the fees may be imposed.

To promote greater market transparency, the Guidelines also require banking institutions to publish all feesand charges imposed on products and services offered to individuals and SMEs at all branches and on theirwebsites. Banking institutions are also required to notify their customers at least 21 days before makingany change to the terms and conditions of products and services including fees and charges.

Financial Mediation BureauIt is important that, in the event of disputes involving products or services offered by financial institutions,consumers have recourse to an inexpensive and effective avenue to seek redress. In this regard, BankNegara Malaysia spearheaded efforts to enhance the dispute resolution mechanism for consumers toresolve conflicts through an impartial and equitable process.

On 20 January 2005, the Financial Mediation Bureau (FMB) was launched, as a result of the mergerbetween the Banking Mediation Bureau and the Insurance Mediation Bureau and, as such, is an integratedagency for the resolution of disputes against financial institutions under the supervision of Bank NegaraMalaysia. The FMB’s scope was expanded to cover disputes against Islamic banks, takaful operators,development financial institutions as well as selected payment system operators and non-bank issuers ofcredit and charge cards to ensure that customers of these financial service providers have access to thedispute resolution mechanism. The scope of the FMB was also expanded with regard to product coverage,type and nature of complaints as well as limits of awards. The FMB provides consumers with a fast andefficient avenue to seek legal redress as an alternative to resolutions through the court process. In addition,consumers benefit from the convenience of a single bureau and consistent processes and proceduresapplied across the different financial service providers.

Deposit InsuranceIn furthering efforts to strengthen the consumer protection framework and enhance the financial safetynet of the banking system, Bank Negara Malaysia issued, in November 2004, a concept paper to thebanking industry on the introduction of a Deposit Insurance System in Malaysia. The key objective of thedeposit insurance system is to provide a reasonable level of protection to depositors on their deposits heldwith banking institutions. The concept paper detailed some of the features being considered for a depositinsurance system.

Comparative TablesTo facilitate meaningful comparison and minimise the cost of information search amongst consumers,Bank Negara Malaysia has published comparative information on key rates, namely base lending rates,fixed deposit rates and negotiable instrument of deposit rates via BankingInfo website. Moving forward,comparative tables on commonly offered deposit and credit products will be developed.

Concept Paper on Product Transparency and DisclosureAs part of Bank Negara Malaysia’s continuous efforts to promote greater market transparency, a conceptpaper on product transparency and disclosure by the banking institutions was issued in March 2004.Frequently, the risks and costs of financial products and services are not adequately disclosed in thepromotional material and that important terms and conditions may not be given due prominence. To

124

ensure that consumers understand the nature and extent of the risks involved, the concept paperrequires that the information be worded and presented in a clear, concise and effective manner. Specificinformation that must be disclosed includes risk factors, yield, pricing, fees and charges, terms andtimeliness of information being disseminated to consumers using standard definitions and terminology.The disclosure requirement also applies to advertisements to ensure that the marketing and promotionalmaterial are not misleading.

Complaint HandlingEffective complaint handling is vital to ensure that customer complaints are promptly investigated andresolved in a satisfactory manner. Complaints that are carefully recorded and properly analysed toidentify the problems and root causes would enable banking institutions to address the shortcomingsin their operations. Starting from June 2004, banking institutions are required to submit a half-yearlyreport on the number and nature of complaints received. Bank Negara Malaysia will continue to play arole in handling customer complaints against banking institutions to ensure that complaints are dealtwith promptly and efficiently to ensure customers are treated fairly by banking institutions.

Revised Guidelines on Financial Reporting for Licensed Institutions (BNM/GP8)Following the issuance of two concept papers to the banking industry, the revised guidelines onfinancial reporting for licensed institutions were issued for implementation in October 2004. Theprimary objective of the revised Guidelines is to ensure compliance with international accountingstandards and consistent disclosure of all material and exceptional items among financialinstitutions to facilitate evaluation, assessment and comparison of the financial position andperformance of the institutions.

The revised Guidelines set out the minimum disclosure requirements and licensed institutions areencouraged to disclose additional information in their financial statements. The major changes to theGuidelines are as follows:• Licensed institutions are required to prepare interim financial reports on a quarterly basis;• Interim financial reports prepared on a quarterly and half-yearly basis are not required to be

published in the newspapers. Instead, licensed institutions shall make available the interimfinancial reports in their websites;

• Licensed institutions are required to segregate their securities portfolio into ’held for trading’,‘held-to-maturity’ and ’available-for-sale’ categories;

• Licensed institutions are given two options to account for their derivative transactions; and• Interest accrued and recognised as income prior to the date the loans are classified as

non-performing shall be reversed out of income. Subsequently, interest earned on non-performingloans shall be recognised as income on a cash basis.

The first set of financial statements prepared under the revised BNM/GP8 would be for the financialyear ending 31 December 2005.

Measure to Improve Access to FinancingUpliftment of Restrictions on the Provision of Bridging Finance for Property DevelopmentThe restrictions on the provision of bridging finance facilities for property development, introduced in1999 to address the property market overhang, were uplifted in September 2004. To ensure that theupliftment does not lead to oversupply in the property market, banking institutions are required toconsider the impact of the project that it proposes to finance on the property market in thesurrounding vicinity. This is in addition to the standard viability assessment on the project itself.Banking institutions are also required to provide its board of directors, whose concurrence is requiredto approve bridging finance facilities, with adequate information to assess such impact.

125

The Banking System

Financial Sector Masterplan

The implementation of the Financial Sector Masterplan (FSMP) is on track and on schedule. Another14 recommendations of the FSMP were fully completed during the year, bringing the total numberof fully completed recommendations to 45, which accounts for almost half of the recommendationswith milestones. Another 28 recommendations are being implemented on a continuous basis, whereinitiatives are continuously being taken to attain the desired outcomes. Details of the completedrecommendations are as listed in the accompanying table.

Completed Recommendations

Banking Sector

R3.4 Liberalise restrictions on salaries and staff mobility in the banking industry to enable the industryto attract the best talent and reward them accordingly

R3.5 Uplift restriction on employment of expatriates to attract the best international talents to meetthe demand for expertise in specific areas of banking

R3.6 Establish board committees, namely Nominating, Remuneration and Risk ManagementCommittees to further enhance corporate governance standards

R3.7 Allow group rationalisation through cross-selling of products and consolidation of back-officeprocesses as well as facilitate the merger of commercial banks and finance companies to furtherenhance efficiency and competitiveness

R3.9 Streamline the regulation of discount houses and merchant banks to enhance and allow faircompetition among players

R3.12 Encourage outsourcing of non-core functions to gain greater strategic focus and efficiencyR3.14 Encourage the development of new delivery channels to increase the range of products and

services to further enhance competitivenessR3.15.1 Simplify the product notification process to provide incentive for the development of new andand innovative products, and outline a set of guidelines providing criteria for product notification andR3.15.2 specific product approval requirementsR3.16a Introduce the New Interest Rate Framework to provide banking institutions with greater flexibility,

thus promoting more efficient pricing of productsR3.18 Encourage participation of banking institutions in areas currently served by fringe institutions

to promote a level playing field and preserve consumer protection and investors’ interestsR3.21 Implement risk-based supervision with supervisory focus on high risk areas and greater attention

on weak institutionsR3.22a Incorporate market risk into the capital adequacy framework to introduce more risk sensitivity to

the existing regulatory capital requirementsR3.23 Develop a formal and informal enforcement action framework to ensure banking institutions take

remedial actions on weaknesses highlightedR3.27 Increase efficiency and competition in the payments system to support the needs of the economy

while maintaining its safety and integrityR3.28 Allow market forces to shape developments in the payments system to promote greater

competition and increase innovation in payments systemR3.33 Allow banking institutions to rationalise their branch network to improve the dispersion of their

branches in the countryR3.37 Expand the role of the Banking Mediation Bureau with the establishment of the Financial

Mediation Bureau to strengthen consumer protection framework and to widen avenues forconsumers to seek redress

Insurance Sector

R4.1 Remove restrictions on outsourcing to enable insurers to further develop core competencies andeffective business strategies

126

R4.2 Allow eligible insurers to use the internet as a distribution channel to enhance competitivenessand efficiency of the insurance industry

R4.3 Promote the growth of bancassurance as a cost-effective alternative distribution channel by

implementing a more flexible regulatory framework on remuneration structures governing

bancassurance arrangements

R4.6 Relax the restrictions on employment of expatriates to accelerate the development of skills and

expertise in the industry

R4.16 Increase the statutory minimum paid-up capital of insurers to enhance their financial

resilience and ability to compete effectively in a more deregulated and liberalised market

R4.17 Strengthen ‘fit and proper’ regulations for board members and senior management of

insurance companies, including minimum qualification standards and training requirements

for directors, to promote sound corporate governance

R4.18 Establish board committees with specific responsibilities and enhance disclosure standards on

compensation to directors and senior management to further strengthen governance structures

and processes and promote greater transparency

R4.19 Raise the entry requirements for the agency force to uphold high standards of professionalism

and competencies among insurance intermediaries

R4.20 Introduce additional compulsory exams as part of the continuing education programmes for

agents to upgrade their knowledge and skills on an on-going basis

R4.21 Further strengthen performance-based supervision to maintain stability under more

deregulated and competitive market conditions

R4.22 Develop an enforcement action framework to ensure timely and consistent supervisory

intervention processes to address institutional risks

R4.25 Establish the Financial Mediation Bureau to strengthen the consumer protection framework

and widen avenues for consumers to seek redress

R4.26 Introduce ‘best advice’ regulations to enhance consumer protection and professionalism in the

sale of life insurance products by insurance intermediaries

R4.27 Strengthen regulations on unfair trade practices to ensure sound business practices and fair

treatment of consumers

R4.29 Allow financial and non-financial institutions to acquire interests in direct insurers to create

business synergies

Islamic Banking and Takaful

R5.3 Build strong management through the establishment of board committees, benchmarking and

employment of experienced and qualified staff

R5.5 Increase the number of Islamic banks to stimulate greater competition and accelerate

international integration by issuing Islamic banking licences to qualified domestic and foreign

banking institutions

R5.6 Increase the number of takaful operators to accelerate the expansion of takaful industry

R5.10 Establish a comprehensive legal infrastructure for consumers to seek legal redress arising from

Islamic financial transactions

Development Financial Institutions

R6.4 Introduce a systematic framework for sourcing funds to ensure appropriate and adequate

funding for the operations of development financial institutions (DFIs)

R6.7 Establish a legislative framework to regulate and supervise DFIs to ensure that DFIs’ policies

and objectives are consistent with the national policy objectives

R6.8 Establish a single Regulatory and Supervisory Authority (RSA) to strengthen the supervision

of DFIs

127

The Banking System

Alternative Modes of Financing

R7.2 Establish a RM500 million venture capital fund to increase the availability of venture capital

financing and stimulate new ventures

R7.3 Introduce further tax incentives for the venture capital industry to promote the growth of venture

capital

R7.4 Liberalise the MESDAQ listing requirements to facilitate the exit of venture capital companies

from their investments

R7.5 Establish two Islamic venture capital funds with a combined initial fund size of RM22.1 million

Labuan International Offshore Financial Centre

R8.3 Adopt a consultative and market driven approach to create a conducive tax and businessenvironment to enhance the competitiveness and attractiveness of Labuan

R8.6 Strengthen Islamic banking and finance as well as takaful to develop Labuan with a strategicfocus on Islamic products and services

R8.7 Enhance Labuan International Financial Exchange (LFX) to be a one-stop financial exchange forresidents and global companies

In the initial phase of the implementation of the FSMP, efforts were focused on enhancing the capabilityand capacity of domestic financial institutions. These efforts were continued in 2004 with furtherinstitutional development initiatives as well as measures to strengthen the regulatory and supervisoryframework, and enhance the consumer education and protection framework.

AchievementsMeasures implemented since the release of the FSMP four years ago, have yielded positive resultsand strengthened the respective building blocks of the financial sector. It has contributed towardsenhancing the capacity and capabilities of domestic financial institutions, promoting a moreefficient and stable payment systems infrastructure, providing a robust infrastructure to ensureoverall stability of the financial sector as well as putting in place a comprehensive consumerprotection infrastructure.

In the banking sector, domestic banking institutions have maintained their market share, despite amore competitive operating environment. As at end-2004, domestic banking institutions commanded78% share of gross loans and 77% of total deposits (end-2003: 78.3% of gross loans and 77.9% oftotal deposits). Domestic banking institutions also maintained its position as the main financier forbusiness enterprises with a market share of 78.7% (end-2003: 79%) and further enhanced its positionas the main lender to small and medium enterprises (SMEs) with a market share of 84.8% (end-2003:82.7%), particularly to the manufacturing sector where its market share increased from 76.3% in2003 to 82% in 2004.

Financial performance of domestic banks continued to be strong. Return on average assets and returnon average equity (excluding dividends received from banking subsidiaries) stood at 1.04% and 11.9%respectively (end-2003: 1.02% and 11.3% respectively). Initiatives taken to improve operationalefficiency continued to show positive results. The cost to income ratio has declined marginally from52.6% in 2003 to 51.9% in 2004. Better productivity levels were recorded, as exhibited by animprovement in pre-tax profit per RM employee cost, from RM1.49 in 2003 to RM1.55 in 2004.Customer service efficiency levels have also shown further improvements especially in the turnaroundtime for loan and credit card processing.

In addition, initiatives previously taken to enhance risk management capabilities have placed domesticbanking institutions in a stronger position to compete more effectively with the foreign banks. With betterrisk management capabilities, domestic banking institutions are better equipped to price their products

128

and services more competitively whilst ensuring that their risk exposures remained within reasonable levels.Better insight into their exposure levels and management capabilities also enable domestic bankinginstitutions to be more innovative in their product and business development strategies. Furthermore, themergers between commercial banks and finance companies have enabled domestic banking institutions tocapitalise on synergies and economies of scale to further enhance cost-efficiency levels.

For the banking system as a whole, the introduction of the New Interest Rate Framework, which wasaimed at promoting a more efficient pricing mechanism for interest-based products, provided bankinginstitutions with greater flexibility in pricing their products and services. This flexibility is also expected tospur greater product innovation by the banking institutions to meet the growing demands of customerswho value greater choices and customised financial products.

Similar to the banking industry, the insurance sector has also recorded performance improvementsamong domestic insurers. Domestic players maintained a strong market position with a market share of72.7% (end-2003: 73.3%) in the general sector. In the life sector, domestic insurers have successfullyleveraged on their comparative advantages to increase their combined market share to 35.8% of lifepremiums (end-2003: 31.8%) following the comparatively higher new business growth registered bydomestic life insurers compared with foreign insurers.

The development of bancassurance as a major distribution channel has contributed significantly to thegrowth of domestic life insurers. Domestic life insurers controlled 82.9% (end-2003: 79.2%) of totalpremiums generated through bancassurance in 2004. Leveraging on effective bancassurance strategies,domestic insurers were also able to correspondingly increase their market share of the fast growinginvestment-linked insurance market which has enjoyed strong demand from consumers in recent years.Domestic insurers accounted for 44.8% of new investment-linked premiums generated in 2004, anincrease from 33.6% in 2003.

The implementation of a more flexible policy on remuneration structures governing bancassurancearrangements in December 2004 is expected to provide appropriate incentives for the continued long-termdevelopment of bancassurance as a cost-effective distribution channel.

In line with efforts to strengthen Malaysia as an Islamic financial services centre and the growingpopularity of Islamic financial services worldwide, Islamic banking has strongly emerged as an efficientand effective financial intermediation channel and has become an integral component of the overallMalaysian financial system. The Islamic banking sector continued to show strong growth, as assets grewto RM94.6 billion as at end-2004 to account for 10.5% of the total assets of the banking system(end-2003: 9.7% or RM82.2 billion). Islamic deposits and financing have increased to RM72.9 billionand RM57.9 billion respectively, to account for 11.2% and 11.3% of the deposits and loans of thebanking system (end-2003: 10.4% and 10.3%). The takaful sector has remained stable with assetsconstituting 5.6% (RM5 billion) of the insurance and takaful industry’s total assets, and accounted for5.1% of total premiums and contributions of the industry.

Significant milestones have been achieved in the regulatory framework of Islamic banking and takaful tostrengthen the institutional capacity and resilience of the players. The Revised Rate of Returns Frameworkis expected to enhance the capacity and efficiency of the Islamic banking institutions in managing theirIslamic banking operations. Recognising that good corporate governance reinforces sound regulation andsupervision as well as contributes towards maintaining market confidence, the new guidelines ondirectorship for both Islamic banks and takaful operators are expected to further strengthen transparencyand accountability.

Additional measures to strengthen Shariah and legal infrastructure were also undertaken. To furtherenhance competitiveness, Islamic financial institutions are now exempted from any additional stamp

129

The Banking System

duty and tax payment arising from instruments and transactions executed in fulfilling Shariahrequirements to enable tax neutrality between Islamic and conventional finance. The Regional Centrefor Arbitration in Kuala Lumpur was chosen to arbitrate cases for Islamic banking and takaful. Thiswould complement the specialised High Court that is assigned to adjudicate all Islamic banking andfinance cases. Following the amendments to the Central Bank of Malaysia Act 1958, the stature of theShariah Advisory Council (SAC) has been elevated as the sole authority on Shariah matters pertainingto Islamic banking and finance that fall under the purview of Bank Negara Malaysia. The SAC willserve as the reference point by the court or arbitrator in the resolution of disputes that involve Shariahissues on Islamic banking and finance cases. The Guidelines on Governance of the Shariah Committeefor the Islamic financial institutions were also issued to specify amongst others, the new structure,roles and functions of the Shariah Committees of the Islamic banks, the conventional banksparticipating in Islamic Banking Scheme and takaful operators, and the requirements for theappointment of Shariah committee members.

In line with Malaysia’s aspirations to become the leading Islamic financial centre, the Labuan OffshoreFinancial Services Authority (LOFSA) has continued with its efforts to develop the Labuan InternationalOffshore Financial Centre (IOFC). Currently, there are two full-fledged Islamic banks, three Islamicinvestment banks and one full-fledged takaful/retakaful operator that operate in Labuan IOFC. To furtherstrengthen Islamic financial services in Labuan IOFC, LOFSA has established various working groupscomprising market experts to assist in formulating strategies to develop and promote Islamic capitalmarket, international Islamic trust and waqf, Islamic fund management, Islamic insurance or takaful andIslamic trade finance. In addition, there is greater co-operation and collaboration amongst regulatoryagencies in the area of financial markets and takaful to meet the requirements of Islamic banking andfinancial institutions. Labuan IOFC’s reputation as an offshore Islamic financial centre was further enhancedfollowing secondary listings of two sukuks from the Middle East, which were listed on the LabuanInternational Financial Exchange (LFX). To pave the way to further develop Islamic capital market with anenhanced global reach, the LFX signed a Memorandum of Understanding with the Bahrain-basedInternational Islamic Financial Market (IIFM) in 2004 to set a framework for greater cooperation betweenLFX and IIFM. This is to capitalise on the potential to expand the investor base for the investment of fundsmobilised from OIC countries.

To complement the role of the banking and insurance sectors in supporting the national economicdevelopment objectives, the DFIs have continued to perform their intermediation role as niche providers offunding and ancillary services to targeted sectors. In line with the recommendations of the FSMP, initiativesremained focused on enhancing the efficiency and effectiveness of the industry, through capacity andcapability building efforts, to ensure that DFIs continue to be able to provide financial and advisory supportto their respective targeted sectors.

As part of the efforts to ensure that DFIs remain focused in their respective roles, Bank Negara Malaysiahad conducted a review on the mandated roles and activities of DFIs. Following the Bank’s proposal, theGovernment has announced the merger of the Export-Import Bank of Malaysia Berhad and MalaysiaExport Credit Insurance Berhad, as well as the rationalisation of the roles and functions of BankPembangunan dan Infrastruktur Malaysia Berhad and Bank Industri & Teknologi Malaysia Berhad. Thiswould enable these DFIs to be more focused, thus more effective in serving the targeted sectors.

Efforts were also undertaken to enhance the capacity and capability of DFIs in providing non-financialservices to their targeted clients. A joint project between Bank Negara Malaysia and the Japan InternationalCooperation Agency to enhance the advisory capabilities of selected major DFIs for SMEs commenced inOctober 2004. It is envisaged that the provision of advisory services can be used to supplement thefinancial assistance available to SMEs, thus enhancing the effectiveness of the DFIs in developing andnurturing SMEs. To enable Bank Negara Malaysia to effectively monitor the performance of the DFIs, acomputerised online reporting system known as Development Financial Institutions Statistical System(DFISS) has been developed, thus enabling the DFIs to submit statistical data electronically. The system

130

enables Bank Negara Malaysia to obtain accurate information in a timely manner to facilitate themonitoring of DFIs’ performance. In order to address the unique features of each DFI, DFISS captures bothgeneric and specific information relating to their businesses.

The initiatives undertaken thus far have resulted in the creation of a financial sector which is stronger,more resilient and in a better position to face greater competitive pressures. The ability of domesticbanking institutions and insurance companies to continue recording strong financial performancedespite the increasingly competitive operating environment, is testament to the fact that they havegrown in strength and capabilities. In addition, the regulatory framework has been further enhanced tocope with the challenges of the increasingly complex financial market. Financial institutions haveadopted better risk management practices in their business operations, which have also provided themwith greater ability and flexibility to respond to the increasing demands and expectations fromcustomers. The achievements and the narrowing of the performance gaps between the domestic andforeign-owned institutions provide a platform for further liberalisation and deregulation as envisagedunder Phase 2 of the FSMP.

Policy Thrusts in Phase 2As outlined in the FSMP, the operating environment will be gradually deregulated and liberalised todevelop a financial sector that is more efficient, dynamic and capable of supporting the changing needs ofthe economy effectively and in the most efficient manner. Competitive pressures will be progressivelyinfused into the banking and insurance industries so as to elevate the delivery of service and overallperformance of the financial sector.

Nevertheless, efforts to enhance the capacity and capability of the domestic institutions will continue toensure that they remain competitive in a more liberalised environment. In tandem with efforts to promotegreater efficiency and competitiveness, emphasis will also be focused on further enhancing resilience andstability of the financial system that will contribute towards overall economic growth and development.Regulatory frameworks will continue to be revised to ensure that they remain relevant and responsive tothe changing financial landscape, and to keep in tandem with the developments in the internationalmarkets. Consumer education initiatives will continue to be pursued to promote better informed andactive consumers, which will play an increasingly important role towards attaining a world-class financialsystem in Malaysia.

With the strong interconnectedness between the financial sector and overall economic development,policy initiatives will continue to be focused on improving access to financing in order to support furthereconomic growth. This include specific focus towards strengthening the infrastructure and access tofinancing for the SMEs and new growth areas such as the agriculture and agro-based sectors.

i) Banking SectorPhase 2 of the FSMP implementation will see more efforts channelled towards infusing greatercompetition into the banking sector. This will be gradually undertaken through the levelling of theplaying field between domestic and incumbent foreign banking institutions and, in the process, enhancethe quality of banking services and provide customers with the opportunity to choose from a wider arrayof products and services. In order to ensure that a core group of domestic banking institutions continuesto remain strong and capable to compete effectively in a more liberalised operating environment,capacity and capability building initiatives will continue to be undertaken. At the same time, initiativeswill continue to be taken to further enhance the regulatory framework so as to provide a moreconducive platform for the market to function effectively and efficiently while preserving the resilienceand stability of the financial sector. Recognising the role that can be played by consumers in instillinggreater sense of market discipline, consumer education programmes will continue to be pursued. Undera more market-oriented operating environment, it is important to ensure that the necessaryinfrastructure for consumer protection is well in place, including the presence of an effective mechanismto monitor and prevent collusive behaviour amongst banking institutions. Therefore, anti-trust regulations

131

The Banking System

for the banking sector will be developed over the long-term, which will define the guiding approachesto address anti-competitive behaviour and unfair practices of banking institutions, and the remedies fordealing with such behaviours.

As a participant in the global financial system, the Malaysian banking system is expected to operate atinternational standards. Attestation by an independent third party will add credibility to the institutionconcerned and, in the process, promote discipline through market forces. However, to achieve thisobjective, there needs to be an enhanced level of consumer awareness and understanding of financialinformation. Another prerequisite is the transparency and accountability of rating agencies thatundertake the assessment to ensure that the ratings given are based on a comprehensive andconsistent methodology.

As the financial market becomes increasingly complex, the need for a more comprehensive andresponsive risk management system becomes critical to ensure the soundness of each bankinginstitution and the resilience of the banking sector as a whole. In this regard, a more sophisticated anddifferentiated treatment of different risk classes will be developed to take into account the risk profile ofloan exposures to different sectors of the economy, in addition to the incorporation of market risk intothe capital adequacy framework. This measure is aimed at ensuring that the capital of each institutionsupports the type of risk to which it is exposed. A more detailed and robust capital adequacy frameworkwill enable banking institutions to effectively manage their risk and capital held. All these measures willbe undertaken as part of the implementation of Basel II.

The increasingly complex operating environment translates into greater challenges for regulators toeffectively perform their oversight functions. With the changing dynamics of risk characteristics,inter-linkages between risk exposures and the development of specialised products, the tools with whichregulators conduct the surveillance function are continuously being updated. The use of technology willalso be further assimilated into the regulatory function to provide Bank Negara Malaysia with integratedreal-time information. Robust surveillance models will promote a better understanding of the impact ofspecific movements in the market on the stability of the financial sector and the economy. Through anearly warning system, Bank Negara Malaysia will be better able to take corrective actions early and thusprevent extensive adverse effect on the financial sector. Such detailed information will also facilitate theanalysis and policy formulation process by providing an assessment of the possible impact of anyparticular change in risk factors on the overall stability of the banking sector.

A key component of the efforts to ensure financial stability is the development of deposit insurance. Aspart of the financial safety net, a Deposit Insurance Scheme will be introduced to protect depositors inthe event of a bank failure. The deposit insurance system will cover both conventional and Islamicbanking institutions.

ii) Insurance SectorThe implementation of Phase 2 in the insurance sector will focus on consolidating the capacity buildinginitiatives in order to achieve the desired outcome of a core of strong domestic market leaders that willbe well-positioned to compete effectively in a progressively more liberalised environment. This will beundertaken through strategies that provide both the appropriate incentives for performanceimprovements, as well as a sound supporting framework for financial and market stability.

Following the capacity building measures implemented under Phase 1, a gradual levelling of the playingfield between domestic and foreign insurers will be implemented in Phase 2. This will encompass boththe gradual removal of remaining operating restrictions applicable to foreign insurers, as well as furtherderegulation across the board in key areas that will allow insurers greater flexibility to individuallypursue innovative business strategies. The deregulatory measures to this end are expected to driveincreased competition in the market, thereby accelerating performance improvements amongdomestic insurers.

132

More importantly, the development of the necessary supporting infrastructure as well as adjustments tothe prudential regulatory and supervisory framework will be simultaneously undertaken to ensure thatinsurers continue to adopt sound financial and business practices in the more deregulated environmentenvisaged under Phases 2 and 3 of the implementation of the Masterplan. This will include thestrengthening of reserve requirements and the risk management framework governing the significantactivities of insurers, establishing an institutional framework to support sound pricing policies followingthe progressive deregulation of price tariffs for motor and fire business, and enforcing higher standardsof disclosure and fair practices in the sale of insurance products.

To achieve a more efficient utilisation of capital, a Risk-Based Capital Framework is being implementedto better align the solvency regime with the risk profiles of individual insurers. Implementation of theframework will provide insurers with substantially greater flexibility to implement appropriate investmentstrategies that would improve performance and at the same time, achieve better asset-liability matchingof insurance funds to support the long term viability of life insurers.

The supporting framework for more effective performance-based supervision will also continue to bestrengthened in Phase 2. This includes the implementation of a more rigorous and risk-focusedsupervisory framework with effect from 2004. The Bank’s surveillance capabilities with respect to keyrisks and trends in the industry will also be further strengthened with enhancements to reportingrequirements and the more effective integration of global developments into domestic marketanalyses and projections to identify trends that may have an impact on the stability of thedomestic market.

iii) Islamic Banking & Takaful SectorThe focus for Islamic banking and takaful under Phase 2 will be to enhance performance and upgradethe infrastructure of the Islamic banking and takaful industry. The strengthening of these componentswill provide the foundations for future sustainable progress in the building of an intermediationsystem that is robust, resilient, and competitive. Bank Negara Malaysia will continue to focus on athree-pronged strategic initiative where efforts will be focused on positioning Malaysia as a leadingcentre for educational excellence in Islamic banking and finance, establishing Malaysia as a leadingname in Islamic banking and takaful consultancy; and positioning Malaysia’s financial institutions asglobal Islamic financial players.

Given the structure of Islamic banking, the design of the regulatory framework for Islamic bankingaccords emphasis to full financial disclosure, prudent risk management and adherence toShariah principles. This will also serve as a firewall to prevent the transmission of risks frominvestment deposits to demand deposits thus enhancing transparency, depositors’ protectionand systemic stability.

It has become increasingly evident that, in the long run, dedicated standards need to be promoted forthe development of Islamic investment vehicles as well as a robust Islamic capital market. The IslamicFinancial Services Board will develop the prudential regulatory and supervisory standards for Islamicbanking operations to guide Islamic banking operations, promote disclosure-based principles, enhancetransparency, and help nurture the development of the Islamic capital market. In addition, the MalaysianAccounting Standards Board will also set the accounting standards for Islamic financial business.

iv) Development Financial Institutions SectorDFIs will continue to play an important role in supporting the development strategies of the nation bycomplementing the banking sector to meet the changing financing requirements of the economy. In thisregard, it becomes increasingly important for DFIs to be effective, efficient and dynamic in response to thedemands of identified target growth sectors. Efforts that were undertaken in Phase 1 to build the capacityand capability of the DFIs will be continued in Phase 2. Greater emphasis will be placed on strengtheningthe financial and operating conditions as well as enhancing the corporate governance, risk management

133

The Banking System

practices and human resource development of the DFIs. This is aimed at ensuring that the financialintermediation process, through the DFIs, will operate effectively and efficiently to support Malaysia’seconomic transformation.

v) Labuan International Offshore Financial CentreLabuan IOFC has demonstrated positive and encouraging results in every sector of offshore businesscovering offshore banking, insurance and insurance-related activities, leasing and capital marketactivities, and is positioning itself as a leading integrated offshore business centre. Going forward,LOFSA will continue to promote and diversify further the financial players and activities in the IOFC.Business development programmes will be undertaken, aimed at expanding offshore financial servicesopportunities from other regions. LOFSA will continue to promote and enhance global awareness onLabuan IOFC’s position as an attractive and cost-efficient offshore business centre. Most importantly,LOFSA will promote the development of Islamic banking and retakaful business to cater for thegrowing demand for Islamic finance products. Further development to build a sustainable, progressiveand efficient Islamic financial centre will continue to reinforce Malaysia’s current potential as a leadingIslamic financial centre. In addition, LOFSA will continue to direct efforts to strengthen the capitalmarket, e-commerce and the ancillary activities. Also important is the development of an activesecondary market for both conventional and Islamic financial instruments listed on the LFX.

vi) Alternative Mode of Financing - Venture Capital and Credit EnhancementsThe development of venture capital financing will continue to be promoted in view of its importance innurturing new growth areas as well as to serve as an alternative source of financing in the economy.Further efforts will be directed towards greater capacity building in terms of skills upgrade and access toprivate sector financing. To accelerate the development of the venture capital industry, a network ofbusiness angels, diversified sources of funds and a large pool of highly skilled knowledge workers arerequired. In addition, constraints in the supply of innovations need to be addressed with the improvementof deals flows through the development of a critical mass of high growth-potential investees. In order toassist the cultivation of better entrepreneurship culture, further concerted efforts will aim at providing thenecessary business and regulatory environment, ensuring access to financing at earlier stages of innovationand reviewing existing policies relating to commercialisation of ideas.

Another area of focus is the credit enhancement initiatives to facilitate lending, especially in the agriculturesector. Initiatives are being taken to enhance financing activities to include the provision of guarantees onagriculture-related loans granted by the banking institutions to high risk but commercially viable ventures,as well as increasing the range of ancillary services deemed essential for sound development of theagriculture sector. In addition, agriculture insurance could play an important role in transforming theagriculture sector into a modern and dynamic commercial sector. The availability and range of insuranceproducts being developed by the insurance industry aim to provide multiple benefits to the farmersincluding enhanced access to financing, stability in farm income as well as improved risk managementpractices and farming technologies.

Moving ForwardThe key emphasis of the FSMP is to move towards a more diversified and balanced financial system withstrong institutional framework, comprehensive market infrastructure, world-class best practices andconducive regulatory environment. As the financial system transitions into Phase 2 of the FSMP, the thrustof initiatives in 2005 will be two-pronged – to continue the efforts to strengthen the institutionaldevelopment of domestic financial institutions to be well-positioned in a more liberalised and deregulatedenvironment; and to review the current policies and regulatory framework in order to level the playing fieldbetween the various market players. Equally important is for institutions to be able to adapt, adjust andrespond to changing economic conditions in particular to support new areas of growth. Having robustfinancial institutions that are able to withstand any potential shocks and have the agility and adaptability toembrace future challenges are key in ensuring long-term sustainability in a more competitive environmentas well as the preservation of financial stability.

134

Financial Services Liberalisation Measures Since 2000

Year

Banking Sector

2000 • The maximum total credit facilities that could be obtained by non-resident controlled companies(NRCCs) from foreign-owned banking institutions in Malaysia was increased from 40% to 50%in December 2000.

• Licensed Offshore Banks in the Labuan International Offshore Financial Centre (Labuan OffshoreBanks) would be allowed to invest in ringgit assets/instruments in Malaysia for their ownaccounts, though not on behalf of their clients.

• Licensed commercial banks, including the foreign-owned banks, and Bank Islam MalaysiaBerhad in Malaysia (licensed banks) were allowed to extend in aggregate an intra-day overdraftfacility of not exceeding RM200 million and an overnight facility of not exceeding RM10 millionto non-resident stockbroking companies and non-resident global custodian banks to financefunding gaps due to inadvertent delay in relation to settlement for trade on the KLSE. Inaddition, they can also enter into short-term currency swap and/or outright forward contracts tocover for purchase of shares on the KLSE.

Non-banking financial sector (excluding insurance)

• The maximum foreign equity limits in a stockbroking company and a financial leasing companywere increased to 49% from 30% effective 1 July 2000.

Banking Sector

2001 • Foreign-owned banking institutions were allowed to set up communicative websites from1 January 2001.

• Banking institutions (including the foreign-owned banks) in Malaysia were allowed to extendcredit facilities in ringgit to finance the purchase and/or construction of one immovable propertyfor non-residents who participate in the Silver Hair Programme implemented by the ImmigrationDepartment of Malaysia.

• Financial institutions (including the foreign-owned banks) were allowed to extend up to threecredit facilities in ringgit to non-residents to finance the purchase or construction of anyproperty in Malaysia (excluding for the purchase of land), subject to their own internal creditassessment guidelines.

• Banking institutions (including the foreign-owned banks) in Malaysia were allowed to effecttransfers involving External Accounts and another External Account and/or Resident Account ofdifferent account holders by way of:

(a) Automated Teller Machine transfer up to RM5,000 per person/company, per day, per bank forany purpose;

(b) Internet-bank transfers up to RM5,000 per person/company, per day, per bank for anypurpose; and/or

(c) Cheques up to RM5,000 per cheque for any purpose.

Insurance sector

• All insurers with the requisite minimum risk management and security systems in place wereallowed to offer the full range of life and general insurance products through the internet witheffect from April 2001.

Banking Sector

2002 • Foreign-owned banking institutions were allowed to offer transactional internet banking from1 January 2002.

135

The Banking System

• Internal credit lines used solely to facilitate drawing against uncleared cheques, granted bylicensed banks (including the foreign-owned banks) to NRCCs, were excluded from thecomputation of the NRCC’s total domestic credit facilities. Licensed banks were also permittedto allow NRCCs to overdraw their current accounts for amounts of up to RM500,000 peraccount for a period not exceeding 2 working days.

• Banking institutions (including the foreign-owned banks) in Malaysia were allowed to extendadditional ringgit credit facilities to any non-resident up to an aggregate of RM5 million pernon-resident to finance projects undertaken in Malaysia. Prior to this, credit facilities in ringgit toa non-resident, for purposes other than purchases of three immovable properties or a vehicle,were limited to RM200,000.

Insurance sector

• The areas in which insurers may employ expatriates were expanded to include, in addition tothe fields of specialised underwriting, actuarial and information technology previously providedfor, other areas involving product research and development, risk management and investment.

Banking Sector

2003 • Licensed banks (including the foreign-owned banks) in Malaysia were allowed to extend overdraftfacilities in ringgit not exceeding RM500,000 in aggregate to a non-resident customer, providedsuch overdraft facilities are covered by fixed deposits placed by the non-resident customer withthe licensed banks in Malaysia. These overdraft facilities were in addition to all ringgit creditfacilities allowed to be extended freely by banking institutions since 21 November 2002.

• The 50% limit on the maximum total credit facilities that could be obtained by NRCCs fromforeign-owned banking institutions in Malaysia was removed on 1 April 2003.

• The overnight limit for foreign currency account (FCA) to retain receipts arising from export ofgoods (export receipts) for Approved Operational Headquarters (OHQ) was increased to US$70million from US$10 million. The maximum overnight limit on export FCA of other residentexporters was also raised to US$70 million.

• Residents may invest in investment products that are linked to foreign currency denominatedderivatives that are offered by licensed banks (including the foreign-owned banks) in Malaysia.The foreign currency funds used for the investment that are utilised from the residents’ FCA willbe earmarked and computed as part of the aggregate overnight balances of the FCA ofthe residents.

• Allow up to three new Islamic banking licences to qualified foreign players.

Insurance sector

• Effective 17 April 2003, foreign-owned insurers with foreign shareholding not exceeding 51%were allowed to open not more than two branch offices in one year.

Banking Sector

2004 • To enhance cash flow management for supporting value chain expansion in Malaysia, licensedbanks (including foreign-owned banks) can retain higher amount of foreign currency funds forresidents in FCA:

- Up to a maximum of US$100 million (previously US$70 million) of export receipts.

- Any amount of non-export receipts for residents with domestic borrowing (previously needapproval).

- Up to US$150,000 for education/employment purpose (previously US$100,000).

• Labuan Offshore Banks are allowed to maintain FCA for residents:

- Up to US$0.5 million of non-export receipts for residents without domestic borrowing

(previously need approval).

136

- Up to US$150,000 for education/employment purpose (previously US$100,000).

- Any amount overseas foreign currency funds for resident individuals.

• To enhance access to ringgit funds for business requirements in Malaysia, the various limits forbanking institutions lending to non-residents in ringgit have been consolidated to one singleaggregate limit of RM10 million for use in Malaysia for any purpose (excluding stockbrokingcompany, custodian bank and correspondent bank).

• The extension of property loans in ringgit by residents, including licensed banks, to non-residents now includes the purchase of land (previously not allowed).

• Licensed banks are allowed to extend an aggregate overnight overdraft facility of RM200million (increased from RM10 million) to a non-resident stockbroking company or a non-resident custodian bank to facilitate settlement for purchase of shares listed on the KLSE.

• Resident individuals employed or staying abroad with foreign currency funds sourced fromabroad are allowed to invest in any foreign currency assets, including those offered by licensedbanks, approved licensed merchant banks and Labuan Offshore Banks.

• Multilateral Development Bank and foreign multinational corporation issuers of ringgit-denominated bonds in Malaysia may enter into forward foreign exchange contracts withonshore licensed banks to hedge their currency risks arising from the issuance of the ringgitdenominated bonds. Non-resident investors subscribing to these issues can also hedge theirforeign exchange risks.

SUPERVISION OF THE BANKING SYSTEM

The supervisory activities throughout 2004 continued to bedirected at the promotion of a sound and robust financialsystem as part of the preservation of financial stability.These objectives were achieved through allocation of on-site supervisory resources to areas of high risk, continuousmonitoring of the banking institutions, adoption of pre-emptive measures and enforcement of prudentialregulatory standards. The responsibilities of Banksupervisors have also expanded in recent years to includeseveral development financial institutions and payment

forward-looking approach to assess a banking institution’srisk profile and risk management systems. With thisforward-looking methodology, supervisors are able toallocate resources optimally in supervising the institutions,focusing on the risk areas.

The financial and operating conditions of the bankinginstitutions are assessed using the CAMELS ratingframework. The respective banking institutions areassigned a composite rating, ranging from strong (bestrated) to very unsatisfactory (poorly rated), and supportedby a rating for each of the six components of the CAMELS

The supervisory objectives were achieved through allocation ofresources to areas of high risk, continuous monitoring of thebanking institutions, adoption of pre-emptive measures andenforcement of prudential regulatory standards.

system operators which have been placed under thesupervision of Bank Negara Malaysia. The Bank is alsoinvolved in providing technical assistance to other domesticsupervisory agencies as well as international bodies.

The supervisory activities, which include on-siteexaminations and off-site supervision, are based on arigorous risk based supervisory framework and emphasisevigilant monitoring of the financial condition andoperating soundness of banking institutions. The risk-based supervisory framework provides a structured and

rating framework, namely capital adequacy, asset quality,management capability, earnings performance, liquidityposition and sensitivity to market risk. The rating coversboth quantitative and qualitative aspects of the financialand operating condition of the banking institution. Implicitin the rating is the adequacy of a banking institution’s riskmanagement systems and practices vis-à-vis its risk profile.During 2004, it was observed that the financialperformance and risk management capabilities of mostbanking institutions had improved as evidenced by theimprovement in their ratings.

137

The Banking System

sector. With greater risk management capabilities,banking institutions have the capacity to offer new andmore complex value-added products and services to awider market segment, hence enhancing capacity toimprove productivity. The growing utilisation of complexand exotic financial instruments either as a riskmanagement or profit-enhancing tool have necessitatedgreater supervisory attention in the area of riskmanagement, particularly in the identification andmeasurement of risks. A significant number of bankinginstitutions have invested in sophisticated trading andrisk management systems as well as strengthening theirmiddle-office and compliance functions.Correspondingly, the supervisors have also enhancedtheir capabilities to assess risk measurement modelsused by banking institutions. In this connection, thesupervisors validate the banking institutions’ market riskmodels to ensure that the practices being adopted are inline with best practices. With effect from September2004, banking institutions are required to implement,on a trial basis, the new Market Risk Capital AdequacyFramework (MRCF). In order to ensure the smoothimplementation of the MRCF upon its full compliancefrom the second quarter of 2005, the Bank has alsoreviewed the banking institutions’ trading book policystatements and MRCF monthly submissions.

As part of the Bank’s efforts to ensure that the bankingsystem is not being used as a conduit for money-laundering activities, supervisory resources are alsochannelled towards reviewing the adequacy of anti-money laundering and anti-terrorist financing measuresestablished by the banking institutions. Over the years,there has been an increasing level of awareness amongbanking institutions on the importance of establishing astrong institutional framework to combat moneylaundering and the financing of terrorism. Together, theBank and the banking industry have instituted thenecessary measures to deter and detect undesirablemoney laundering activities, which can undermine theintegrity of the banking system.

In line with the standards stipulated in the BaselCommittee’s Core Principles of Effective BankingSupervision, the normal on-site examination cycle foreach banking institution, including Islamic banks anddevelopment financial institutions is once in every 18months. However, more frequent examinations arecarried out if a banking institution warrants closersupervision. These examinations cover local and overseasbranches, bank holding companies and relatedcompanies of banking institutions. The examinations ofbank holding companies and other related companies ofbanking institutions are an integral part of the

The on-site supervision of banking institutions wascomplemented with rigorous off-site surveillancefunctions. The off-site surveillance of the financialcondition of banking institutions was conducted througha review of regular reports and financial informationsubmitted by the banking institutions. This mechanismenables early detection of emerging problems so that pre-emptive corrective actions can be taken. A fraudsurveillance system has also been put in place to monitorincidences of fraud in the banking system. This enabledidentification of new modus operandi of frauds that washighlighted to the banking institutions so as to preventfurther occurrences and losses in the banking system. Therespective banking institutions are also subjected tocontinuous monitoring of their resilience to economicshocks under stressed conditions. In conjunction with this,banking institutions are required to submit to the Bankthe results of their stress tests on a quarterly basis. Thestress test incorporates a set of minimum parametersprescribed by the Bank while allowing the bankinginstitution the flexibility to adopt its own assumptions forcertain parameters.

As part of the supervisory activities, the Bank evaluatesthe performance of directors and the various boardcommittees established in the banking institutions, in linewith the increasing attention accorded to the assessmentof corporate governance practices of the bankinginstitutions. In this respect, it was observed that the boardand senior management of banking institutions arebecoming increasingly responsive to risk managementissues and this has contributed significantly to thecreation of a strong risk management culture across thebanking industry. There has also been more activeinvolvement of directors and senior management ofbanking institutions, particularly amongst theindependent directors who are more aware of theirresponsibilities and having a more active role in guidingthe institutions. This bodes well for the banking industryas they are able to provide further perspective anddirection regarding the level of risk exposures andstrategies for the banking institutions. The Bank continuesto place emphasis on the importance of embeddingstrong corporate governance culture in all aspects of abanking institution’s operations. In line with theexpectations under the Financial Sector Masterplan, theroles and functions performed by the board memberseither individually or collectively towards enhancing theirorganisation’s capacities, capabilities and competitivenessare continuously assessed and evaluated.

The emphasis on risk management in bankinginstitutions in recent years has also resulted in thedevelopment of a more vibrant and dynamic banking

138

consolidated supervision process undertaken by theBank. This process enables the Bank supervisors toassess the ability of the bank holding company to act asa source of financial support to the banking institutionwithin the group and to assess whether other risk-takingactivities within the banking group may pose a financialand contagion risk to the banking institution. Theplanning and monitoring of the performance of theBank’s on-site examinations are certified under the MSISO 9001:2000 Quality Management System.

In line with the importance of the role of the board in thecorporate governance of the banking institution, Banksupervisors have more frequent interactions withmembers of the board and senior management ofbanking institutions. This assists Bank supervisors to keepabreast with issues confronting the banking institution, itsbusiness strategies, risk profile and risk managementcapabilities and, at the same time, communicatingsupervisory concerns on the banking institution to thesenior management. This two-way communication withsenior management is useful for Bank supervisors to havea thorough understanding of the banking institution,identifying emerging risks more efficiently and effectively,hence instituting corrective measures in a prompt manner.

Supervisory issues arising from on-site examinations arecommunicated to the senior management and board ofdirectors of the banking institutions in addition to therecommended courses of action. Banking institutions arerequired to respond to the proposed corrective actionsand update the supervisors on the status of theirimplementation. In cases where the supervisory issues areconsidered significant and require speedy correctiveactions, banking institutions are subjected to the InformalEnforcement Action Framework (IEAF). With theimplementation of IEAF since September 2002, significantsupervisory issues are closely monitored by the Banksupervisors and greater commitment from the board andsenior management is being obtained towards theirresolution in a prompt and systematic manner.

With the rapid and diversified development of technologyin the banking environment in recent years, the bankinginstitutions are required to be more effective in managingthe related information systems (IS) risks in order toimprove the safety and soundness of the IS environmentin these institutions. The Bank has undertaken severalmeasures to enhance the overall IS governance as well asto promote IS best practices. These include on-siteexamination, off-site monitoring, issuance of guidelineson the management of the IS environment and improvingthe standards of IS supervision by benchmarking againstother proven IS auditing standards.

In addition to on-site IS examination of bankinginstitutions, the Bank also conducted examinations on thepayment system operators under the Payment SystemsAct 2003. The examination process includes an appraisalof the capability of the institution in managing the IS risksand where applicable, payment systems risks as well ason the overall management of the payment systemoperator, and subsequently highlighting areas of concernsrelated to IS initiatives, security and controls, and systemperformance. Over the years, the overall IS riskmanagement framework in most banking institutions hadimproved considerably, given the increased awarenessand commitment by the management of the institutions.

For better assessment of the banking institutions’ ISenvironment and to ascertain the soundness of their ISoperations, the Bank has enhanced the quality of its ISsupervision function by implementing a newmethodology for on-site examination, PRISM (InformationSystems Risk Assessment). This methodology provides amore balanced appraisal of the IS environment in thebanking institutions by linking the IS practices and risks tothe business requirements and processes. The Bank is alsodeveloping a system to enhance the off-site monitoringfunction by implementing a database of information onthe development and usage of technology by thebanking institutions. The system would be able to providean early warning mechanism on potential systemic risksas well as to provide benchmarking of core processesacross the banking industry and promote best practices inIS risk management.

An area that has been accorded supervisory importance isthe outsourcing arrangements of banking institutions.This is due to the increasing trend in outsourcing of someof the banking institutions’ back-office processes, such aspayment processing, call centre and IS infrastructureservices to third-party service providers. The Bank reviewsthe outsourcing arrangements between the bankinginstitutions and the third-party service providers as well asconducts examinations on the third-party serviceproviders to ensure that all aspects of the outsourcing aremanaged effectively. Ultimately, the customers of thebanking institutions must be adequately protected whilebenefiting from the more efficient services provided bythe banking institutions.

In order to remain effective in today’s fast evolvingfinancial markets, Bank supervisors need to build upexpertise quickly in order to be able to provide valueadd to the banking institutions. For this purpose,several specialised groups of Bank supervisors hadbeen developed to focus on specific areas, which arecritical in performing the Bank’s supervisory functions.

139

The Banking System

In meeting the supervisory responsibilities expected ofthe supervisors specifically under Pillar 2 of the newBasel capital accord, various capacity building initiativesare being undertaken to equip supervisors with thenecessary knowledge and skills. In addition toknowledge acquisition, supervisory processes are beingreviewed and enhanced to facilitate the assessment ofa bank’s capital management and processes.

Globalisation and market liberalisation under theFinancial Sector Masterplan will see the emergence ofnew and significant players. The formation of bigger

banking entities arising from the merger of thecommercial banks and finance companies within eachbanking group, emergence of new foreignincorporated Islamic banks, increasing complexity ofoperations arising from the greater regional presence,cross-selling activities within entities in the samebanking group and outsourcing of banking institutionsoperations will necessitate the Bank to continuously setnew benchmarks for its supervisory approaches andactivities. Efforts will continue to be taken to ensurethat the supervisors are equipped with the necessaryskills and capacity to manage these challenges.

Malaysia’s Anti-Money Laundering and Combating the Financing ofTerrorism (AML/CFT) Programme

OverviewMalaysia continued to develop and enhance its national AML/CFT regime by strengthening its AML/CFTlegislative framework as well as by improving domestic and international co-operation, and upgrading thecapacity of law enforcement personnel in these important areas. Bank Negara Malaysia, as the lead agencyfor the National Co-ordination Committee to Counter Money Laundering (NCC) that co-coordinates theimplementation and enforcement of the Anti-Money Laundering and Anti-Terrorism Financing Act 2001(AMLA) and AML/CFT measures, is committed in ensuring that Malaysia’s financial system is sound, robustand free from abuse.

During the year, Bank Negara Malaysia extended the AMLA regulatory net to new reporting institutionsand invoked other reporting obligations under Part IV of the AMLA to existing reporting institutions. Moreimportantly, extensive AML/CFT briefings, training and awareness sessions were conducted throughout thecountry for the law enforcement personnel and the respective regulatory authorities in the public sector aswell as various categories of new reporting institutions in the private sector.

Enhancing the Role of the NCCThe NCC continued to ensure that the national AML/CFT regime remained up to date and relevant to theevolving threats of money laundering and terrorism financing. Domestic co-operation was further strengthenedby regular meetings of the NCC members during the year to develop, among others,AML/CFT policies, and to coordinate the effective implementation of the AML/CFT measures, based oninternationally accepted standards as contained in the Financial Action Task Force on Money Laundering’s (FATF)Forty Recommendations on Money Laundering and Nine Special Recommendations on Terrorism Financing. TheFATF, which is an inter-governmental body established by the G-7 Summit in Paris in 1989, develops andpromotes policies to combat money laundering and terrorism financing. During the year, the NCC continued toensure that the developments in the national AML/CFT regime are consistent with the FATF’s Recommendations.

The NCC’s role in the national AML/CFT regime is further strengthened by changes in its composition. TheNCC now comprises senior level representation from the various enforcement agencies. The Ministry ofDomestic Trade and Consumer Affair’s Enforcement Division, which is responsible for enforcing the OpticalDiscs Act 2000 and Copyright Act 1987, was included as a new member of the NCC. During the year, theNational Narcotics Agency ceased to be a member as matters relating to the enforcement of theDangerous Drugs Act 1952 is under the purview of the Royal Malaysian Police, which is one of thefounding members of the NCC.

140

Enhancing AML/CFT Legislative FrameworkInstead of a new anti-terrorism financing statute, Malaysia amended five pieces of legislationnamely, the AMLA, the Penal Code, the Subordinate Courts Act 1948, the Courts of Judicature Act1964 and the Criminal Procedure Code to enable Malaysia to accede to the following twointernational conventions on terrorism:• The International Convention for the Suppression of the Financing of Terrorism adopted by the

General Assembly of the United Nations on 9 December 1999 and comply with the UnitedNations Security Council Resolutions on counter-terrorism measures, in particular SecurityCouncil Resolution 1373 (2001) of 28 September 2001; and

• The International Convention against the Taking of Hostages adopted by the General Assemblyof the United Nations.

The Anti-Money Laundering (Amendment) Act 2003 and the Penal Code (Amendment) Act 2003were gazetted as law on 25 December 2003. The Penal Code (Amendment) Act 2003, amongothers, extended the application of the Penal Code to extra-territorial offences under the newChapter VIA, which deals with, among others, the suppression of the financing of terrorist acts, andadded on additional grounds for extra-territorial criminal jurisdiction to be sought. The SubordinateCourts (Amendment) Act 2004 and the Courts of Judicature (Amendment) Act 2004 were gazettedas law on 23 December 2004. The amendments, among others, extended the extra-territorialcriminal jurisdiction of the High Court to offences under the new Chapter VIA of the Penal Code.The consequential amendments to the Criminal Procedure Code on police powers in relation toterrorism offences would be tabled in Parliament after deliberation by the Select Committee of theLower House of Parliament.

The Anti-Money Laundering (Amendment) Act 2003, among others, extended the reporting ofsuspicious transactions to Bank Negara Malaysia to cover the reporting of suspected terrorismfinancing activities. This new law also extended the AMLA mechanism for tracing, freezing, seizing,forfeiting and confiscating assets to include assets used for the financing of terrorist acts. The newPart VIA of the AMLA empowers the Minister of Internal Security to deem any entity as a terrorist,whose property could then be seized and forfeited to the Federal Government.

AMLA Regulatory NetExtension to New Reporting InstitutionsThe AMLA requires a reporting institution to report to Bank Negara Malaysia any transaction wherethe identity of the person involved, the transaction itself or any other circumstances concerning thetransaction gives the reporting institution reason to suspect that it involves proceeds of an unlawfulactivity. The statutory requirement to report suspicious transactions has been invoked incrementallyon conventional, Islamic and offshore entities since the commencement of the AMLA on 15 January2002. During the year, the AMLA regulatory net was extended to the stockbrokers and futuresbrokers with effect from 31 March 2004 and to the lawyers, accountants and company secretarieswith effect from 30 September 2004. Lawyers and accountants are required to report to the Bankany suspicious transaction identified in the course of carrying out the following types of businessactivities for their clients:(i) buying and selling of immovable property;(ii) managing client’s money, securities or other property;(iii) managing of accounts including savings and securities accounts;(iv) organising of contributions for the creation, operation or management of companies; or(v) creating, operating or managing of legal entities or arrangements and buying and selling of

business entities.

141

The Banking System

Company secretaries are required to report to Bank Negara Malaysia any suspicious transaction identifiedin the course of carrying out the following types of business activities for their clients:(i) acting as a formation agent of legal entities;(ii) acting as (or arranging for another person to act as) a director or secretary of a company, a partner

of a partnership, or a similar position in relation to other legal entities;(iii) providing a registered office, business address or accommodation, correspondence or

administrative address for a company, a partnership or any other legal entities or arrangement;(iv) acting as (or arranging for another person to act as) a trustee of an expressed trust; or(v) acting as (or arranging for another person to act as) a nominee shareholder for another person.

The extension of the AMLA regulatory net to cover lawyers, accountants and company secretaries is asignificant milestone in the national AML/CFT regime. Money laundering schemes have become morecomplex as countries endeavour to implement comprehensive AML/CFT measures in the financial sector todetect and deter money laundering, terrorism financing and other transnational crime, thereby forcingcriminals to turn to these professionals to assist them in accessing the financial system. The timelyinvocation of the AMLA reporting obligations on these professionals during the year further deniedcriminals indirect access to the financial system through the professional ‘gatekeepers’ who could structurecomplicated financial transactions with the view to hide tainted proceeds.

Increasing Reporting ObligationsThe AMLA reporting obligations are invoked gradually on the reporting institutions to provide sufficienttime for them to implement and discharge their AMLA reporting obligations. The statutory requirement toreport suspicious transactions to Bank Negara Malaysia was initially invoked on Lembaga Tabung Haji, BankKerjasama Rakyat Malaysia Berhad and Bank Simpanan Nasional on 15 January 2003. In order to facilitatesuch reporting to Bank Negara Malaysia, any obligation as to the secrecy or other restriction on thedisclosure of information imposed by written law or otherwise on these institutions were overridden andtheir officers reporting suspicious transactions in good faith to Bank Negara Malaysia were providedimmunity from civil, criminal and disciplinary proceedings. During 2004, the remaining reportingobligations under Part IV of the AMLA, where relevant, were invoked on Lembaga Tabung Haji, BankKerjasama Rakyat Malaysia Berhad and Bank Simpanan Nasional with effect from 31 March 2004. Thesereporting obligations include retention of records for a period of six years, conducting customer duediligence, as well as establishing internal reporting and compliance programmes that are designed toreduce their vulnerability to misuse by criminals.

Increasing Predicate OffencesIn 2004, the number of money laundering predicate offences in the Second Schedule to the AMLAwas increased from 150 to 168 serious crimes from 24 pieces of legislation. The inclusion of thenew money laundering predicate offences in the AMLA would enable Bank Negara Malaysia totrack the financial trail of these offences and share the financial intelligence with the relevantenforcement agencies.

Enhancing AML/CFT ComplianceDuring the year, Bank Negara Malaysia developed a comprehensive AML/CFT Compliance Handbook as areference guide to assist reporting institutions in discharging their obligations under the AMLA. TheHandbook contains various documents and literature on the national AML/CFT initiatives pertaining tospecific industries, including industry specific regulatory and compliance guidelines, international standardsand recommendations as well as circulars and core compliance standards. The CD-ROM copy of theHandbook was distributed during the year to the conventional, Islamic and offshore reporting institutionsand the various trade associations. Reporting institutions could refer to the Handbook for assistance inestablishing, among others, suspicious transactions reporting mechanisms, record-keeping, customer due-diligence, compliance and on-going training of employees.

142

Domestic Co-operationAwareness ProgrammeThe AML/CFT awareness programme was conducted nationwide through a series of briefings for the variouscategories of new reporting institutions as well as the respective regulatory authorities. The objectives of thebriefing sessions were to educate the reporting institutions on their obligations and responsibilities under theAMLA and to establish their working relationship with the Financial Intelligence Unit (FIU) in Bank NegaraMalaysia. In addition to the AMLA briefings, Bank Negara Malaysia organised training courses and workshopsto upgrade the knowledge and skills of the various law enforcement personnel involved in the fight againstmoney laundering and terrorism financing. During the year, the following training sessions were conducted:• Briefing on the AML/CFT measures to members of the Malaysian Bar Council in January 2004;• Briefing on the AMLA invocation and reporting obligations to the capital market intermediaries in

March 2004;• Briefing on the AMLA to Heads and Senior Officers of the Enforcement Division of the Ministry of

Domestic Trade and Consumer Affairs in April 2004;• Seminar on the AML/CFT measures to the Sabah Law Association in May 2004;• Briefing on the AMLA invocation and reporting obligations were conducted at 18 locations for lawyers,

accountants and company secretaries from July – September 2004; and• Briefing on the AMLA to senior officials of the Companies Commission of Malaysia on 5 November 2004

in connection with the invocation of the AMLA reporting obligation on company secretaries.

Combating the crimes of money laundering and terrorism financing is essential to the integrity of thefinancial systems. The training sessions were effective platforms to raise concerns and exchange ideas on bestpractices and on the practical implementation of the AML/CFT measures. Arising from these training sessions,which raised the reporting institutions’ level of compliance with international standards, the nationalAML/CFT regime is now better supported by the contribution of the financial and non-financial reportinginstitutions that hold critical information on transactions that may hide criminal schemes.

AMLA Investigation Reference GuideAs part of the efforts to document the AMLA investigation processes, a Working Group on the AMLAInvestigation Reference Guide, comprising members from the relevant agencies in the NCC drafted a set ofrequired tasks to assist investigators in carrying out investigation in relation to money laundering and terroristfinancing offences under the AMLA. The successful formulation of the AMLA Investigation Reference Guideis the result of co-operation among experienced domestic law enforcement personnel, who were unstintingin sharing their knowledge and skills in conducting investigations into financial crimes. After the NCC hasadopted the AMLA Investigation Reference Guide in the coming year, it would be distributed to the relevantlaw enforcement agencies to facilitate investigations into any breaches of the AMLA provisions.

Sub-Committee for Information SharingThe NCC set up a Sub-Committee for Information Sharing during the year for better analysis and sharing ofinformation gathered from suspicious transactions reports (STRs) and for better use of financial intelligence.This Sub-Committee provides a formal mechanism where intelligence developed by Bank Negara Malaysiabased on information obtained from the STRs could kick-start investigations into suspected money launderingoffences, terrorism financing and other serious crimes.

International Co-operationAs Malaysia is a member of the Asia/Pacific Group on Money Laundering (APG) Technical Assistance Donorand Provider Group, Bank Negara Malaysia provided technical assistance to the National Bank of Cambodia indrafting the relevant AML/CFT Guidelines for banking institutions in Cambodia. In addition, Bank NegaraMalaysia will continue to participate in the AML/CFT mutual evaluation exercises undertaken by variousjurisdictions that are members of the APG. Collaborative efforts are also enhanced through the signing ofMemorandums of Understanding on the sharing of financial information with various jurisdictions.

143

The Banking System

Capacity BuildingTraining InitiativesCapacity building continued to be the focus of Bank Negara Malaysia with emphasis on financialinvestigation techniques in order to upgrade the expertise of law enforcement personnel. Experts from bothdomestic and foreign law enforcement agencies shared their knowledge and expertise at various trainingworkshops during the year. The participating agencies included the Inland Revenue Board and the Attorney-General’s Chambers of Malaysia, the National Criminal Intelligence Service and the National Terrorist FinancialInvestigation Unit of the United Kingdom, the Immigration and Customs Enforcement Division of the UnitedStates’ Department of Homeland Security, and the United Nations Office of Drugs and Crime. During theyear, Bank Negara Malaysia organised and participated in the following training programmes:(i) The Money Laundering and Terrorism Financing Seminar, Kuala Lumpur, March 2004;(ii) The AMLA Enforcement Workshop, Kuala Lumpur, September 2004;(iii) The Computer Forensic Introduction Workshop, Kuala Lumpur, November 2004; and(iv) The AMLA Net Worth Analysis Workshop, Kuala Lumpur, November - December 2004.

Internal Enabling InitiativesFinancial Intelligence System Phase I (FINS)As the competent authority under the AMLA, Bank Negara Malaysia continued to receive STRs, which haveimproved in terms of quality and quantity during the year. For the purpose of facilitating the reporting ofsuspicious transactions by financial institutions, Bank Negara Malaysia developed FINS to assist the financialinstitutions in their online submission of STRs. FINS went live in May 2004 and enabled the financialinstitutions to submit STRs from the convenience of the compliance officers’ work-stations in a high speedand secured web environment. The basic analysis tool in FINS automatically analyses the STRs received andthereby enables Bank Negara Malaysia’s financial analysts to expedite their identification and review of thefinancial linkages between the dubious transactions.

Increase of Staff in the Financial Intelligence Unit (FIU)In view of the expanding AMLA regulatory net and the additional responsibility of tracking the financing ofterrorism, Bank Negara Malaysia increased the staff strength of the FIU from 18 to 24 with the creation ofmore high level posts in the department. In order to facilitate the effective implementation and enforcementof the AMLA, two new sections, namely the Compliance Section and the Investigation Support Section, werecreated during the year. The Compliance Section oversees the financial and non-financial reportinginstitutions’ compliance with the AMLA obligations, while the Investigation Support Section helps therelevant law enforcement agencies with financial intelligence for their AMLA related investigations.

Challenges AheadBank Negara Malaysia will continue to extend the AMLA regulatory net to other classes of reportinginstitutions such as trust companies, operators of forecast numbers and other gaming outlets, fund andasset management companies, unit trust companies, real estate agents, jewellers, dealers in preciousmetals and stones and antique dealers. The money laundering trends and typologies as well asinternational AML/CFT standards will determine the timing of the invocation of the AMLA obligations onany of these non-financial entities. In addition, the AMLA obligations will only be invoked after therequisite briefing sessions to, and consultations with, the respective industries and sufficient time is grantedfor the target reporting institutions to fully understand and prepare for their statutory obligations.

Another essential mechanism to ensure effective implementation of AMLA is to establish an informalAMLA enforcement framework for swift regulatory action against any reporting institution for its failure tocomply with the AMLA reporting obligations. Such an informal enforcement framework wouldsystematically enumerate corrective and pre-emptive actions against any errant reporting institution beforeits non-compliance deteriorates to a stage where it becomes the weakest link in the national AML/CFTregime and is abused by criminals to launder their tainted funds.

144

PERFORMANCE OF THE BANKING SYSTEM

OverviewThe banking system remained resilient throughout2004, with positive developments recorded in all keyfinancial soundness indicators. With non-performingloans (NPLs) continuing to trend downwards andprofitability improving, capital ratios were sustained athigh levels throughout the year, providing the bankingsystem with sufficient buffer to absorb any unexpectedshocks. The sound financial position of bankinginstitutions, together with sustained strong economicperformance, low interest rate environment, andfavourable household and business sentiments, providedthe main impetus for strong expansion in the financingactivities. The main highlights of the performance of keyindicators of the banking system were:

• High capital adequacy ratios despite several capitalrationalisation exercises and strong expansion inrisk-weighted assets;

• Higher profitability with improved returns on equityand average assets;

• Net interest margin remained narrow ascompetition continued to exert pressure in thelending market;

• NPLs continued to trend downwards to its lowestlevel since the Asian financial crisis, driven mainlyby sustained recoveries and reclassifications, andlower incidences of new NPLs;

• Lending activities of the banking institutionsremained robust, supportive of the increaseddemand from the households and businesses; and

• Exposure to market risks remained withinprudential levels.

ProfitabilitySupported by favourable economic and financialmarket conditions, the banking system recordedpreliminary unaudited pre-tax profits of RM11.8 billionfor the calendar year 2004, 16.1% higher than thepreceding year. This was attained on account ofimproved gross operating profits, higher net gains fromsecurities trading and investment activities, as well asincrease in dividend income from non-banking entities.The strong financial performance resulted in higherreturns on average assets and equity of 1.4% and16.6% respectively, whilst pre-tax profits per employeerose to RM127,827 in 2004 from RM110,526 in theprevious year.

The banking system posted gross operating profits ofRM12.6 billion for the year, an increase of 3.3% overthe level recorded in 2003. The improved performance

was driven by higher net income from interest- andfee-related activities, which offset the increase in staffcost and overheads. Reflecting strong competition in theloan market, income from loan and financing activitiesrecorded a marginal growth of RM0.3 billion or 1.1%.The boost in net income from interest-related activitieswas driven by strong increases in interest income fromnet interbank activities (+RM0.8 billion or 96.6%), bulkof which was due to the liquidity operations of BankNegara Malaysia to absorb excess liquidity, as well asinvestment securities (+RM0.6 billion or 23.9%). By typeof institutions, net interest income of the commercialbanks increased by 13.8%, while that of the financecompanies declined by 14.6%, partly reflecting thetechnical adjustment following the mergers of fivefinance companies into the commercial banks.Meanwhile, the merchant banks registered a decline intheir net interest income of 3.7% during the year giventheir continued focus on fee-based activities.

As competition kept lending rates low, the commercialbanks continued to diversify into a broader range ofnon-lending fee-related activities to cater to moreaffluent consumers. Income from fee-based activitiesfor commercial banks and finance companies as agroup increased by 18.1% to RM4 billion in 2004. Thiswas contributed mainly by income derived from privatebanking activities, including cross-selling of unit trustand bancassurance products, and payment-relatedactivities such as remittances. The ratio of fee-basedincome to operating income of commercial banks andfinance companies as a group stood at 17.2% in 2004compared with 15.6% in the previous year.

Fee-based income of the merchant banks posted astrong growth of 7% to RM350 million, attributedprimarily to higher income generated from portfoliomanagement, share placement and loan syndicationactivities. Fees derived from portfolio managementactivities recorded a marked increase of 124.7% toamount to RM37.8 million. Although accounting foronly 10.8% of total fee-based income of merchantbanks, the substantial growth reflected increasedawareness and growing acceptance of wealthmanagement products in generating better returns inthe prevailing low interest rate environment. Theincrease in other fee income of 76.3% to RM54 millionwas driven primarily by several large placements ofcorporate shares during the year.

The ratio of cost to income rose slightly to 48.8%following increases in both staff cost and overheads.The larger expenses on personnel was reflective ofthe higher remuneration packages offered to retain

145

The Banking System

expertise in light of competition in the market andhigher number of staff. With greater emphasisaccorded to marketing and promotional activities, atotal of 17.2% of overheads incurred for the yearwas for marketing expenditure compared with14.3% in 2003.

Despite improving asset quality, total loan lossprovisions rose by 5.4% as banking institutions setaside higher allocations for general provision, whichincreased by RM0.4 billion following expansion in theloan base, and specific provision, which wasRM0.1 billion higher as several banking institutionsadopted stricter provisioning and classification policiesfor non-performing loans to further strengthen theirbalance sheets. The higher provisions were partiallymitigated by an increase of RM0.2 billion in recoveries.

Interest MarginInterest margin continued to narrow during the year ascompetition in the loan market continued to exertdownward pressure on lending rates, particularly in theretail and SME lending segments. Consequently,

interest margin net of expenses and loan lossprovisions for the year declined by 21 basis points to0.38 percentage points.

Gross interest margin (difference between interestincome and interest expense, expressed as apercentage of interest-related assets) of thecommercial banks and finance companies as agroup, declined by 13 basis points to2.66 percentage points on account of higher interestexpense. Interest income remained almostunchanged at 4.78% despite the generally lowerlending rates as the loan base expanded. Thereduction in lending rates was most apparent in thehousing market, where the average first year lendingrates fell by as much as 93 basis points to 3.08% perannum in December 2004, with a smaller quantumof decline in the remaining periods to maturity. Inaddition, average lending rates on new businessloans have also remained competitive at 5.64% perannum, whilst that of the SMEs was at 6.20% perannum. With liquidity remaining ample, depositrates were maintained at low levels. Nonetheless,interest expense as percentage of interest-relatedassets increased by 13 basis points to 2.12% as thebanking system experienced a strong increase intotal deposits of 13%.

The commercial banks and finance companies as agroup also incurred higher staff-related and overheadexpenses largely attributed to better remunerationpackages and higher marketing expenses. Expressedas a percentage of interest-related assets, staff costand overheads totalled 1.54%. Meanwhile, loanloss provisions as a percentage of interest-relatedassets for the year rose slightly to 0.74% comparedwith 0.67% in the previous year reflecting theadoption of more prudent strategies in dealing withirrecoverable NPLs.

Table 5.2Banking System1: Income and Expenditure

For the calendar year

2003 2004p Annual change

RM million %

Interest income net ofinterest-in-suspense 38,123 40,612 2,489 6.5

(Interest-in-suspense) 4,793 3,812 -981 -20.5

Less: Interest expense 18,943 20,385 1,442 7.6

Net interest income 19,180 20,227 1,047 5.5

Add: Fee-based income 3,741 4,377 636 17.0

Less: Staff cost 5,095 5,683 588 11.5Overheads 5,625 6,316 691 12.3

Gross operating profit 12,201 12,605 404 3.3

Less: Loan loss andother provisions 4,155 4,493 338 8.1

Gross operating profitafter provisions 8,046 8,112 66 0.8

Add: Other income 2,131 3,699 1,568 73.6

Pre-tax profit 10,177 11,811 1,634 16.1

Of which:Commercial banks 6,728 8,094 1,366 20.3Finance companies 2,644 2,739 95 3.6Merchant banks 685 866 181 26.4Islamic banks 120 111 -9 -7.5

Return on assets (%) 1.3 1.4Return on equity (%) 15.3 16.6Cost to income2 (%) 46.8 48.8

1 Includes Islamic banks.2 Only taking into account staff cost, overheads, net interest income and

fee-based income.p PreliminaryNote: Total may not add-up due to rounding.

Table 5.3Weighted Average Lending Rates for New LoansApproved During the Month

Commercial banks Finance companies

Average for December (% per annum)

2003 2004 2003 2004

Business loans 5.72 5.64 7.18 8.06of which: SMEs 6.30 6.20 7.17 8.04

Household loans1 4.32 4.34 6.49 6.32of which:

Purchase of residential properties 4.01 3.08 4.09 3.13Purchase of passenger cars n.a. 6.53 6.59 6.37

1 Excludes credit card loans.n.a. Not applicable.

146

Lending ActivityLending activities of the banking system remained robustin 2004. The positive sentiments in the household andbusiness sectors, coupled with the conducive interest rateenvironment, provided an impetus for stronger demandfor loans from the private sector during the year. As themain mobiliser of funds in the economy, the bankingsector was able to support the increasing lendingrequirements arising from growth in householdconsumption and business activities given theirstrengthened position. The introduction of the NewInterest Rate Framework in 2004 also provided greaterflexibility for banking institutions to price their financialproducts more efficiently and effectively, therebyenhancing their ability to structure and customise theirbanking products to suit the needs of the customers.

The robust demand for loans was evidenced by thestrong growth in loan applications in 2004. During theyear, the banking system received loan applicationsamounting to RM273.3 billion, which was 20.1%higher than the previous year. The average loan approvalrate remained strong at 63.5%, with new loansapproved growing by 13.6% to RM173.6 billion in2004. Therefore, the monthly average of new loansapproved in 2004 of RM14.5 billion was highercompared to the monthly average of RM12.7 billionrecorded in the preceding year. Loan disbursements also

Table 5.4Banking System1: Financing Activities

For the year

2003 2004Annualgrowth

(%)RM billion

Loan approvals 152.8 173.6 13.6

Loan disbursements 441.6 488.2 10.6

Loan repayments 430.4 461.6 7.2

As at end-

2003 2004Annualgrowth

(%)RM billion

Outstanding loans 473.8 514.0 8.5

Total banking system financing2 508.0 547.2 7.7

Total financing for the economy3 618.4 674.0 9.0

1 Includes Islamic banks.2 Outstanding banking system loans plus private debt securities held by the

banking system.3 Outstanding banking system loans plus outstanding private debt securities.

The banking sector was able to support the increasing lendingrequirements arising from growth in household consumption andbusiness activities given their strengthened position.

expanded by 10.6% to RM488.2 billion during the year,reflecting the higher financing requirements from theprivate sector to fund their activities. As disbursementssurpassed repayments, total outstanding loans rosestrongly at an annual rate of 8.5% in 2004. Totalholdings of private debt securities (PDS) by the bankinginstitutions declined by 2.7% in 2004. As a result, totalfinancing by the banking sector to support economicactivities increased by 7.7% as at end-2004.

Lending to householdsReflecting improved household income and consumersentiment, the pace of private consumption increasedduring the year, and the banking system continued tochannel a significant portion of their financing to thissector. As at end-2004, loans to the household sector

represented the largest proportion of loans in thebanking sector, accounting for 51.4% of totaloutstanding loans. In total, outstanding loans to thehousehold sector expanded by 14.4% toRM264.4 billion as at end-2004. Loan applicationsreceived from households expanded by 22.1% toRM120.2 billion in 2004, of which 72.2% wereapproved during the year. Total loan approvals to thissector grew by 20.5% to RM86.8 billion, whilst loandisbursements recorded a corresponding increase of13.8% to RM130.3 billion in 2004. Despite the highdisbursements, unutilised loans within this sector grewby 14.7% to RM67.8 billion as at end-2004. As in theprevious years, lending activities within this sector wereconcentrated in mortgage financing, financing for thepurchase of passenger cars and credit cards. The stronggrowth in loans to this sector was supported mainly bythe competitive financing packages offered by bankinginstitutions and the promotional campaigns carried outby the private sector to boost demand.

Within the portfolio of loans to the household sector,the highest proportion of loans was channelled towardsthe acquisition of residential properties, amounting toRM130.3 billion or 49.3% of total household loans. Inline with the Government’s effort to promote homeownership, the demand for housing loans continued toremain buoyant to cater for the large supply of mid-rangeresidential properties launched during the year. In 2004,the banking system received RM52.4 billion worth ofapplications for the purchase of residential properties,11.7% higher than the preceding year. Loan approvals

147

The Banking System

for the purchase of residential properties rose by 18.8%to RM35.7 billion in 2004, whilst loan disbursementsgrew by 9.1% to RM38.8 billion. Borrowers were ableto benefit from lower average lending rates for theseloans which ranged from 3.08% to 3.73% per annumfor the commercial banks and 3.07% to 5.08% perannum for the finance companies. As a result, totaloutstanding loans for the purchase of residentialproperties grew at an annual rate of between 14.2% to16.2% throughout the year. Although the level ofexposure of the banking institutions to the residentialsector has increased more than twofold since 1998,banking institutions are better able to manage the riskarising from these lending activities given theirenhanced risk management standards. Bankinginstitutions have also been able to leverage on theCentral Credit Reference Information System todetermine the credit profile of borrowers, therebyfacilitating their credit assessment process.

Loans for the purchase of passenger cars accounted forthe second largest proportion of loans to thehousehold sector. As at end-2004, loans to this sectorcomprised 27.2% of total household loans, recordingan increase of 17.2% from RM61.3 billion as atend-2003 to RM71.9 billion as at end-2004. Thestrong consumer demand for motor vehicles wasattributed mainly to renewed interest in demandfollowing the revision of duties on passenger cars witheffect from 1 January 2004, a number of new launchesof mid-range passenger cars and the promotionalactivities undertaken by car companies to expand theirsales. Loan applications for the purchase of passengercars grew by 27.4% to RM40.6 billion fromRM31.8 billion in 2003. Loan approvals to this sectorincreased by 17.2% to RM30.4 billion in 2004, whilstloan disbursements remained high at RM29.1 billion in2004 compared with RM24.5 billion in 2003.

Reflecting the strong demand for consumption loans,outstanding credit card loans also recorded an increase of16.3% in 2004. Loan approvals for credit cards soared by26.6% to RM11.7 billion in 2004, whilst utilisation ofcredit card lines was high, accounting for 32.4% of thetotal credit lines extended to cardholders. The increase inutilisation is in tandem with the higher number of cards incirculation, which grew by 28.6% to more than6.6 million cards as at end-2004. Disbursements to thissector also rose by 19.1% to RM36.3 billion in 2004,compared with RM30.5 billion in 2003. Efforts bybanking institutions to promote credit cards as a mode ofpayment were complemented by sound risk managementstandards to ensure that the risk arising from moreaggressive lending to this sector is manageable.

Lending to businessesThe improvement in corporate profitability, favourablefinancing conditions and improved external sectorperformance in 2004 were strong drivers inencouraging larger private investments in new projectsand corporate expansion. Reflecting this, demand fornew financing by businesses was higher in 2004. Loanapplications received from businesses increased by20% in 2004, a turnaround from the decline of 7.7%in 2003. The increase was driven by higher applicationsreceived from the manufacturing, construction and thewholesale and retail trade sectors, amounting toRM76.2 billion in 2004.

In tandem with higher loan applications, new loansapproved to businesses increased by 9.8% toRM84.9 billion, accounting for 48.9% of total newloans approved by the banking system. Nearly 51% orRM43.2 billion of new loans approved to businesseswere channelled to the construction, manufacturing andthe wholesale and retail trade sectors. In terms ofdisbursements, 68.7% of total disbursements by thebanking system were channelled to the business sector.Loan disbursements to businesses grew by 10.5% toRM335.3 billion in 2004, of which 60.8% werechannelled to the manufacturing and the wholesale andretail trade sectors. As disbursements were relativelyhigher compared with repayments of RM319.8 billion,total outstanding loans to the business sector expandedby 2.6% to RM219.2 billion as at end-2004.

Small and medium enterprises (SMEs) continued toreceive strong support from the banking sector. Loans toSMEs accounted for 40.3% of outstanding loans tobusinesses. Loan approvals were high and accounted for58.4% of total applications received, whilst loanrejections remained low, constituting 19.1% of totalapplications received. In 2004, new loans approvedincreased by 21.9% to RM31.6 billion, to more than92,000 SMEs. On a monthly average basis, the level ofloan approvals amounting to RM2.6 billion per month in2004 was higher compared to the level achieved in 2003of RM2.2 billion per month. Concurrently, loandisbursements to SMEs also expanded strongly by 15.3%to RM100.4 billion. Consequently, outstanding loans toSMEs expanded by 7.7% in 2004.

In terms of loans to SMEs by sectors, about 59.3% ofoutstanding loans to SMEs were channelled to themanufacturing, construction and the wholesale andretail trade sectors. In line with the Government’s callto promote businesses involved in business processoutsourcing and information technology, totaloutstanding loans to SMEs involved in the business

148

services sector grew by 27.8% on a monthly averagebasis in 2004. SME loans to the agriculture, forestryand fishing sectors also recorded strong growth of24.2% to RM4 billion as at end-2004. With theestablishment of the National SME DevelopmentCouncil in August 2004 and the initiatives in thepipeline to strengthen the capacities andcompetitiveness of the SMEs, access to financing forSMEs will be further enhanced.

In view of the positive response to the special funds,Bank Negara Malaysia further increased the allocation offunds to the Fund for Small and Medium Industries 2and the New Entrepreneurs Fund 2 by RM2.5 billionand RM850 million respectively during the year. Withthis, a total of RM8.9 billion has been set aside underthe five special funds managed by Bank NegaraMalaysia to finance priority sectors. As at end-2004,

the outstanding loans in these special funds amountedto RM5.1 billion. Meanwhile, the Special ReliefGuarantee Facility which was launched in May 2003 toassist businesses affected by the SARS outbreak waseventually closed in July 2004, following the quickcontainment of the outbreak and the recovery of thebusinesses that were affected.

Financing through the bond marketThe bond market continued to be an importantchannel for corporations to source funds to meet theirfinancing requirements. In tandem with the buoyanteconomic performance, the issuance of PDS wassustained at a high level following issuances of debt

Net NPLs (6-months) Net NPLs (3-months)

Net NPL ratio (6-months) Net NPL ratio (3-months)

0

2

4

6

8

10

12

0

5

10

15

20

25

30

35

40

45

50

J F M A M J J A S O N D J F M A M J J A S O N D

2003 2004

RM billion %

Graph 5.1Banking System1: Net Non-performing Loans

1 Includes Islamic banks.

The net NPL ratio as at end-2004 was at its lowest level since theAsian financial crisis in 1998.

securities by a few large corporations during the year.In 2004, funds amounting to RM28 billion were raisedin the bond market, mainly by the utilities andconstruction sectors. As a result, outstanding PDS inthe market rose by 10.7% to RM160.1 billion as atend-2004. Total financing channelled to the economy,which included lending by banking institutionsexpanded by 9% to RM674 billion as at end-2004.

Asset QualityReflecting the strong economic performance underpinnedby buoyant business activities and strong consumption,non-performing loans (NPLs) of the banking systemdeclined further in 2004. The net NPL ratio as at end-2004was at its lowest level since the Asian financial crisis in1998. Recoveries and reclassifications to performingaccounts, supported by lower new NPLs during the yearcontributed to the large decline in NPLs.

Net NPLs based on the 3-month classification declinedby 6.3% to RM37.5 billion as at end-2004. Coupledwith the high growth in loan base of 8.5%, the net NPLratio of the banking sector improved by 1.3 percentagepoints to 7.6% as at end-2004 (end-2003: 8.9%).Similarly, net NPLs based on the 6-month classificationdeclined by 5.8% to RM29 billion, to account for 5.9%of net loans as at end-2004. The loan loss coverageratios as at end-2004 strengthened to 53.9% and 59%on a 3-month and 6-month basis respectively. Includingthe value of collateral, the coverage ratios improvedfurther to 165.3% and 171.8% respectively.

The favourable economic environment increased thecapacity of borrowers to service their loans. Better loanrepayment capabilities translated into lowerclassification of loans as new NPLs. During the year,new NPLs amounted to RM23.9 billion, representing adecline of 5% or RM1.3 billion. Recoveries andreclassifications of NPLs, albeit lower by 2.2%,remained strong at RM22.4 billion in 2004. A numberof banking institutions capitalised on their strongperformance to write-off legacy loans that weredeemed uncollectible. Total write-offs during the yearwere high at RM8.7 billion.

As at end-2004, three CDRC cases had yet to beimplemented, with total debts amounting toRM2.4 billion. The other 45 debt restructuring caseswith total debts of RM50.1 billion have beensuccessfully implemented in view of the favourablemarket conditions. The completion of the debt

149

The Banking System

restructuring process has strengthened thecorporations and placed them in a better position todrive economic activities.

Total loans that were in arrears by more than onemonth declined by 6.5% or RM3.2 billion in 2004. Asa percentage of total outstanding loans in arrears, theproportion of arrears in buckets of more than onemonth declined from 61.1% as at end-2003 to54.7% as at end-2004. Therefore, loans in arrears bymore than one month accounted for 8.9% of totalloans as at end-2004 (end-2003: 10.3%).

The improvement in NPLs for the business sector hasbeen broad-based during the year. The improvedprofitability position of the corporate sector, drivenmainly by stronger private consumption and external

Table 5.5Banking System: Non-performing Loans and Loan Loss Provisions

As at end-

2003 2004

Classification

3-month 6-month 3-month 6-month

RM million

Banking systemNon-performing loans 65,773.8 54,797.5 60,431.2 50,301.7Interest-in-suspense 9,344.7 8,961.6 8,480.5 8,101.8Specific provisions 16,416.4 15,070.2 14,473.0 13,222.3General provisions 9,216.7 8,166.2 9,643.9 8,347.2

Net NPL ratio (%)1 8.9 6.8 7.6 5.9Total provisions/NPL (%) 53.2 58.8 53.9 59.0

Commercial banksNon-performing loans 44,541.6 37,562.2 46,214.2 38,869.3Interest-in-suspense 6,201.2 6,027.5 6,373.1 6,093.9Specific provisions 11,763.1 10,870.5 11,460.3 10,373.8General provisions 6,895.7 5,844.6 8,414.7 7,117.9


Finance companiesNon-performing loans 16,025.5 12,841.2 9,495.5 7,423.7Interest-in-suspense 2,504.0 2,313.6 1,491.2 1,412.5Specific provisions 3,616.5 3,205.7 2,058.8 1,927.2General provisions 1,905.6 1,906.1 829.5 829.5


Merchant banksNon-performing loans 3,204.5 2,818.6 2,568.8 2,340.0Interest-in-suspense 452.6 442.3 400.8 391.3Specific provisions 603.2 588.5 496.3 497.3General provisions 240.7 240.9 235.8 235.9


Islamic banksNon-performing loans 2,002.3 1,575.6 2,152.7 1,668.7Interest-in-suspense 186.9 178.2 215.3 204.1Specific provisions 433.7 405.5 457.7 424.0General provisions 174.7 174.7 163.9 163.9


1 Net NPL ratio = (NPL less IIS less SP) / (Gross loans less IIS less SP) x 100%.


RM billion

0

20

40

60

80

100

120

1-<3 months 9-<12 months

3-<6 months 12 months and above

6-<9 months

Graph 5.2 Banking System1: Ageing Profile of Loans in Arrears


J F M A M J J A S O N D J F M A M J J A S O N D

2003 2004

150

sector performance, led to stronger repayments anddeclining NPLs in the business sector throughout theyear. NPLs to the business sector declined by 12.9% orRM5.1 billion, to account for 13.6% of total businessloans as at end-2004 (end-2003: 16.3%). Theimprovement was largest for NPLs of themanufacturing sector, which registered a decline of13.9% or RM1.4 billion as at end-2004. Although theshare of NPLs for this sector remained the largestamong all business sectors, accounting for 24.9% oftotal business NPLs, the NPLs for this sector is expectedto decline further with continued growth in themanufacturing sector. NPLs for the construction sectoralso declined by RM0.9 billion to RM7.2 billion in 2004due mainly to write-offs of large accounts during theend of the year.

In line with the improvement in NPLs for the businesssector, NPLs of the SMEs in almost all economic sectorsalso declined in 2004. NPLs of SMEs recorded animprovement of 11.4% to RM10.6 billion as atend-2004, to account for 12% of total loans of SMEs. Interms of share of SME NPLs to total business NPLs, they

accounted for 30.6% of the total NPLs for the businesssector. At the sectoral level, NPLs of SMEs were highestin the manufacturing, construction and the wholesaleand retail trade sectors, accounting for 58.7% of totalNPLs of SMEs. Reflecting the strong performance in themanufacturing sector, NPLs for this sector registered thelargest improvement of RM0.4 billion to RM2.7 billion asat end-2004. NPLs for the transport, storage andcommunication sector also declined by 43.9% orRM0.2 billion due largely to write-offs. NPLs for the realestate sector improved by 21.2% to RM0.7 billion whileNPLs for the construction sector declined by 7.6% toRM1.9 billion as at end-2004.

Gross NPLs for the household sector declined toaccount for 7.2% of total outstanding householdloans as at December 2004 (end-2003: 7.9%).Despite the growth in household NPLs by 3.8% toRM18 billion as at end-2004, the magnituderemained small vis-à-vis the stronger growth inhousehold loans of 14.4% during the year. Within thehousehold sector, NPLs for the purchase of residentialproperties were the largest contributor to household

Table 5.6Banking System1: Non-performing Loans by Sector

As at end-

As percentage of totalNPL by sector Change loans to the sector

2003 2004 2003/2004 2003 2004

RM million %

Business enterprises 39,699.2 34,597.4 -12.9 16.3 13.6 of which SME loans 11,923.3 10,569.7 -11.4 14.5 12.0Households 17,388.1 18,041.5 3.8 7.9 7.2Others 1,184.2 1,086.9 -8.2 11.0 10.8

Total 58,271.5 53,725.7 -7.8 12.3 10.5

Agriculture, hunting, forestry and fishing 781.2 678.6 -13.1 7.4 6.2Mining and quarrying 147.9 89.4 -39.5 13.5 9.0Manufacturing 10,001.4 8,615.8 -13.9 16.4 13.7Electricity, gas and water supply 1,444.4 1,299.5 -10.0 28.5 25.0Wholesale and retail trade, restaurants and hotels 4,633.6 4,340.4 -6.3 11.8 10.0

Wholesale trade 1,758.2 1,623.2 -7.7 8.0 6.4Retail trade 1,428.1 1,250.5 -12.4 11.7 9.5Restaurants and hotels 1,447.3 1,466.6 1.3 28.9 30.4

Broad property sector 26,641.0 26,029.4 -2.3 14.1 12.5Construction 8,178.4 7,246.7 -11.4 27.7 23.6Purchase of residential property 10,122.4 11,292.5 11.6 8.7 8.5Purchase of non-residential property 4,803.9 4,347.4 -9.5 16.7 14.0Real estate 3,536.3 3,142.9 -11.1 25.5 22.9

Transport, storage and communication 1,188.0 722.2 -39.2 11.1 7.2Finance, insurance and business services 2,356.2 1,876.4 -20.4 8.1 6.1Consumption credit 2,641.4 2,549.5 -3.5 9.5 8.0

Personal use 2,014.3 1,848.9 -8.2 13.3 10.7Credit cards 578.6 663.9 14.7 4.7 4.7Purchase of consumer durable goods 48.5 36.8 -24.2 13.0 11.7

Purchase of securities 3,750.0 2,894.3 -22.8 18.9 14.9Purchase of transport vehicles2 2,749.2 2,752.4 0.1 4.2 3.7Community, social and personal services 752.7 791.0 5.1 15.2 15.5

1 Includes Islamic banks.2 Includes purchase of passenger cars.


151

The Banking System

NPLs, accounting for 62.6% of total household NPLsas at end-2004. NPLs for residential properties grewby 11.6% or RM1.2 billion during the year.Nevertheless, its NPL ratio remained manageable at8.5% as at end-2004, given the higher rate ofincrease in loans for residential properties of between14.2% to 16.2% in 2004. NPLs for credit cardsremained small at 4.7% of total credit card loans,whilst the NPL ratio for the purchase of transportvehicles declined to 3.7% as at end-2004(end-2003: 4.2%). Given the improvements in theperformance of the stock market, NPLs for thepurchase of securities recorded a large decline of22.8% or RM0.9 billion as at end-2004, to account for14.9% of total loans to this sector. While there havebeen concerns about the risk of over-indebtedness ofthe household sector, such risk is minimised due to theability of the banking institutions to accesscomprehensive credit information of borrowers fromthe Central Credit Reference Information System andthe various risk management infrastructure put in placeto strengthen credit risk management standards inbanking institutions.

As economic performance is expected to remainbuoyant in 2005, NPLs in the banking system areexpected to improve further. Strong performance ofthe corporate sector, supported by continued robustprivate consumption, will strengthen NPL recoveriesand reduce the possibility of new NPLs. Against thisbackdrop, banking institutions are expected toundertake more aggressive measures to deal withtheir legacy NPLs, especially in cases where recoveryprospects are limited even after taking into accountthe recoverability of the collateral. In tandem withthese efforts, banking institutions are also expectedto continuously strengthen their risk managementinfrastructure in preparation for the implementationof Basel II requirements. With a more sound androbust risk management infrastructure in place and ahealthier quality of asset portfolios, bankinginstitutions would continue to be in a strongposition to support the lending requirements of thegrowing economy.

Liquidity ManagementThe sustained large current account surplus of thebalance of payments in 2004 led to a further increasein international reserves from RM170.5 billion as atend-2003 to RM253.5 billion as at end-2004. Thiscontributed to high liquidity in the banking systemduring the year. The resultant excess liquidity in thebanking system was mopped up under the liquidityoperations conducted by Bank Negara Malaysia to

maintain the overnight interbank rate within the25 basis points around the overnight policy rate of2.7% per annum. As a result, market intervention inthe form of interbank borrowings and issuance of BankNegara Bills and Negotiable Notes remained highthroughout the year, with additional mopping up ofliquidity through repo activities undertaken during thelast quarter of 2004. By end-2004, Bank NegaraMalaysia had mopped up RM142.6 billion of excessliquidity from the banking system as compared withRM95.4 billion as at end-2003. Liquidity managementconducted by Bank Negara Malaysia in 2004 hasensured that interest rates remained stable throughoutthe year. The weighted average overnight interbankrate ranged from 2.69% to 2.72% per annum whilethe weighted average one week interbank rate rangedfrom 2.71% to 2.80% per annum.

In relation to the liquidity management by bankinginstitutions, the banking system as a whole hadsufficient liquidity to meet any unexpected withdrawalsfor a period of up to one month. The projected

0

20

40

60

80

100

120

140

160

2.62

2.64

2.66

2.68

2.70

2.72

2.74

2.76

2.78

2.80

2.82

Jan Feb Mar Apr May June Jul Aug Sept Oct Nov Dec

RM billion % per annum

Bank Negara Malaysia's total intervention

Weighted average overnight money interbank rate (RHS)

Weighted average 1-week interbank rate (RHS)

Graph 5.3 Liquidity in the Banking System1 in 2004


Table 5.7Banking System: Liquidity Projection as at31 December 2004

Cumulative Buffer asmismatch % of total

(RM billion) deposits

1 wk. 1 mth. 1 wk. 1 mth.

Commercial banks 64.9 99.9 14.5 22.4

Finance companies 4.2 4.7 10.7 12.0

Merchant banks 6.7 9.4 39.7 56.0

Islamic banks 4.0 5.7 20.4 28.9

Banking system 79.7 119.7 15.3 22.9

152

cumulative liquidity surplus of the banking system as atend-2004 was RM79.7 billion to meet demands of upto one week and RM119.7 billion to meet demands ofup to one month. Commercial banks, financecompanies, merchant banks and Islamic banksrecorded projected surpluses in the one-month bucketamounting to 22.4%, 12%, 56% and 28.9% of theirtotal deposit base respectively.

Interest Rate RiskExposure of the banking system to interest rate risk(inclusive of price risk of Islamic type exposures) isassessed using the duration-weighted net position(DWP) approach. In 2004, the DWP approach wasfurther refined to better reflect the economic valuechanges of interest rate sensitive positions, taking intoaccount their cash flow payment structures. Applyingthe refined DWP approach, the level of interest raterisk in the banking system in 2004 remainedmanageable. Expressed as a percentage of capitalbase, the banking system’s DWP increased marginallyto 5% as at end-2004.

A significant portion of the banking system’s interestrate risk was concentrated in the more than threeyears maturity bucket due principally to an increaseof 22% in fixed rate loans with remaining maturitiesof over three years. This increase reflects primarilyhire-purchase receivables and Islamic loans thatrose by RM5 billion and RM7 billion respectivelyduring the year.

A key measure introduced to address the bankingsystem’s interest rate risk associated with fixed rateloans, was the amendment to the Hire-Purchase Act1967, which was passed by the Parliament in 2004.The amendment allows banking institutions to price

their hire-purchase loans based on a variable ratebasis. Furthermore, the increased use of Islamicvariable rate financing under the concept of bai’bithaman ajil (deferred payment sale) which wasintroduced in 2003, has allowed banking institutionsto mitigate their exposures to fixed rate productstypical of Islamic financing. Another significantmeasure allowing the interest rate risk associated withthe funding and lending structures of stand-alonefinance companies to be better managed was theamendment of the Banking and Financial InstitutionsAct 1989 to facilitate the merger of the commercialbank and the finance company within a banking

Table 5.8Banking System1: Impact of 1% Rise in InterestRate on Capital Strength

Duration-weighted net position

Impact onAs a risk weighted

percentage of capital ratiocapital base (percentage

point)

As at end-

20032 2004 2003 2004 2003 2004

Commercial banks and Finance companies -2,898 -3,398 -4.4 -4.7 -1.0 -1.0

Merchant banks -475 -397 -10.2 -8.2 -3.8 -4.1

Banking system1 -3,373 -3,795 -4.8 -5.0 -1.1 -1.1

1 Excludes Islamic banks but includes price risk of Islamic type exposures.2 Figures have been adjusted with the application of the refined DWP approach.Note: Total may not add-up due to rounding.

RM million

Commercial banks and Finance companies

Merchant banks

1 Excludes Islamic banks but includes price risk of Islamic type exposures.

Duration-weighted net position as % of capital base

0

5

10

15

20

25

No. of banking institutions

Graph 5.4Banking System1: Distribution of Duration-weighted Net Position as a Percentage of Capital Base as at 31 December 2004

Up to 5 > 5 - 10 > 10 - 15 > 15 - 20 > 20

Tenure range

Commercial banks and Finance companies

Merchant banks

Banking system

1 Excludes Islamic banks but includes price risk of Islamic type exposures.

Mismatches (RM billion)

Graph 5.5 Banking System1: Net Interest Rate Position Mismatches as at 31 December 2004

-40

-60

-20

0

20

40

60

> 1 - 3 mths

> 3 - 6 mths

> 6 - 12 mths

> 1 - 2 yrs

> 2 - 3 yrs

> 3 - 5 yrs

> 5 - 10 yrs

> 10 - 15 yrs

> 15 yrs

≤ 1mth

153

The Banking System

group. However, given that it was only recentlyimplemented, the full benefits of the merger, interms of the potential reduction in interest rate riskwithin the banking system is yet to be fully realised.

With the mergers, some of which were implementedduring 2004, the analysis of interest rate risk of thecommercial banks and finance companies was basedon their combined statistics. As a group, their DWPrecorded an increase of 17% to RM3.4 billion as atend-2004. The rise in DWP of the commercial banksand finance companies as a group, was attributed to asignificant increase in fixed rate loans with remainingmaturity of more than three years. The merchantbanks, however, recorded a decline of 16% in theirDWP in 2004, following a contraction in their holdingof long-term debt securities with remaining maturitiesof more than three years.

In September 2004, consistent with the BaselCommittee on Banking Supervision (BCBS)’srecommendation, Bank Negara Malaysia issued theMarket Risk Capital Adequacy framework forimplementation. The framework requires market riskto be incorporated into the capital adequacyframework. For the banking system, the majorsource of market risk in the trading book is interestrate risk. In 2004, interest rate risk declined by 9%to RM1.5 billion or 1.9% of capital base. Thereduction in interest rate risk was due primarily tobanking institutions taking advantage of theimproved bond market in 2004 by reducing theirbond holdings.

Equity RiskThe overall exposure of the banking system to equityrisk remained insignificant, with equity investmentsrepresenting only 0.4% of the banking system’s totalassets as at end-2004. Equity investments by bankinginstitutions fell by 9.9%, from RM3.4 billion as at

end-2003 to RM3.1 billion as at end-2004. Bankinginstitutions took advantage of the improved stockmarket performance in the first and last quarter of2004 to sell down the shares acquired from debtrestructuring activities in previous years.

During the year, the banking system’s investments inquoted shares fell by 8.1% to RM1.8 billion as atend-2004 from RM1.9 billion as at end-2003. Of theoverall decline in investment in quoted shares, theholding of quoted shares arising from the conversionof loans into equity declined by RM153.7 million or12.7% while shares purchased directly from the

Table 5.9Banking System1: Impact of Trading BookInterest Rate Risk on Capital Strength as at31 December 2004

RM million Total interest rate

Interest rate riskrisk/Capital base

(%)

2003 2004 2003 2004

Commercial banks andFinance companies 1,007 994 1.6 1.3

Merchant banks 644 504 14.3 10.5

Banking system1 1,651 1,498 2.4 1.9

1 Excludes Islamic banks but includes price risk of Islamic type exposures.Note: Total may not add-up due to rounding.

As at 31 December 2003

Market purchase 35.6%Quoted

shares 57.9%

Underwriting 2.3%

As at 31 December 2004

Unquoted shares 42.1%

Loan conversion

59.6%

Debt satisfaction 2.4%


Graph 5.6 Banking System1: Composition of Equity Investments

Unquoted shares 43.2%

Quoted shares 56.8%

Market purchase 32.8%

Underwriting 0.5%

Debt satisfaction 3.9%

Loan conversion

62.7%

0

2

4

6

8

10

12

14

16

0-<2 2-<4 4-<8 8-<13 13-<20 ≥20

Equity as % of capital base

Graph 5.7 Banking System: Distribution by Equity as a Percentage of Capital Base as at 31 December 2004

No. of banking institutions

Commercial banks

Finance companies

Merchant banks

Islamic banks

154

market registered a decrease of RM1.9 million or0.3% during the year. Similarly, restructuring activitiesduring the year that involved a major conversion ofunquoted shares into bonds had resulted in adecrease in total investments in unquoted shares ofthe banking system by 12.3% to RM1.3 billion as atend-2004 from RM1.5 billion as at end-2003.

Within the banking system, the decline in equityholdings in 2004 was reflected across the differentcategories of banking institutions. The merchant banksas a group, recorded the highest percentage decline of17.4% despite an increase in shares held as a result ofunderwriting. This was followed by the financecompanies (-15.4%), commercial banks (-6.5%) andIslamic banks (-4.9%). Despite the relatively significantpercentage decline in equity holdings of the merchantbanks and finance companies in 2004, as a group, theyhad a relatively higher ratio of quoted shares to capitalbase at 6.7%. The commercial banks and the Islamicbanks’ holdings of quoted shares to capital base wereonly 1.6% and 1.8% respectively. In terms of individualbanking institution, most banking institutions had lessthan 2% of their capital base exposed to equity risk.

Based on a 10-day volatility of the Kuala LumpurComposite Index in 2004, the potential maximum lossin equity value for the banking system as a whole wasslightly lower at 7.7% as at end-2004 compared to

7.9% as at end-2003. This represented merely 0.2% ofthe capital base of the banking system.

Foreign Exchange RiskThe significant increase in the foreign currencyassets of the banking system in 2004 was attributedto the continued repatriation of export earnings andinflows of foreign funds for portfolio and directinvestment. However, the foreign currency riskundertaken by the banking institutions remainedwithin prudential levels, as the banking system’s netopen position (NOP) as a percentage of capital baseregistered a decline from 4.5% as at end-2003 to4.2% as at end-2004.

Table 5.10Banking System: Equity Exposure

Equity1 Equity1/Potential

holdings Capital base equity1 loss/

(RM million) (%)Capital base

(%)

As at end-

2003 2004 2003 2004 2003 2004

Commercial banks 1,071.6 1,067.0 2.0 1.6 0.1 0.1

Finance companies 427.8 357.2 3.7 6.7 0.3 0.5

Merchant banks 402.3 320.8 8.6 6.7 0.7 0.5

Islamic banks 35.2 34.8 2.2 1.8 0.2 0.1

Banking system 1,936.9 1,779.7 2.7 2.3 0.2 0.2

1 Amount of investment in quoted shares.

Table 5.11Banking System: Foreign Currency Exposure

NOP NOP/Capital base(RM million) (%)

As at end-

2003 2004 2003 2004

Commercial banks 2,622 2,928 4.9 4.5

Merchant banks 50 48 1.1 1.0

Islamic banks 35 34 2.1 1.7

Banking system 2,707 3,010 4.5 4.2

RM billion % p.a.

2004

Net open foreign currency position

Net foreign currency swap purchased

Net open foreign currency assets (including value spot and tomorrow)

Net outright forward foreign currency purchased

US TBill secondary market rate (RHS)

3-month average KLIBOR (RHS)

Graph 5.8 Banking System1: Components of Foreign Currency Exposure


-20

-15

-10

-5

0

5

10

15

20

J F M A M J J A S O N D

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

155

The Banking System

To manage their long foreign currency positions,banking institutions placed out the funds in theforeign currency interbank money market, resulting inan increase in interbank foreign currency placementsfrom RM17 billion as at end-2003 to RM34 billion asat end-2004. This was complemented by an increaseof RM4.4 billion or 41% in foreign currency loansextended in 2004. Foreign currency liabilities alsotrended up as banking institutions engaged incurrency swaps to hedge their foreign currencyforward purchases.

Although the forward premiums in the foreigncurrency forward market narrowed considerably from55 basis points to 12 basis points, there was strongdemand from exporters to sell foreign currencyforward contracts in 2004. As a result, bankinginstitutions’ foreign currency forward contractspurchased from domestic non-bank entities rose fromRM17 billion as at end-2003 to RM34 billion as atend-2004. The strong demand from exporters to sellforeign currency forward contracts may be attributedto their need to hedge their foreign currencyexposures in an environment of increasing exports,which rose by 24% during the year, and heightenedspeculation by the market that the ringgit would berevalued upwards against the US dollar. Thiscontributed to the overall increase in foreign currencyforward contracts purchased by banking institutionsfrom RM21 billion as at end-2003 to RM38 billion asat end-2004. As a result of managing the significantincrease in foreign currency forward contractspurchased, foreign currency swaps payable rose byRM27 billion to RM51.8 billion.

The banking system is expected to remain a netforeign exchange forward purchaser in anenvironment with the interest rate differentialbetween the US dollar and ringgit remaining positive.

Capital StrengthThe banking system remained well-capitalised, withrisk-weighted capital ratio (RWCR) and core capitalratio sustained above 13% and 10% respectivelythroughout the year. The capital base increased byRM6.6 billion to RM78.1 billion as at end-2004. Themajor contributor to the higher capital base wascapital raising exercises by several bankinginstitutions that amounted to RM4.2 billion, ofwhich RM3.3 billion was raised through the issuanceof US dollar-denominated subordinated debt papers.Audited profits contributed another RM1 billion.Meanwhile, the risk-weighted assets of the bankingsystem grew by RM47.6 billion or 9.2% toRM566.6 billion as at end-2004 due to higherfinancing activities. Overall, the RWCR of thebanking system remained at 13.8% as at end-2004.

1

2

3

4

5

6

7

8

9

10

<-10 -10-<-2 -2-<2 2-<5 5-<10 ≥10

Commercial banks

Merchant banks

Islamic banks

No. of banking Institutions

Graph 5.9 Banking System: Distribution of Net Open Foreign Currency Position as at 31 December 2004

NOP as % of capital base

Table 5.12Banking System: Constituents of Capital

As at end- Annual

2003 2004 change

RM million RM million (%)

Tier-1 capital 62,727.3 61,669.1 -1,058.2 -1.7Tier-2 capital 19,410.6 23,734.1 4,323.5 22.3

Total capital 82,137.9 85,403.2 3,265.3 4.0

Less:Investment in

subsidiaries andholdingsof other bankinginstitutions’capital 10,604.9 7,296.3 -3,308.6 -31.2

Capital base 71,533.0 78,106.9 6,573.9 9.2

Risk assets:0% 177,443.2 210,372.2 32,929.0 18.610% 17,256.3 14,669.8 -2,586.5 -15.020% 120,995.7 121,059.9 64.2 0.150% 120,545.1 136,405.0 15,859.9 13.2100% 432,769.7 472,700.3 39,930.6 9.2

Total risk-weightedassets 518,967.0 566,581.8 47,614.8 9.2

Risk-weightedcapital ratio (%)

Banking system 13.8 13.8 0.0

Commercial banks 14.1 13.9 -0.2Finance companies 11.6 10.2 -1.4Merchant banks 19.2 21.9 2.7Islamic banks 11.7 12.5 0.8


156

Tier-1 capital of the banking system declinedmarginally due to rationalisation of capital arisingfrom mergers between commercial banks andfinance companies (Bafin mergers). This, togetherwith a higher increase in risk-weighted assets,resulted in the core capital ratio declining marginallyto 10.8% as at end-2004 (end-2003: 11.1%).Meanwhile, total Tier-2 capital increased significantlydue to capital raising exercises by several bankinginstitutions. As a result, total capital increased by4% and, together with a lower capital deduction forinvestment in subsidiaries following completion ofthe Bafin mergers, this caused the capital base toincrease by 9.2%.

The RWCR of commercial banks declined marginallyto 13.9% as at end-2004, as the increase inrisk-weighted assets outpaced the expansion ofcapital base following lower capital deduction forinvestment in subsidiaries and issuance ofsubordinated debt papers. The RWCR of the financecompanies declined to 10.2% due to the exclusion

of the capital base of the five finance companiesthat had merged with the commercial banks. TheRWCR of the merchant banks increased to 21.9%due mainly to the reduction in risk-weighted assetscaused by a decline in the loan base as the merchantbanks wind-down their loan activities to focus oninvestment banking and fee-based activities.

Total risk-weighted assets of the banking systemincreased by 9.2% to RM566.6 billion as atend-2004, in tandem with higher loan growthduring the year. The increase in the 0% categorywas due mainly to Bank Negara Malaysia’s liquidityoperations, whilst continued expansion in mortgagefinancing and lending to the private sectorcontributed to higher growth in the 50% and 100%categories respectively.

With strong level of capitalisation, the banking systemis well positioned to meet the demands for financingto support economic growth and any unexpectedshocks in 2005.

The Islamic Financial System

158-159 Overview160-165 Policy Direction in 2004163-164 White Box: Shariah Governance Framework for Islamic

Financial Institutions165-166 Supervision of the Islamic Banking System167-174 Performance of the Islamic Banking System

158

OVERVIEW

The year 2004 marked another significant milestone inthe progress of Islamic banking and finance in theMalaysian banking system in its two decades ofdevelopment. The financial liberalisation of the Islamicbanking sector was brought forward from 2007 to2004 with the issuance of three new Islamic banklicences under the Islamic Banking Act 1983 (IBA) toIslamic financial institutions from the Middle East.

The move to bring forward the liberalisation programmeemanated from the rapid development and steadyperformance of the Islamic banking industry over the


The move to bring forward the liberalisation programmeemanated from the rapid development and steady performanceof the Islamic banking industry over the years.

years. Since 2000, the Islamic banking industry has beengrowing at an average rate of 19% per annum in termsof assets. At end-2004, total assets of the Islamicbanking sector increased to RM94.6 billion, whichaccounted for 10.5% of the total assets in the bankingsystem. The market share of Islamic deposits andfinancing also increased to 11.2% and 11.3% of totalbanking sector deposits and financing respectively.

The entry of the new foreign Islamic banking licenseesis in line with the recommendations of the FinancialSector Masterplan (FSMP) to position Malaysia as aninternational Islamic financial hub. The new entrants,each with distinctive capabilities and strengths, willhave the opportunity to participate in the growing

Islamic banking industry and tap new markets inMalaysia and the region, as well as promote healthycompetition which is necessary to elevate the industryto new levels of dynamism.

The presence of the foreign players will alsoaccelerate the global integration of the domesticIslamic banking system. The exchange of knowledgeand expertise will promote greater economic andfinancial linkages between Malaysia and the MiddleEastern region, and foster greater harmonisation interms of Shariah interpretation and understanding.Greater international trade and investment flowswould also be facilitated.

Bank Negara Malaysia also continued in 2004 tofurther strengthen the overall infrastructuredevelopment of the Islamic banking system,including enhancing the institutional structure andhuman capital development.

• As the Islamic banking industry entered a moreadvanced stage of development, the ‘window-based’ institutional structure was reviewed to furtherstrengthen and elevate the development of thedomestic Islamic banking industry through a newenabling institutional structure. The domesticbanking groups and foreign Islamic Banking Scheme(IBS) banks were encouraged to set up Islamicsubsidiaries (IS), which will be licensed as an Islamic

Graph 6.1 Market Share of Deposits and Financing as at end-2004

Deposits

Islamic banking 11.2%

Conventional banking 88.8%

Financing

Islamic banking 11.3%

Conventional banking 88.7%

159


bank under the IBA. The underlying principle of theincorporation of IS is primarily aimed at furtherstrengthening the institutional structure of Islamicbanking business operations for greater strategicfocus, while continuing to leverage on the synergiesof the conventional banking operatinginfrastructures, which include the availability ofIslamic banking products and services at the existingbranches of the conventional commercial banks.Towards this end, Bank Negara Malaysia hasapproved the application of five domestic bankinggroups, namely four IBS banking groups and a non-IBS bank, to establish IS under the IBA to carry outIslamic banking business. To date, one of thebanking groups has launched its IS.

• In terms of regulatory and prudential structure,efforts were directed at improving the corporate

The Islamic financial landscape in Malaysia has been set on acourse that is filled with vast potential and prospects for futuregrowth, specifically in positioning Malaysia as a leading Islamicfinancial hub to the international financial community.

governance of Islamic banks via the issuance ofguidelines to enhance the effectiveness of theirboard of directors. The financial disclosurerequirements were also enhanced, in line withinternational accounting standards, to meet a higherdegree of transparency. Additionally, the rate ofreturn framework was further strengthened toprovide flexibility to the banks in managing theirportfolios to compete and to align their businessoperations with market trends and outlook.

• In line with the developments in the conventionalbanking system, the Islamic banking institutionswere also required to prepare to embrace the BaselII implementation approach. In adopting either theStandardised Approach for credit risks or theInternal Ratings Based Approach under the newcapital accord, sound and robust risk managementframework and practices would be continuouslyupgraded and benchmarked against the bestindustry practices. This would facilitate the effortsof the Islamic banking institutions to optimallyapply their economic and regulatory capital.

• Significant enhancement to the Shariah governancein the Islamic banking system was attained followingthe enlargement of the role and functions of theShariah Advisory Council of Bank Negara Malaysia.In addition, the introduction of the new Shariah

committee framework, where the functions andduties of the Shariah committees have been clearlyoutlined and streamlined, has reinforced the centralShariah advisory body at the Central Bank.

• The amendments to the tax legislation that accordneutrality to tax treatment between Islamic andconventional banking products and services willcreate a more conducive tax regime for the Islamicbanking industry.

• Product innovation continued to thrive within theboundaries of the Shariah framework. A morediversified product range that includes variable rateand equity-based mechanisms is being more widelyintroduced. To mitigate liquidity risk due to marketvolatility, the Islamic banking institutions arebeginning to introduce long-term variable rate

financing. Through the usage of periodic rebatemechanism, the effective profit rate on the financingcan vary to closely track the benchmark rate currentlyused in the market, thus alleviating any fundingmismatch. To further strengthen the risk managementframework, a profit rate swap mechanism thatapplies Islamic principles will also be introduced,allowing the fixed rate commitment of a financingcontract to be exchanged with the variable ratecommitment of another contract, and vice versa.

• In terms of human capital development andconsumer awareness, continuous efforts were carriedout throughout the year through various seminars,workshops, exhibitions and other promotionalactivities. As the Islamic banking industry progresses,a human capital development programme is beingstructured collectively by the public and privatesectors to create a larger pool of experts andprofessionals in Islamic banking and finance to meetthe increasing manpower requirements arising fromthe rapid institutional development.

In view of these significant developments, the Islamicfinancial landscape in Malaysia has been set on acourse that is filled with vast potential and prospectsfor future growth, specifically in positioning Malaysiaas a leading Islamic financial hub to the internationalfinancial community.

160

POLICY DIRECTION IN 2004

The key focus of policy in 2004 for the Islamic bankingsector continued to be on the efforts to furtherstrengthen the Islamic banking system as an integralcomponent of the Malaysian financial system. Thepolicy thrust centred on enhancing the institutionalstructure, regulatory and prudential framework,Shariah and legal infrastructure, product and marketdevelopment, as well as human capital developmentand consumer education.

The policy thrust centred on enhancing the institutional structure,regulatory and prudential framework, Shariah and legalinfrastructure, product and market development, as well as humancapital development and consumer education.

Strengthening Institutional Financial InfrastructureInstitutional DevelopmentStrengthening the financial infrastructure is a keyprerequisite for the development of a dynamic andprogressive Islamic banking system. In 2004, significantinitiatives were carried out in the development of theinstitutional financial infrastructure of the Islamicbanking system.

• Bank Negara Malaysia approved the issuance of newIslamic banking licences under the Islamic Banking Act1983 (IBA) to three leading foreign Islamic financialinstitutions from the Middle East, namely, KuwaitFinance House, Al-Rajhi Banking & InvestmentCorporation and a consortium of Islamic financialinstitutions represented by Qatar Islamic Bank, RUSDInvestment Bank Inc. and Global Investment House.The issuance of the Islamic banking licences to foreignplayers is part of the strategy to enhance the diversityand depth of players in the Islamic financiallandscape. The presence of full-fledged foreign Islamicbanks in Malaysia would increase the potential to tapnew growth opportunities as well as raise theperformance and development of the overall Islamicfinancial system.

• An important strategic measure undertaken in 2004was the move by several conventional banking groupsparticipating in the Islamic Banking Scheme (IBS) totransform the current ‘Islamic window’ institutionalstructure into an ‘Islamic subsidiary’ (IS) within theirrespective banking groups. This strategic move is intandem with the recommendations of the FinancialSector Masterplan (FSMP) to further strengthen theinstitutional structure of the banking institutionsparticipating in the IBS. From the legal perspective, this

exercise will accord licensing of the Islamic bankingbusiness of conventional banking groups under Islamicbanking law. In this regard, Bank Negara Malaysia hasapproved the applications of five domestic bankinggroups to establish an IS under their commercialbanking arm to undertake Islamic banking businessunder the IBA. The incorporation of the IS by thedomestic banking groups will involve the detachmentand migration of the existing Islamic banking portfoliosin the conventional banking institutions to the newlyincorporated IS. The IS will be incorporated as a wholly

owned subsidiary of the commercial bank and anydivestment of shares in the IS to either domesticinvestors or foreign investors is subject to the conditionthat the IS will remain as a subsidiary of the commercialbank with a minimum equity interest of 51%.

The incorporation of IS will provide an institutionalstructure that can assimilate future developmentsin the Islamic financial regulatory infrastructureover the longer term and thus strengthen theoverall prudential and supervisory regime of theIslamic banking system. This will preserve theintegrity of the Islamic banking system andoperations in line with the dictates of the Shariah.Developments include the drafting of a differentset of prudential regulatory and supervisorystandards for Islamic banking operations to beissued by the Islamic Financial Services Board(IFSB), a different set of accounting standards forIslamic financial business to be issued by theMalaysian Accounting Standards Board (MASB)and the forthcoming introduction of the DepositInsurance Scheme. Compared to the windowarrangement, the incorporation of IS will furtherstrengthen the commitment and provide greaterstrategic focus by the Islamic banking institutionsto promote the development of an efficientIslamic banking system.

The distinctive features of the IS, among others,include:o A minimum capital fund of RM50 million or the

current amount of Islamic banking capital fundsof the conventional banking institution thatcomply with the minimum risk-weighted capitalratio requirement of 8%, whichever is higher;

161


o An independent board of directors, a dedicatedchief executive officer and managementteam; and

o Flexibility to leverage on the existinginfrastructure of the conventional bankinginstitutions within the banking group, includingthe branch network and support functions. Thiswould further strengthen the institutionalstructure for Islamic banking business whileretaining the synergies available within thebanking group, consistent with the objective ofstrengthening the competitiveness of the Islamicbanking institutions through the maximisation ofgroup synergy and cost efficiency.

The incorporation of IS will provide an institutional structure thatcan assimilate future developments in the Islamic financialregulatory infrastructure and thus strengthen the overallprudential and supervisory regime of the Islamic banking system.

Risk ManagementThe Islamic banking institutions also continued tofocus on enhancing their risk managementframework, an important prerequisite in thedevelopment of a sound and robust institutionalfinancial infrastructure.

• In November 2004, a review on the bai’ bithaman ajil(deferred payment sale) variable rate financingmechanism was conducted to promote efficiency inthe pricing of this mode of financing. Under therevised policy, the maximum financing spread of 2.5percentage points above Base Lending Rate (BLR),which is used to determine the effective profit rate,has now been removed. In addition, the requirementto seek Bank Negara Malaysia’s approval for theceiling profit rate to be more than four percentagepoints above the benchmarked BLR has been lifted.Accordingly, Islamic banking institutions are nowallowed to determine a reasonable ceiling profit ratetaking into account the institution’s risk managementcapabilities, business strategies and market outlook.The Islamic banking institutions are also required toinclude in their financing agreements, and in theirletter of offer, the mechanism and benchmark used inderiving the effective profit rate.

Enhancing Regulatory, Prudential and OperationalFrameworkTo ensure effective functioning of the Islamic bankingsystem, various initiatives to enhance the regulatory,prudential and operational framework were taken.

Regulatory• As part of the effort to enhance corporate

governance in Islamic banks, the Guidelines onDirectorship in the Islamic Banks or GP1-i (theGuidelines) were issued in March 2004. The purposeof the Guidelines is to strengthen the effectivenessof the board of directors, who would assume fullresponsibility for the overall management of anIslamic bank. The Guidelines set out therequirements on duties and responsibilities of theboard, appointment and reappointment of directorsand chief executives, directorship in othercorporations and composition of the board ofdirectors as well as the requirement for theIslamic banks to establish an Audit Committee

and other board committees consisting ofNominating Committee, RemunerationCommittee and Risk Management Committee.

• The Guidelines on Financial Reporting for LicensedInstitutions or BNM/GP8 issued in October 2004 tothe financial institutions also incorporated severalenhancements to the financial reportingrequirements for the Islamic banking operations ofthe IBS institutions. The enhancements, amongstothers, included the requirement for the IBSinstitutions to disclose their cash flow statementand statement of changes in equity, in addition tothe balance sheet and income statement. It alsospecified the requirements for disclosure of thefunctions and duties of the Shariah advisorycommittee and responsibility towards zakatobligations, policy on profit equalisation reservesdisclosure and classification of deposits acceptedinto mudharabah and non-mudharabah categories.These requirements were introduced to reflect thenature of and risk associated with Islamic bankingoperations. The above minimum disclosurerequirements are to be adopted for the financialyear beginning January 2005.

Prudential• The revised Framework of Rate of Return was

issued to the Islamic banking industry in August2004 to provide it with greater flexibility inmanaging its rates of return and to enhance theoperational efficiency and capacity among Islamic

162

banking institutions in managing their businessportfolios. Among the revisions made to theframework are the flexibility to offer differentprofit sharing ratios, requirement to segregatebetween mudharabah and non-mudharabahdeposits, classification of funds under restrictedor unrestricted funds and discretion to assignflexible weightage to each type of deposits. Withregard to board rates, the Islamic bankinginstitutions are required to display the profitsharing ratio and rate of return for each type ofdeposits as well as the effective period of therate. The revised framework was implementedbeginning 1 October 2004.

• In tandem with the implementation of theMarket Risk Capital Adequacy Framework forconventional banking institutions, a similarframework for Islamic banks was issued inSeptember 2004. The framework sets out theapproach prescribed by Bank Negara Malaysia indetermining the level of capital to be held by theIslamic banks against their market risk, which isdefined as the risk of losses in on- and off-balance sheet positions arising from movementsin market prices. The framework wasimplemented on a trial basis beginningSeptember 2004 with full compliance from1 April 2005.

• Following the issuance of the two-phaseimplementation approach of Basel II for theconventional banks, Bank Negara Malaysia alsoissued a two-phase implementation approach forthe Islamic banks in September 2004. Under thisapproach, the Islamic banks are given the optionto either comply with the Standardised Approachfor credit risks in 2008 or to move directly to theInternal Ratings Based Approach in 2010. Withregard to the Basel II implementation, the Islamicbanks are also required to conduct gap, impactand cost-benefit analyses, developimplementation roadmap, timeline and budget,undertake research and analytical work as wellas ensure the roles and responsibilities of theBoard and senior management are taken on.These requirements will provide Bank NegaraMalaysia with the basis for monitoring theprogress made by the Islamic banks in observingthe Basel II requirements and, at the same time,serve as a platform for the Islamic banks incomplying with the capital adequacy standard forthe Islamic banking institutions scheduled to beissued by the IFSB in 2005.

Operational• With effect from 12 October 2004, acceptance of

investment deposits of less than one-month tenurecan only be carried out by Islamic banks anddiscount houses. Following this policy, bankinginstitutions participating in the Islamic BankingScheme (commercial banks, finance companies andmerchant banks) are no longer allowed to acceptdeposits of this tenure except by way of sell andbuy back arrangements.

• In line with the efforts to strengthen Islamicbanking operations and streamline industrypractices, Bank Negara Malaysia introduced a policyon takaful coverage for financing-i (Islamicfinancing) in October 2004. Islamic bankinginstitutions are required to offer takaful plans asthe first choice to their customers in the offering ofprotection for Islamic financing that needscoverage. However, if the cost of coverage, i.e.contribution or premium, is to constitute part ofthe financing package, it is mandatory that theIslamic banking institutions only offer takaful plans.

• To facilitate submission of applications of newproducts for approval and maintenance of arepository of all Islamic banking products availablein Islamic banking institutions, Bank NegaraMalaysia is developing an on-line system known asProduct Approval & Repository System (PARS). PARSwill expedite the processing of applications tointroduce new products as it provides on-lineapplication and submission of documents. Thesystem will also facilitate easy monitoring of theflow of processing work on applications, andprompt retrieval of up-to-date product informationstored in the system. The project is due forcompletion in 2005.

Strengthening Shariah and Legal InfrastructureAn effective and conducive Shariah frameworkcombined with a sound legal system is an essentialelement for a comprehensive Islamic bankingsystem. The Bank has continuously enhanced andfine-tuned the Shariah framework and legal systemto keep abreast with developments in the Islamicbanking industry.

• Bank Negara Malaysia has issued the Guidelineson the Governance of Shariah Committee forthe Islamic Financial Institutions in December2004 to rationalise and streamline the functionsand duties of Shariah committees of thefinancial institutions.

163


Shariah Governance Framework for Islamic Financial Institutions

The Financial Sector Masterplan on Islamic banking and takaful emphasised the importance of establishingan effective Shariah framework in the development of Islamic banking and takaful. An effective Shariahframework would serve to ensure uniformity and harmonisation of Shariah interpretations that willstrengthen the regulatory framework and governance practices for the Islamic financial industry. BankNegara Malaysia issued the Guidelines on the Governance of Shariah Committee for the Islamic FinancialInstitutions in December 2004, aimed at achieving uniformity of Shariah decisions, in addition to creatingand expanding the pool of competent Shariah personnel in Islamic banking and takaful.

Prior to the issuance of the guidelines, various Shariah bodies co-existed and were governed under separatelegal framework. An Islamic bank was required under the Islamic Banking Act 1983 to establish a ‘Shariahadvisory body’, while a takaful operator needed to set up a ‘Shariah Supervisory Council’ as stipulated underthe Takaful Act 1984. The Islamic Banking Scheme (IBS) banks under the Banking and Financial InstitutionsAct 1989 were required to appoint a Shariah consultant, while financial institutions under the DevelopmentFinancial Institutions Act 2002 appointed Shariah bodies on their own initiatives. These Shariah bodies werenot adequately regulated, and were operating independently of one another, and were also independent ofthe Shariah Advisory Council (SAC) established by Bank Negara Malaysia. Therefore, these Shariah bodiesneeded to be regulated in order to avoid divergence of Shariah interpretations on similar matters andeliminate confusion among the public. Current practice of allowing similar members in the various Shariahbodies of Islamic financial institutions was also reviewed from the perspective of corporate governanceespecially in terms of confidentiality and secrecy provisions.

To address these emerging issues, the Bank amended the Central Bank of Malaysia Act 1958 in 2003 toenhance the role and functions of the SAC of Bank Negara Malaysia. The SAC was accorded the soleauthoritative body on Shariah matters pertaining to Islamic banking, takaful and Islamic finance. The jurisdictioncovers all financial institutions regulated and supervised by the Bank. An important development is that theJudiciary has agreed to refer to the SAC dispute cases involving Shariah issues on Islamic banking and finance.To preserve its independence, members of the SAC of Bank Negara Malaysia are not allowed to participate inany Shariah committee of financial institutions.

Following the establishment of the SAC at the Bank, the guidelines to strengthen the Shariah committees at theIslamic financial institutions were issued in December 2004. The guidelines, which will take effect on 1 April2005, set out the rules, regulations and procedures in the establishment of a Shariah Committee (theCommittee), the role, scope of duties and responsibilities of a Committee as well as the relationship andworking arrangement between the Committee and the SAC of Bank Negara Malaysia. The requirement toestablish the Committee covers the Islamic banks, banking institutions that participate in the IBS, takafuloperators and development financial institutions that provide Islamic banking facilities. IBS banks may establish aCommittee for the banking group, while takaful operators must have their own Committee as required by law.

Among the duties and responsibilities of the Committee are to advise the board of directors on Shariah matterson the bank’s business operations to ensure that they comply with Shariah principles at all times, to endorsethe Shariah Compliance Manuals, and to endorse and validate relevant documentations. To ensure the properrecord for easy reference, the Committee is required to provide written Shariah opinions or decisions.

To ensure the smooth running of the Committee, every Islamic financial institution is responsible to providethe necessary assistance to the Committee in all its undertakings. The Islamic financial institution isrequired to refer all Shariah issues to the Committee for advice for adoption. It is also required to ensurethat product documents containing Shariah matters be endorsed and validated by the Committee, provideaccess to relevant records, transactions, manuals or other relevant information for the Committeemembers to enable them to perform their duties, and provide sufficient resources, independent expertconsultation, reference materials and training.

164

• Following the establishment of the Shariah AdvisoryCouncil (SAC) at Bank Negara Malaysia under theCentral Bank of Malaysia Act 1958, the MalaysianJudiciary and the Regional Centre for ArbitrationKuala Lumpur will use the SAC as the referencepoint in the event of a dispute that involves Shariahissues on Islamic banking and finance. As thereference body and advisor to Bank Negara Malaysiaon Shariah matters, the SAC is also responsible forvalidating all Islamic banking and takaful products toensure their compatibility with the Shariah principles.

• The SAC has convened six meetings during 2004.Among the main decisions made by the SAC wereas follows:-

o Approval on the mechanism of Islamic bondbased on bai’ bithaman ajil to be used by thenational mortgage corporation in purchasingthe financing assets from the Islamic financialinstitutions. The new instrument will be analternative investment instrument offered tothe investors and players that prefer fixed andpre-determined return on their investment.The SAC has also approved the biddingmethods for this instrument to be basedeither on price or rate of return. Methods todetermine the rate of return to successfulinvestors can also be based either on bidprice or bid profit rate or weighted averageof bid profit rates.

o An Islamic financing that includes cost ofcoverage as part of its financing package mustbe covered by takaful. This is to avoid the

An individual person is only allowed to be a member of one Committee for each industry. In other words,if the person sits on the Committee of an Islamic banking institution, he cannot sit on another Committeeof an institution of the same industry. However, he is allowed to sit on a Committee of a takaful company.A company or an institution is no longer allowed to be a Committee member as the guidelines restrict themembers of the Committee to individuals only. The Committee member must be at least qualified in thefield of Islamic jurisprudence (Usul Fiqh) or Islamic transaction/commercial law (Fiqh Mu’amalat) or possessthe necessary knowledge, expertise or experience in the related field.

The composition of the Committee shall be a minimum of three members. In addition to the ShariahCommittee, an Islamic financial institution is required to designate at least one officer, preferably withknowledge in Shariah, to serve as the secretariat to the Committee. The Committee will report to theboard of directors of the financial institution. This reporting structure reflects the status of the Committeeas an independent body of the Islamic financial institution.

The guidelines are expected to improve and strengthen the Shariah governance of the financial institutions andcontribute towards creating a larger pool of highly qualified, conversant and experienced Shariah advisors.

involvement of Islamic financial institutions inany transaction that is not Shariah compliant.However, the SAC viewed that if the cost ofcoverage does not form part of the financingpackage, the Islamic financial institutions shouldoffer takaful as a first choice to the customers.

o Approval in principle on the profit rate swaptransaction based on sell and buy backarrangement was given to an IBS merchantbank. The proposed profit rate swap is anarrangement where one party exchanges thefixed profit rate obligation of its asset with thevariable profit rate obligation of thecounterparty’s asset, or vice versa. Onerationale for this mechanism is for the Islamicfinancial institutions to match their long-terminvestment or fixed rate financing with theirshorter-term variable funding rates in order tomitigate their market risk exposure.

• The Law Review Committee that was formed inJune 2003 by Bank Negara Malaysia focused itstask in 2004 in reviewing the relevant tax lawsgoverning the Islamic banking and financetransactions, namely the stamp duty and tax law,and has made some recommendations to theGovernment. Towards this end, the Governmenthas announced the tax neutrality policy for Islamicbanking and finance in the 2005 Budget to createan equitable tax treatment of Islamic banking andfinancial transactions vis-à-vis similar conventionalbanking transactions. Under the tax neutralityframework, the Inland Revenue Board (IRB) willexempt additional instruments and transactions

165


executed to fulfil Shariah requirement, fromadditional stamp duty and tax payment.Subsequent amendments were made to theIncome Tax Act 1967, Real Property Gains Tax Act1976 and Stamp Act 1949. To facilitate thisarrangement, Bank Negara Malaysia has beenempowered under these laws as the authority torecommend to the IRB to exempt such additionalinstruments and transactions from stamp duty.

Enhancing Human Capital Development andConsumer EducationDuring the year, efforts continued to focus ondeveloping human capital and expertise to enhancethe effectiveness and competitiveness of the Islamicbanking business. The purpose was to enhance theintellectual capital development with the objective ofcreating a larger pool of experts and high calibreprofessionals in Islamic banking and finance.

• To achieve this objective, the Islamic Banking andFinance Institute Malaysia (IBFIM) organisedseveral courses on Islamic banking and finance,covering the management, operation, Shariahand legal aspects. It undertook joint efforts, localas well as international, with Islamic financialinstitutions and other institutions in thedevelopment of a comprehensive and completerange of Islamic financial products and services.IBFIM also assisted financial institutions indesigning training programmes to meet theirspecific training requirements. In addition, IBFIMprovided advisory and consultancy services todomestic and foreign institutions.

• Two workshops on Risk Management and CapitalAdequacy, and on Implementing Islamic MoneyMarket for Islamic banking and finance wereorganised by the Bank on 23 September 2004.The Workshop on Risk Management and CapitalAdequacy provided insights on the standardsetting process and the challenges faced by theIslamic financial institutions in implementing riskmanagement and in meeting the requirements ofthe IFSB’s capital adequacy standards. TheWorkshop on Implementing Islamic Money Marketfocused on the development and importance ofan Islamic money market as an integralcomponent of a comprehensive Islamic financialsystem.

• To boost customer awareness and education, asurvey was conducted on the customerrequirements and the extent to which these were

met by the products and services provided by theIslamic banking industry. The results revealed theneed to enhance customer relationship ascustomers place importance on the quality ofinterface with banking institutions. Enhancinghuman capital is therefore vital. Customers arebecoming increasingly discerning and demandinggreater product differentiation and value addedservices that meet their financial requirements.

• Bank Negara Malaysia also participated in the 1st

Malaysia International Halal Showcase, organisedby the Islamic Da’awah Foundation, which washeld from 14 to 18 August 2004, and the IslamicBanking and Takaful Expo, organised by theAssociation of Islamic Banking InstitutionsMalaysia held from 8 to 10 October 2004.

• Bank Negara Malaysia launched the Islamic moneymarket website in October 2004 as part of theinitiative to effectively and efficiently disseminateinformation on domestic Islamic financialinstruments. It provides greater transparency of theIslamic money market operations, thus facilitatinginvestment decisions and enhancing publicconfidence in their investments. The website alsoprovides an analysis facility to chart historical data, inaddition to the rules and regulations in the conductof Islamic money market transactions. The websiteat http://iimm.bnm.gov.my will be linked to thewebsite of markets in other jurisdictions to serve as aplatform for exchanging information and knowledgebeyond Malaysian borders.

• In promoting Malaysia as a centre for educationexcellence and training in Islamic banking andfinance, an initiative is underway to establish astructured financial training and educationinstitute. This is to meet the increasingmanpower requirements arising from the currentinstitutional development. This will effectivelydevelop a human capital framework whereIslamic banking industry requirements for skilledstaff and experts would be adequately met bythe supply of human resources.

SUPERVISION OF THE ISLAMIC BANKING SYSTEM

An important component in the development of asound and viable Islamic banking system is theestablishment of a strong supervisory framework,which has the capacity to specifically address theunique peculiarities inherent in Islamic bankingactivities. As Islamic banking and finance has become

166

an integral component of the banking system, strainsexperienced in the Islamic banking system would haverepercussions on the overall financial system.

Islamic banks are supervised premised on the samerisk based supervision framework as in conventionalbanking. The financial and operating condition of theIslamic banking operations are assessed using theCAMELS-i rating framework. This framework assessescapital, asset quality, management quality, earningsperformance, liquidity and sensitivity to market risk.However, the rating criteria has been adapted to caterfor the specific characteristics inherent in Islamicbanking operations. The CAMELS-i rating alsoincludes an assessment on the adequacy of thefinancial institutions’ risk management systems. Animportant facet of the supervision of the Islamicbanking operations is the review of the financial

An important component in the development of a sound and viableIslamic banking system is the establishment of a strong supervisoryframework, which has the capacity to specifically address the uniquepeculiarities inherent in Islamic banking activities.

institution’s compliance with Shariah principles. Forthis purpose, ‘Shariah compliance checklists’ havebeen developed as a tool for bank supervisors tocarry out their supervisory functions.

In line with the FSMP, Islamic banking institutionsinvested more resources in enhancing their riskmanagement systems during 2004, to build resiliencewhile operating successfully in a highly competitiveenvironment. New product development andinnovations were also intensified in creating a widerange of Islamic financial products capable of meetingcustomers’ requirements. The Islamic bankinginstitutions also developed and enhanced theiroperational processes in improving their efficiency andeffectiveness to operate in a more dynamic andcompetitive environment. The stress-test analysis on theIslamic banking institutions showed that there wasadequate capital to withstand economic shocks as wellas to meet planned business expansion.

In 2004, Bank Negara Malaysia conducted on-siteexaminations of full-fledged Islamic banks, coveringboth head offices and branches, as well as theconventional financial institutions (commercial banks,finance companies, merchant banks and discounthouses) offering Islamic banking products and services,under the IBS. These examinations were conducted aspart of the overall examination of the conventional

financial institutions. In reviewing the overall financialand operating conditions of the Islamic bankingoperations of the conventional financial institutions,particular attention was given to ensure that therewere proper internal controls and procedures in placeto prevent commingling of conventional and Islamicbanking funds. These on-site examinations werecomplemented with off-site surveillance to ensure thatthere was continuous monitoring of these financialinstitutions. The two-pronged approach to supervisionenabled the Bank to detect emerging problems andthus take necessary pre-emptive supervisory actions ona timely manner.

The entry of the new foreign Islamic bankingplayers and the establishment of Islamic subsidiariesby domestic banking institutions are expected tofoster the development of more innovative Islamic

financial products and services into the market.Whilst this development will broaden and deepenthe Islamic financial markets, supervisors will needto ensure that financial institutions have in placeadequate risk management systems to identify,measure, monitor and control all associated risks andthat adequate capital is held against the risks.

The existing supervisory processes and procedures willcontinue to evolve in line with best internationalstandards. Regulatory and supervisory standards, whichcan specifically address the unique peculiarities of theiroperations, are necessary to promote resilience andcompetitiveness of the Islamic banking sector. In thisregard, the work of the IFSB, the body established toissue prudential and supervisory standards for theIslamic banking and finance industry would act as acatalyst to the development of a stronger supervisionframework in Malaysia. Concurrently, a group ofspecialised supervisors has been established to act as areference point for its peers by keeping abreast withnew developments in the area of Islamic banking.

The challenges facing the bank supervisors goingforward will be more demanding as the system becomesmore complex and liberalised. To meet the increasingsupervisory needs in a rapidly changing environment,resources will continue to be invested towardsstrengthening the Bank’s supervisory capacity.

167


PERFORMANCE OF THE ISLAMIC BANKING SYSTEM

The Islamic banking industry continued to show stronggrowth in 2004 in tandem with the growth in theeconomy, as reflected by the increased market share ofthe Islamic banking industry in terms of assets, financingand deposits of the total banking system. The industrywas able to sustain its performance, and its strongcapitalisation levels were attributed to increases incapital and profits as well as higher financing activities.In addition, asset quality recorded further improvementwith a declining trend in net non-performing financingratio and high financing loss provisions.

Capital StrengthThe Islamic banking sector remained well capitalised.The risk-weighted capital ratio (RWCR) and core capitalratio were sustained above 12% and 10% respectivelythroughout the year. The total capital base of the Islamicbanking institutions increased from RM6.8 billion as atend-2003 to RM7.8 billion as at end-2004, mainly dueto new capital injections and audited profits. Total risk-

The Islamic banking industry continued to show strong growth in2004 in tandem with the growth in the economy.

due to hikes in other financing and placement withBank Negara Malaysia. As at end-2004, the Islamicbanking system recorded a strong RWCR of 12.5% andcore capital ratio of 10.4%.

Table 6.1Islamic Banking System:Sources and Uses of Funds


2003 2004p 2004p

RM million

SourcesCapital and reserves 2,081 725 7,509Deposits 6,906 12,647 72,859Funds from other financial

institutions 2,541 -2,958 4,027Other liabilities 2,598 1,925 10,185

Total 14,126 12,339 94,580

UsesCash 15 16 271Reserve with

Bank Negara Malaysia 321 -159 1,358Deposits with other financial

institutions 1,247 9,670 18,652Financing 11,897 9,223 57,883Securities 3,277 -3,510 19,044Other assets -2,631 -2,901 -2,628

1 Denotes the interbranch balances pending settlement.p Preliminary

1

0

2

4

6

8

10

12

14

16

Graph 6.2 Islamic Banking System: Capital Adequacy in 2004

% RM billion

J F M A M J J A S O N D

Month

0

1

2

3

4

5

6

7

8

Capital base

Core capital ratio (%)

Risk weighted capital ratio (%)

weighted assets of the Islamic banking system grew by20.4% or RM10.6 billion to RM62.5 billion in the past12 months. The growth was apparent in all riskcategories except for the 20% category where therewas a decline in Islamic Acceptances held andplacement with domestic banking institutions. A largeincrease was recorded in the 100% and 0% riskcategories (RM10 billion and RM8 billion respectively)

The RWCR of Islamic banks and IBS commercial banksstood at 12.5% and 12.7% respectively. The RWCR ofIBS merchant banks as a group increased from 13.5% to14.5% mainly due to the higher increase in the capitalbase compared with the increase in the risk-weightedassets. The RWCR of IBS finance companies was 10.8%with the capital base declining significantly by 58.4% orRM1,170 million to RM832 million as at end-2004mainly due to the rationalisation of capital arising fromthe merging of operations of four IBS financecompanies with their IBS commercial banks of the samegroup. Accordingly, the risk-weighted assets alsodecreased by 49% or RM7.4 billion.

AssetsAs at end-2004, the total assets of Islamic bankingsector increased by RM12.3 billion or 15% to RM94.6billion. A significant portion of the increase in totalassets was attributable to the high growth in totalfinancing. As at end-2004, total financing amountedto RM57.9 billion or 61.2% of the total Islamicbanking assets. Meanwhile, investment in securitiesdecreased by 15.6% (RM3.5 billion) during the year toaccount for RM19 billion or 20.1% of total assets. Interms of market share, the largest portion of Islamicbanking assets remained with the IBS commercialbanks with a share of 57%, followed by Islamic banks(26.3%) and the IBS finance companies (8.2%). In

168

terms of the growth in assets, IBS merchant banksrecorded the highest growth of 47.1%, followed by IBScommercial banks (46.5%) and Islamic banks (18.4%).

Financing ActivitiesThe financing activities of the Islamic banking systemgrew further in 2004. During the year, there wasincreased demand for financing, resulting in a higher

Murabahah 7.0%

Other Islamic concepts 17.4%

Bai' Bithaman Ajil 49.9%

Mudharabah & Musyarakah

0.5%

Istisna' 1.2%

Ijarah 24.0%

Graph 6.3 Islamic Banking System: Major Financing Concepts

number of financing applications received by the Islamicbanking institutions. Evidently, there were increases infinancing approvals and financing disbursements of0.6% and 14% respectively. In addition, financingrepayments increased by 28.6% as many customersrepaid and refinanced their financing to take advantageof the environment of low cost of funds.

In 2004, total financing expanded by 19% orRM9.2 billion (2003: 32.4% or RM11.9 billion).Consumer financing extended by Islamic bankinginstitutions, which had risen by 19.7%, wassupported by strong consumer spending. Similarly,financing for purchase of transport vehicles(primarily for purchase of passenger cars) recordeda growth of 15.2%, while financing for purchase ofresidential properties expanded by 7.3%. Theexpansion in consumer demand was furthersupported by the attractive and competitivefinancing packages offered by the Islamic bankinginstitutions. Financing extended to themanufacturing sector continued to be significant in2004, accounting for 10.6% of total financing as atend-2004 (end-2003: 9%). Financing based on bai’bithaman ajil (deferred payment sale) conceptremained dominant, constituting 49.9% of totalfinancing while ijarah (leasing) constituted 24%.

The Islamic banking sector continued to focus onproviding financing to small and medium enterprises(SMEs). Total financing provided by the Islamicbanking institutions to the SMEs increased by 29.6%from RM6.2 billion as at end-2003 to reach RM8billion as at end-2004. Islamic financing contributed13.8% of the total financing extended by thebanking system to the SMEs as at end-2004 ascompared with 7.5% as at end-2003.

Table 6.3Islamic Banking System: Direction of Financing


2004p2003 2004p

RM million

Agriculture, hunting,forestry and fishing 267.6 467.0 2,328.6

Mining and quarrying -11.0 13.1 76.6Manufacturing 505.6 1,725.8 6,112.6Electricity, gas and water supply -284.8 470.3 719.2Community, social and

personal services 89.4 115.2 418.5

Broad property sector 4,747.0 1,923.6 22,451.0Real estate 142.6 94.5 906.4Construction 655.3 597.4 3,530.9Purchase of residential

property 3,581.4 1,044.4 15,433.3Purchase of

non-residential property 367.7 187.3 2,580.4

Wholesale and retail trade,restaurants and hotels 410.6 1,273.9 3,070.9

Transport, storage andcommunication 199.5 152.2 1,176.5

Finance, insuranceand business services 661.6 156.8 2,090.1

Purchase of securities -14.1 -42.7 878.1

Consumption credit 5,584.9 2,931.2 17,803.4Credit cards 95.7 155.8 312.0Personal use 575.5 812.2 2,449.3Purchase of consumer

durable goods -9.2 -10.5 43.6Purchase of transport

vehicles 4,922.9 1,973.7 14,998.5Others -258.7 36.1 757.0

Total 11,897.6 9,222.5 57,882.5

p Preliminary

Table 6.2Islamic Banking System: Financing Activities

For the yearAnnual change2003 2004p

(%)RM million

Financing approvals 16,168 16,260 0.6Financing disbursements 36,049 41,089 14.0Financing repayments 26,157 33,639 28.6

As at end-Annual change2003 2004p

(%)RM million

Outstanding financing 48,660 57,883 19.0

p Preliminary

169


Asset QualityThe asset quality of the Islamic banking industryimproved further during the year. As at end-2004, thegross and net non-performing financing (NPF) ratiosstood at 8.1% (2003: 8.5%) and 5.3% (2003: 5.5%)respectively, based on a 6-month classification. Thenet NPF ratio of the Islamic banking institutions wassustained within the range of 4.8% to 5.7%throughout the year. Financing loss coverageremained high at 60.5% of total NPF as at end-2004.In terms of absolute amount, financing loss coverageincreased to RM3 billion from RM2.4 billion in 2003.

The income-in-suspense, general provision andspecific provision set aside by Islamic banking institutionsincreased by 16.1%, 36.6% and 15.8% respectivelyduring the year. The general provision of total netfinancing for the Islamic banking industry increased to2.1% from 1.8% as at end-2003 reflecting the prudentstance of a number of Islamic banking institutions insetting aside higher provisions for financing.

The broad property sector continued to account forthe largest share, at 66.7% of the total NPF (2003:62.4%). The high NPF in the broad property sector

Table 6.4Islamic Banking System: Non-performing Financing and Financing Loss Provisions

As at end-

2003 2004p

Classification Classification

3-month 6-month 3-month 6-month

RM million

Islamic banksTotal financing 9,809.2 11,463.3General provisions 174.7 174.7 174.7 163.9 163.9 163.9Income-in-suspense 178.2 186.9 178.2 204.1 215.3 204.1Specific provisions 405.5 433.7 405.5 424.0 457.7 424.0Non-performing financing 1,575.6 2,002.3 1,575.6 1,668.7 2,152.7 1,668.7

Net NPF ratio (%)3 10.8 15.0 10.8 9.6 13.7 9.6Total provisions/NPF (%) 48.1 39.7 48.1 47.5 38.9 47.5

Commercial banks2

Total financing 22,323.8 38,803.0General provisions 400.9 379.7 300.8 923.2 922.9 545.5Income-in-suspense 213.3 130.1 207.1 341.5 343.6 334.8Specific provisions 280.3 284.4 309.3 544.8 552.5 532.3Non-performing financing 1,991.7 2,274.4 1,653.7 2,798.6 3,411.7 2,542.4


Finance companies2

Total financing 15,746.0 6,823.5General provisions 316.7 316.6 318.7 130.0 130.0 130.0Income-in-suspense 150.8 155.8 149.8 100.5 107.9 100.5Specific provisions 274.9 296.7 274.5 136.4 151.4 136.4Non-performing financing 832.3 1,058.7 805.1 389.5 639.2 389.5


Merchant banks2

Total financing 781.0 792.7General provisions 12.1 12.1 12.1 12.9 12.9 12.9Income-in-suspense 20.6 20.7 20.6 7.6 7.6 7.6Specific provisions 5.4 5.4 5.4 14.9 14.9 14.9Non-performing financing 125.6 128.3 125.6 109.8 109.8 109.8


Islamic banking systemTotal financing 48,660.0 57,882.5General provisions 904.4 883.2 806.2 1,230.0 1,229.7 852.3Income-in-suspense 562.9 493.5 555.6 653.7 674.4 647.0Specific provisions 966.0 1,020.2 994.6 1,120.1 1,176.5 1,107.6Non-performing financing 4,525.2 5,463.7 4,160.0 4,966.7 6,313.4 4,710.5


1 Financing classified as NPF based on individual banking institution’s NPF classification policy i.e. 3-month or 6-month classification.2 Refers to Islamic banking portfolio of conventional banking institutions participating in Islamic Banking Scheme and represents a subset of the figures reported under

the total banking system for commercial banks, finance companies and merchant banks.3 Net NPF ratio = (NPF less IIS less SP) / (Gross financing less IIS less SP) x 100%.

p Preliminary

Actual1 Actual1

170

was recorded in the residential property andconstruction sub-sectors, which increased byRM345.9 million (24%) and RM176.9 million(29.8%) respectively. The NPF level of the residentialproperty to total financing for this sub-sectorincreased from 10% as at end-2003 to 11.6% as atend-2004. Apart from the broad property sector,there was also an increase in NPF in the purchase oftransport vehicles sub-sector, primarily for purchaseof passenger vehicles of RM116.1 million.

Rates of ReturnDuring the year, the rates of return to generalinvestment depositors showed a declining trendacross the different tenures. The 1-month and3-month rates ranged between 2.63% to 2.87%and 2.73% to 2.93% respectively. The decliningtrend was partly due to the proportionately largerincrease in the general investment deposit basethan the increase in the net distributable income.The general investment deposits recorded anaverage monthly growth of 1.5% while the netdistributable income registered an average monthlygrowth of 1.3%.

ProfitabilityIn 2004, the Islamic banking sector recorded anincrease of 14.1% in net income (from financingactivities and securities) of RM306.6 million at theoperating level. Notably, other income of the Islamicbanking sector registered an increase of RM87.5million or 11.8%. The Islamic banking sectorposted higher profit before provision of RM2.6billion (2003: RM2.3 billion). After allocatingfinancing loss provisions, the Islamic banking sectorrecorded profit before tax of RM986.3 million forthe calendar year 2004 (2003: RM960.4 million).Despite the higher provision for financing losses ofRM1.6 billion, a higher profit before tax wasrecorded as the increase in total income was morethan offset the increase in provisions. The higherfinancing loss provisions charged by the Islamicbanking institutions were partly due to the increasein NPF and Profit Equalisation Reserve. The return

J

4.00

3.50

3.00

2.50

2.00F M

2004

A M J J A S O N D

Graph 6.5 Islamic Banking System: Average Rates of Return to General Investment Depositors

%

12-month

9-month

6-month

3-month

1-month

Graph 6.4 Islamic Banking System: Net Non-Performing Financing Ratio1

%

18

16

14

12

10

8

6

4

2

02000 2001 2002 2003 2004

Islamic banking system Islamic banks


Merchant banks

1 Based on actual classification.

Table 6.5Islamic Banking System: Income and Expenditure

For thecalendar year

2003 2004p

RM million %Income1 net of

income-in-suspense 3,864 4,296 432 11.2(Income-in-suspense) 307 310 3 1.0

Less: Expense1 1,689 1,814 125 7.4

Net income 2,175 2,482 307 14.1

Add: Other income 748 836 88 11.8Less: Staff cost 232 267 35 15.1

Overheads 384 422 38 9.9

Profit before provisions 2,307 2,629 322 14.0

Less: Financing loss & otherprovisions 1,347 1,643 296 22.0

Pre-tax profit 960 986 26 2.7

Return on assets (%) 1.2 1.0Return on equity (%) 14.2 13.1

1 From financing activities and securities.p Preliminary

Annual change

171


on assets and return on equity, however, declinedto 1% and 13.1% respectively due to the increasein asset size and capital funds.

LiquidityThere was ample liquidity in the Islamic banking systemthroughout 2004. Total deposits recorded a moderategrowth of 21% or RM12.7 billion to reach RM72.9billion as at end-2004. The IBS commercial banks andIslamic banks accounted for the major share of 83.1%of the total deposits in the Islamic banking sector(2003: 73.3%). Among the Islamic banking players,the IBS merchant banks recorded the highest growthrate in deposits of 79.2% followed by the IBScommercial banks, which registered a growth of 50%.

Investment deposits (general and specific) continuedto capture a major portion of the Islamic bankingdeposits, amounting to 57.6% of Islamic bankingdeposits. During the year, savings and demanddeposits recorded a growth of 22.8% and 17.6%respectively mainly due to increase in the retailcustomer base in Islamic banking. In terms of thematurity profile of general investment deposits,96.2% of the general investment deposits continuedto be concentrated at the shorter end of the yieldcurve, mainly in the one to three-month maturitytenure as the incremental return between theshorter and longer placement tenures continued toremain small. The average rates earned on depositsremained stable in 2004.

In terms of short-term liquidity for the period of upto one month, the two Islamic banks had sufficientliquidity to meet any unexpected withdrawals. Therewas surplus liquidity above the minimumrequirement of 3% for the up to one-week time

bucket and 5% for the one-week to one-month timebucket. The financing to deposits ratio decreasedfrom 80.8% as at end-2003 to 79.4% as at end-2004 due to higher percentage increase in totaldeposit base compared with that in total financingduring the period.

Islamic Interbank MarketDuring the year, the Islamic interbank marketregistered significant growth of 64.8% in terms ofturnover volumes against a backdrop of ampleliquidity. The mudharabah interbank investmenttransactions continued to dominate more than 70%market share of the total turnover volumes in theIslamic interbank market. Stable rate of return on themudharabah interbank investment coupled with theenlarged issuance of Government and Central Banksecurities had contributed to strengthen the Islamicinterbank market position to meet increasing marketdemand for short-term investments.

By Institution Total deposits: RM72.9 billion

Islamic banks 28.5%

Finance companies

8.2%

Merchant banks 2.1%

Discount houses 6.6% Commercial

banks 54.6%

By Type Total deposits: RM72.9 billion

More than 1 year1.8%

Others 0.8%

Up to 1 year 45.6%

General investment deposits 47.4%

Specific investment deposits 10.2%

Demanddeposits 17.7%

NIDs 12.3%

Savings deposits 11.6%

Graph 6.6 Islamic Banking System: Deposits by Institution and Type

Table 6.6Islamic Interbank Market - Turnover Volume

2003 2004p Annual change

RM billion %

Total 341.4 562.4 221.1 64.8

Mudharabah InterbankInvestment1 283.8 485.7 201.9 71.1

Financial Instruments 57.6 76.8 19.2 33.3Islamic Accepted Bills1 10.0 10.3 0.3 3.5Negotiable Islamic

Debt Certificate1 4.2 8.2 4.0 94.0Bank Negara

Negotiable Notes 8.9 21.2 12.3 137.6Islamic Treasury Bills2 – 1.2 1.2 –Government Investment

Issues 34.5 35.9 1.4 4.0

1 Volume transacted through brokers.2 Inaugural issuance.p Preliminary

172

The Islamic interbank market sustained ampleliquidity during the year. The excess liquiditycondition, however, was effectively maintained atan appropriate level through Bank NegaraMalaysia’s liquidity operation. Under the liquidityoperation, the excess liquidity was absorbedthrough the issuance of Government and BankNegara Malaysia Islamic papers as well as throughthe direct acceptance of wadiah interbank deposits.During the year, the Government of Malaysia issuedthe inaugural Islamic Treasury Bills (ITB) amountingto RM1 billion based on the Shariah concept of selland buy back arrangement. The one-yearGovernment paper was issued in eight series andattracted broad investor participation, with theissue being over-subscribed by 3.6 times. Apartfrom the ITB, the Government also issued anadditional RM2.1 billion of Government InvestmentIssues (GII), of which RM1 billion was issued for aseven-year tenor as part of the effort to lengthenthe benchmark yield curve for Islamic securities.Bank Negara Malaysia issued an additional RM2billion of Bank Negara Negotiable Notes (BNNN).Following the issuance of the three Governmentand Bank Negara Malaysia papers, the net issuanceof Islamic securities by the Government increasedby 51% or RM5.1 billion.

The continuous liquidity surplus in the Islamicbanking system was further absorbed through thewadiah interbank deposits transaction whereby theaverage daily amount absorbed by Bank NegaraMalaysia under this mechanism increased fromRM2.4 billion in 2003 to RM6.8 billion in 2004.The bulk of the wadiah transactions, however, was

RM billion

Graph 6.7 Mudharabah Interbank Investment - Turnover Volume

0

10

Jan-

03Fe

b-03

Mar

-03

Apr

-03

May

-03

Jun-

03Ju

l-03

Aug

-03

Sep-

03O

ct-0

3N

ov-0

3D

ec-0

3Ja

n-04

Feb-

04M

ar-0

4A

pr-0

4M

ay-0

4Ju

n-04

Jul-0

4A

ug-0

4Se

p-04

Oct

-04

Nov

-04

Dec

-04

20

30

40

50

60

1 Week 1-3 months6 months,12 months & others

Graph 6.8 Mudharabah Interbank Investment - Share of Turnover Volume

% share

0

20

40

60

80

100

2003 2004

Weekend

69.174.8

19.517.9

4.2

0.6

1.7

7.1 3.1

2.0

Overnight

concentrated on the overnight tenor. Following theliquidity operations carried out by the Bank, themudharabah interbank investment overnight ratethat was used as an indicator by Bank NegaraMalaysia for the day-to-day liquidity operation in theIslamic interbank market remained stable at anaverage of 2.70% throughout the year.

Trading volume in the mudharabah interbankinvestment transactions continued to recordfavourable growth of 71.1%, at an average monthlyturnover of RM40 billion. Similar to the wadiahinterbank acceptance deposits, more than 70% of themudharabah interbank investment transactions weremainly concentrated on the overnight tenor, primarilydue to the limited supply of Shariah compliantshort-term papers. The stable rate of return whichaveraged 2.70% for the overnight investment inmudharabah interbank investment was also thecontributing factor given that the rate was morefavourable to market participants compared to thedeclining yields in the Government Islamic securities.

With the exception of Islamic Accepted Bills (AB-i), therewas continuous demand for short-term liquid assetsarising from the surplus liquidity position. Due to thelimited supply of instruments in the secondary market,the majority of the AB-i issuers preferred to hold theshort-term paper until maturity. In addition, the AB-iprovided higher return on investment as it was pricedabove the mudharabah interbank investment rate.

173


0

Government Investment Issues

Bank Negara Negotiable Notes

Islamic Treasury Bills

1

2

3

4

5

6

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2004

RM billion

Graph 6.9 Islamic Securities - Turnover Volume

Notwithstanding the limited supply, the moderate increasein AB-i was offset by a higher increase in the supply ofNegotiable Islamic Debt Certificate (NIDC-i). The ampleliquidity situation in the banking system provided theenvironment for the Islamic banking institutions to increasethe creation of NIDC-i to mobilise medium and long-termdeposits. This exercise has consequently improved thesupply of NIDC-i in the secondary market. As at the end of2004, total outstanding NIDC-i amounted to RM8.8 billionas compared to RM5.7 billion as at end-2003, representingan increase of 54%. In terms of maturity tenor, 62% orRM5.7 billion of the outstanding NIDC-i ranged from ninemonths to five years.

The increase in supply of BNNN and the new issuanceof ITB contributed significantly to higher trading ofthese instruments in the secondary market. During theyear, the turnover volume of BNNN grew by 137.6% orRM12.3 billion. The trading of ITB also showed anencouraging growth where the turnover ratio in thenew Government paper recorded 1.2 times in terms oftrading volume to the total outstanding securities.Meanwhile, the trading volume of GII recorded amarginal increase of 4% or RM1.4 billion as comparedto that of the previous year due to the relatively loweraverage yield-to-maturity.

The Islamic bond market charted a positive growthof 13.4% or RM11.6 billion in 2004. Totaloutstanding Islamic securities amounted to RM97.8billion, accounting for 25.7% of the total outstanding

bonds in the capital market. In the private debtsecurities market, a total of RM82.7 billion Islamicsecurities remained outstanding as at end-2004,which accounted for 42% of the total outstandingprivate debt securities in the market or an increase of8.5% from 2003. The continued low interest rateenvironment and ample liquidity situation influencedcorporations to raise funds in the capital market viathe issuance of long-term private debt securities.

A significant development in the domestic Islamicbond market was the inaugural issuance ofringgit-denominated Islamic debt securities basedon bai bithaman ajil (BBA) by a multilateral financial

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Yield (%)

Average Yield 5-year - 4.049 3-year - 3.227 1-year - 2.660

1-year

3-year

5-year

Graph 6.10 Government Investment Issues - Average Yield to Maturity

2004

Table 6.7Outstanding Islamic Securities

2003 2004pAnnualchange

RM billion %

Total 86.2 97.8 11.6 13.4

Government Securities 10.0 15.1 5.1 51.0Government Investment Issues 7.0 9.1 2.1 30.0Islamic Treasury Bills 0.0 1.0 1.0 -Bank Negara Negotiable Notes 3.0 5.0 2.0 66.7

Private Debt Securities 76.2 82.7 6.5 8.5Khazanah bonds 10.0 9.0 -1.0 -10.0Corporate bonds 52.5 57.0 4.5 8.5Commercial papers 6.2 3.6 -2.6 -41.7Medium-term notes 5.4 10.0 4.5 83.6Cagamas bonds 1.1 2.5 1.5 135.6Asset backed securities 1.0 0.6 -0.4 -39.4

p Preliminary

174

institution. The issuance was made possible followingthe liberalisation to the Foreign ExchangeAdministration Rules to facilitate multilateraldevelopment banks, multilateral financial institutionsand multinational corporations to raise ringgit-denominated bonds in the Malaysian capital market.

In the mortgage securities segment, Cagamas Berhad(Cagamas) introduced a new Islamic mortgagesecurities based on the concept of BBA in addition tothe existing mudharabah Cagamas bond. Under thisconcept, Cagamas undertakes a sell and buy back

arrangement transaction with market participantsfor the purpose of raising funds from the capitalmarket. Funds raised from these issuances wereutilised by Cagamas to purchase the house financingand hire and purchase facilities from the Islamicbanking institutions. In 2004, Cagamas issued atotal of RM1.6 billion of the new BBA Cagamas withmaturities ranging from two to five years. Theincrease in the supply of the Cagamas bondpromoted active secondary market trading activitiesof this instrument, which registered a growth of84% or RM2.1 billion in terms of turnover volume.

176 Overview 176-178 Policies and Developments179-189 Performance of Development Financial Institutions

DevelopmentFinancial Institutions

176

OVERVIEW

The main policy thrust for the regulation andsupervision of development financial institutions (DFIs)in 2004 continued to be directed at enhancing furtherthe capacity and capabilities of the DFIs. As in previousyears, while emphasis continued to be accorded onstrengthening the foundation on which DFIs couldoperate efficiently and effectively, the policy effortstook a wider perspective geared towards realigning theactivities and institutional structure of the DFIs. Theseare aimed at ensuring that the DFIs remain focused inproviding financial and non-financial support to theidentified strategic sectors of the economy. Coupledwith these efforts, the supervision and monitoring ofDFIs continued to be conducted through off-sitesurveillance and regular on-site examinations.

respective DFIs, Bank Negara Malaysia conducted areview on the mandated roles and activities of theDFIs under the Development Financial InstitutionsAct 2002 (DFIA). The review, aimed at assessing theextent of the strategic focus of the DFIs inperforming their roles, identified issues relating tothe institutional structure and focus of businessactivities affecting the performance and effectivenessof the DFIs in developing and promoting theidentified strategic sectors. Following the review, theBank proposed to the Government to rationalise theinstitutional structure and functions of BankPembangunan dan Infrastruktur Malaysia Berhad(Bank Pembangunan), Bank Industri & TeknologiMalaysia Berhad (Bank Industri), Malaysia ExportCredit Insurance Berhad (MECIB) and Export-ImportBank of Malaysia Berhad (EXIM Bank). The


While emphasis continued to be accorded on strengthening thefoundation on which DFIs could operate efficiently and effectively,the policy efforts in 2004 took a wider perspective geared towardsrealigning the activities and institutional structure of the DFIs.

In line with the overall growth of the economy, thefinancing activities of the DFIs increased in 2004 as theDFIs continued to provide financial support to theidentified priority and strategic sectors of the economy.Savings mobilised by the deposit-taking DFIs alsoregistered strong growth during the year. The DFIs’efficiency in delivering quality products and services tothe targeted sectors is expected to improve as theseinstitutions continuously review their internaloperations and benchmark against their counterpartsin the markets. This has to be complemented withimprovements in staff and management capabilities insupporting the DFIs towards meeting the performancestandards expected of these institutions.

POLICIES AND DEVELOPMENTS

The major developments and progress made inactualising the strategy to enhance the capacity andcapability as well as to facilitate the development ofDFIs were as follows:

• Realignment of Roles and Functions of DFIsGiven that part of the strategy to enhance theeffectiveness and efficiency of DFIs is to clearly definethe strategic focus and roles of each of the

rationalisation aims to enhance the focus of thebusiness and activities of the DFIs in the respectivemandated sectors. The broad policy proposalswere announced by the Minister of Finance inthe 2005 Budget.

• Enhancing Advisory Capabilities of DFIs forSmall and Medium EnterprisesAs part of the efforts to support the activities ofsmall and medium enterprises (SMEs), BankNegara Malaysia embarked on a project inOctober 2004 to enhance the capabilities of theDFIs in providing advisory services to the SMEs inMalaysia. The advisory services are envisaged tocomplement the financial services alreadyprovided by the DFIs, thus enhancing theeffectiveness of these institutions in developingand nurturing SMEs. Five DFIs, namely, BankPembangunan, Bank Industri, EXIM Bank, MECIBand Bank Pertanian Malaysia (BPM) participated inthe project, given their existing involvement inproviding financing to SMEs.

Taking into consideration the specific mandatedfunctions and the unique features of each of theparticipating DFIs, a customised action plan

177


containing strategies to enhance their advisorycapabilities will be formulated according to thefunction of the respective DFIs. The plan wouldinclude, among others, identification of the relevantadvisory services to meet the demand of SMEs fromthe different economic sectors, human resourcedevelopment and training needs, as well as theestablishment of an institutional structure for the DFIs.

• Development of Computerised StatisticalReporting SystemOn 1 December 2004, Bank Negara Malaysiaimplemented an online reporting system tocapture and generate statistical data on DFIs. Thereporting system is known as the DevelopmentFinancial Institutions Statistical System or DFISS.To address the unique business of each DFI, DFISScaptures both generic and specific informationrelating to their businesses. The system enablesthe Bank to obtain important information in atimely manner, thus facilitating the monitoring ofthe performance of DFIs and the formulation ofeffective policies.

• Monitoring and Supervision of DFIsThe Bank’s thrust for supervisory activities in 2004continued to be on strengthening each DFI’sinstitutional capacity and operating infrastructure.Premised on the risk-based supervisoryframework, both the off-site and on-site activitieswere directed at ensuring that the DFIs performedtheir mandated role effectively and werefinancially sound. Supervisory attention andresources were directed at identifying areas ofhigh risk and of supervisory concern forimprovement and in making recommendations toaddress the weaknesses in a timely and effectivemanner. Having completed the first two years ofsupervision of the DFIs, the Bank continued toensure that corrective or remedial actions hadbeen taken by the institutions to addressweaknesses that have been identified.Consequently, the DFIs have progressedsignificantly in adopting best practices in themanagement and achievement of organisationalobjectives, which include their socio-economicroles. Overall, there were progressiveimprovements in the operations of the DFIs,especially in the areas of corporate governance,risk management and internal audit.

During 2004, the on-site examinations continuedto emphasise on adequacy, effectiveness andefficiency of the DFIs’ operational infrastructure,

internal processes as well as staff and managerialcapacity in supporting the achievement ofmandated roles. The DFIs have focused on puttingin place the appropriate infrastructure and humanresource capabilities to enable identification oftheir niche markets and fulfilling the needs of thecustomers arising from their mandated roles.These included assessing the needs of thesemarkets and ensuring internal operationalefficiency and delivery systems that facilitatemeeting the financing and business advisoryneeds of these markets. Some DFIs have alsodeveloped their respective key performanceindicators to measure and monitor operationalefficiency, as well as their achievement in fulfillingtheir mandated roles. Periodic assessments againstthe key performance indicators will be undertakento enforce discipline in addressing the gaps indesired outcomes.

There were also improvements in the level ofcorporate governance in the DFIs. Given thesignificance of the role of the DFIs’ Board inoverseeing the overall effectiveness and efficiencyof the institutions, regular dialogues between thesupervisors and members of the Board and seniormanagement were held, enabling the Bank tobetter assess the quality of the operatinginfrastructure in terms of Board and managementoversight. These sessions have facilitated a betterunderstanding by the members of the Board as tothe role that they need to perform, bothindividually and collectively, in guiding thestrategic direction of the institutions. Thesesessions with the members of the Board alsoprovided the opportunity for the supervisors toshare their supervisory concerns on theinstitutions, thereby facilitating timely andeffective corrective measures on the issues ofconcern impacting the operating and financialconditions of the institutions.

There were also notable improvements in therisk management initiatives of the DFIs as theseinstitutions have progressively implemented bestpractices in risk management. The Board andsenior management of the DFIs recognised theneed to ensure that the risk managementinfrastructure such as staff, systems and internalprocesses, including the relevant policies, are inplace and effective. Risk managementmechanisms are being continuously assessed bythe Bank to ensure their effectiveness insupporting the Board and management in

178

performing their oversight function on the DFIs’operations. The mandated roles of the DFIs inthe targeted sectors had resulted in theseinstitutions assuming relatively higher riskportfolios, necessitating the need to have inplace adequate and robust risk managementsystems, consistent with the magnitude andcomplexity of the risks assumed. The DFIs werealso required to strengthen their internal auditfunction to encompass management auditswhich would assist the Board and seniormanagement in managing risks and overallefficiency of the organisations, its internalprocesses and initiatives. The competencies ofthe audit staff need to be continuouslyenhanced with relevant training and operationalexposure. Overall, audit operations haveimproved with the adoption of risk-basedmethodology in addressing the relativeriskiness of the DFIs’ operations, whoseresources were directed at areas that posedhigher degree of risks.

The off-site surveillance activities had providedcontinuous monitoring of the DFIs and enabledearly detection of potential problems andimplementation of pre-emptive measures. Theseactivities, which included detailed monitoring offinancial data and trends on risk areas, had alsoassisted in monitoring the effectiveimplementation of corrective measuresundertaken by the DFIs. The complementary rolesplayed by the off-site surveillance and on-siteexamination had allowed the Bank to implementrisk-based supervision approach that is consistentwith the changes in the risk profile and the issuesof concern for the institutions.

• Modifications to the Development FinancialInstitutions Act 2002The DFIA has enabling provisions which allowmodifications to be made to the Act to meet theunique characteristics and specialised roles ofeach DFI. This flexibility is necessary to cater forthe differing circumstances and requirements ofnew DFIs that may be placed under the purviewof DFIA in the future. Such modifications will beput in place by way of an order issued by theMinister of Finance and published in the Gazette.Towards this end, the following modificationshave been made to the DFIA so as not toconstrain the operations and activities of the DFIsin meeting the financing needs of their respectivemandated sectors.

Modification relating to prohibition oflending to related companiesEssentially, the DFIA prohibits DFIs from lending totheir shareholders, directors or officers and relatedparties to prevent conflict of interests situation fromarising. A provision in DFIA related to this prohibitionhas been modified to allow two DFIs, namely BankPembangunan and Bank Industri to lend to venturecapital companies or subsidiary companies, wherethe formation of such venture capital companies orthe activities of such subsidiary companies are in linewith the DFIs’ mandated roles. The underlyingrationale behind this modification is to remove therestrictions which prohibit DFIs from providing wideranging financing support to the targeted sectors.The modification was given retrospective effect from15 February 2002.

Modification to the requirement for theannual accounts to be published after theannual general meetingThe DFIA requires DFIs to publish their annualaccounts within fourteen days following theirannual general meetings. As a number of DFIs arestatutory bodies and do not hold annual generalmeetings as in the case of companies, the relevantprovision in DFIA was modified and gazetted on1 May 2004 so as to remove the reference toannual general meetings. The modificationprovides clarity to those DFIs which are statutorybodies with regard to the requirement for them topublish their annual accounts.

• Placement of Bank Pertanian Malaysia underDFIABPM was gazetted as a prescribed institutionunder the DFIA with effect from 11 June 2004,thus placing BPM under the purview of BankNegara Malaysia. Similar to other prescribedinstitutions, BPM was placed under DFIA with theview of strengthening its operational and financialsoundness and to ensure that BPM’s activities andoperations are in line with its mandatedobjectives. In particular, as a specialised institutionfor agriculture financing, the continuousimprovement and strengthening of BPM’soperational and financial conditions through theregulatory and supervisory requirements, areimportant in ensuring that BPM continues toperform its mandated roles effectively andefficiently. This is important in supporting theGovernment’s strategies for developing theagriculture sector as outlined in the Third NationalAgricultural Policy.

179


PERFORMANCE OF DEVELOPMENT FINANCIALINSTITUTIONS

The financing activities of the DFIs increased in 2004,in tandem with the overall growth of the economy.During the year, the DFIs provided financial support tothe identified priority and strategic sectors of theeconomy namely, agriculture, capital-intensive andhigh technology industries, shipping, infrastructure,manufacturing, export, Bumiputera entrepreneurs,cooperatives as well as home ownership and property

In tandem with the overall growth of the economy, financingactivities of the DFIs to support the growth of the identifiedpriority and strategic sectors of the economy, increased in 2004.

development at the state level, namely in Sabahand Sarawak. Meanwhile, savings mobilised bythe deposit-taking DFIs registered strong growthduring the year.

Financing ActivityTotal loans outstanding of the 14 DFIs identified in theFinancial Sector Masterplan as a group recorded astrong growth of 16.5% or RM5.4 billion (2003: 9.9%or RM2.9 billion) to RM37.7 billion as at end-2004. Theincrease was largely attributable to consumption credit

extended by Bank Kerjasama Rakyat Malaysia Berhad(Bank Rakyat) and infrastructure financing provided byBank Pembangunan.

Consumption credit rose by 18.6%, accounting for24.5% of total loans outstanding of the DFIs. Similarly,financing to the construction, utilities as well as thetransport, storage and communication sectors as agroup, which represents 28.3% of total loans

Table 7.1Development Financial Institutions1 : Sources andUses of Funds

Annual Change As at end-

2003 2004 2004

RM million

Sources:Shareholders’ funds 1,519 1,386 10,810

Paid-up capital 1,180 670 7,862Reserves 83 364 1,964Retained earnings 256 352 984

Deposits accepted 2,605 7,475 49,878

Borrowings 2,600 993 17,569Government 2,855 1,260 12,990Multilateral / International agencies -275 -1,426 1,732Others 20 1,159 2,847

Others -80 1,366 12,053

Total 6,644 11,220 90,310

Uses:

Deposits placed 3,799 2,662 18,906

Investments 1,961 2,809 24,038of which:

Government securities 999 -322 2,629Shares 351 56 6,834

Quoted -124 312 5,513Unquoted 475 -256 1,321

Loans and advances 2,913 5,354 37,709

Fixed assets 100 156 3,864

Others -2,129 239 5,793

Total 6,644 11,220 90,310

Contingencies:

Guarantee 502 287 3,949

Export credit insurance -29 186 309

Total 473 473 4,258

1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri &Teknologi Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, BankSimpanan Nasional, Export-Import Bank of Malaysia Berhad, Malaysia ExportCredit Insurance Berhad, Bank Pertanian Malaysia, Malaysian IndustrialDevelopment Finance Berhad, Sabah Development Bank Berhad, BorneoDevelopment Corporation (Sabah) Sendirian Berhad, Borneo DevelopmentCorporation (Sarawak) Sendirian Berhad, Credit Guarantee Corporation MalaysiaBerhad, Sabah Credit Corporation and Lembaga Tabung Haji.

Table 7.2Development Financial Institutions1 : Direction ofLending

Annual Change As at end-

2003 20042004

RM million

Agriculture, forestryand fishery -90 387 3,261

Mining and quarrying -15 -8 67Manufacturing 595 234 4,186Electricity, gas and water

supply 163 612 1,229Import and export,

wholesale and retail trade,restaurants and hotels 10 180 430

Broad property sector 537 1,645 10,022Construction 219 126 4,136Purchase of residential

property 143 1,138 4,066Purchase of non-

residential property 48 23 464Real estate 127 358 1,356

Transport, storage andcommunication 351 602 5,315

Finance, insurance andbusiness services -86 -388 1,307

Consumption credit 1,071 1,452 9,239Others 377 638 2,653

Total 2,913 5,354 37,709

1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri &Teknologi Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, BankSimpanan Nasional, Export-Import Bank of Malaysia Berhad, Bank PertanianMalaysia, Malaysian Industrial Development Finance Berhad, Sabah DevelopmentBank Berhad, Borneo Development Corporation (Sabah) Sendirian Berhad,Borneo Development Corporation (Sarawak) Sendirian Berhad, Credit GuaranteeCorporation Malaysia Berhad, Sabah Credit Corporation and Lembaga TabungHaji.

180

outstanding, recorded an increase of 14.4%,benefiting primarily from infrastructure financing byBank Pembangunan. The agriculture andmanufacturing sectors also recorded positive growth of13.5% and 5.9% respectively, together contributing19.8% to total loans outstanding of the DFIs.Meanwhile, total outstanding insurance cover andguarantees provided by the relevant DFIs increased by12.5% to RM4.3 billion as at end-2004, attributedmainly to higher guarantee coverage provided by theCredit Guarantee Corporation Malaysia Berhad (CGC).

Financing activities of the seven DFIs that are under thepurview of DFIA recorded a growth of 19.1% in totalloans outstanding. Retail financing provided by BankRakyat to its members rose strongly by 25.3%, whilefinancing to the infrastructure sector and BumiputeraSMEs undertaken by Bank Pembangunan increased by15.3% and 10.5% respectively. Similarly, BankSimpanan Nasional (BSN) recorded a strong growth of30.4% in loans outstanding, on account of personalloans extended whilst BPM registered a growth of14.8%. Positive growth of 15.7% in lending activitieswas also recorded by EXIM Bank. Meanwhile, bothBank Industri and MECIB registered a positive growthof 12% and 36.6% respectively, in their lending/underwriting activities in 2004, as against a reductionin the previous year. Savings mobilised by BSN fromindividuals increased by 8.5% whilst deposits mobilisedby Bank Rakyat grew strongly by 30.6%, partly due toattractive returns offered by the bank.

In terms of asset quality, the NPL level of the DFIs as agroup increased by RM499.7 million to RM5.2 billion asat end-2004. However, due to a significant expansion inthe loan base, the gross NPL ratio improved to 14.6%compared with 15.6% a year ago. Nevertheless, thegross NPL levels of the DFIs remained high, ranging from7.9% to 40.3% of total loans outstanding. Most of theDFIs classified a loan or financing account in default forsix months or more as non-performing. After taking intoaccount the provisions made for potential loan losses,the net NPL amount and ratio of the DFIs stood atRM1.8 billion or 5.5% as at end-2004 (end-2003:RM1.5 billion or 5.6%).

Sources of FundingTotal deposits mobilised by the deposit-taking DFIsincreased by 17.6% to RM49.9 billion as at end-2004.Savings mobilised from individuals recorded a growthof 10.2% to RM24.5 billion, accounting for 49.1% oftotal deposits mobilised. Lembaga Tabung Haji (LTH)and BSN remained dominant in mobilising savings fromindividuals. Meanwhile, deposit placements by businessenterprises and the Government and Governmentagencies accounted for 28.4% and 13% respectivelyof total deposits outstanding. Apart from theshareholders’ funds totalling RM10.8 billion or 12% oftotal resources, the DFIs also funded their operationsthrough Government borrowings, which amounted toRM13 billion as at end-2004. This represented 14.4%of total resources and was primarily utilised to enhanceaccess to financing.

Bank Pembangunan dan Infrastruktur MalaysiaBerhadLending by Bank Pembangunan to its targeted sectors,namely Bumiputera SMEs and the infrastructure sector,recorded a growth of 13.9% in 2004. Total loansoutstanding increased to RM11.6 billion as at end-2004 (end-2003: RM10.2 billion), led by financing ofinfrastructure projects which rose by 15.3% to RM9.9billion. Both Government-identified and private sectorprojects registered marked growth of 13.7% and19.7% respectively, with the former accounting for72.7% of total loans outstanding for the infrastructuresector. The main beneficiaries of the increase ininfrastructure loans were utilities (RM611.8 million),transport and communication (RM238.7 million) andconstruction (RM125.2 million) sectors.

Total loans outstanding to SMEs meanwhile increasedby 6.1% to RM1.7 billion. Financing to BumiputeraSMEs, which accounted for 83.1% of total loansoutstanding to SMEs, expanded by 10.5% (2003:4.6%) to RM1.4 billion. Apart from financing, the bank

Table 7.3Development Financial Institutions1 : Non-performing Loans and Loan Loss Provisions

As at end-

2003 2004

RM million

General provisions 673 747

Interest-in-suspense 1,226 1,363

Specific provisions 1,990 2,074

Non-performing loans 4,732 5,232

Percent (%)

Gross NPL ratio2 15.6 14.6

Net NPL ratio3 5.6 5.5

Total provisions/NPL 82.2 79.9

1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri &Teknologi Malaysia Berhad, Bank Kerjasama Rakyat Malaysia Berhad, BankSimpanan Nasional, Export-Import Bank of Malaysia Berhad, Bank PertanianMalaysia, Malaysian Industrial Development Finance Berhad, Sabah DevelopmentBank Berhad, Borneo Development Corporation (Sabah) Sendirian Berhad,Borneo Development Corporation (Sarawak) Sendirian Berhad and Sabah CreditCorporation.

2 Gross NPL ratio = (NPL / Gross loans*) x 100%.* Excluding loans provided by Credit Guarantee Corporation Malaysia Berhad

and loans under ECR scheme.3 Net NPL ratio = (NPL less IIS less SP) / (Gross loans* less IIS less SP) x 100%.

* Excluding loans provided by Credit Guarantee Corporation Malaysia Berhadand loans under ECR scheme.

181


also provides advisory services (inclusive of financial,corporate and technical advice), entrepreneurialtraining, project consultancy and other services as partof its continuous efforts to promote the developmentof a viable and resilient Bumiputera Commercial andIndustrial Community. In 2004, the bank launchedseven new programmes, namely, the EntrepreneurAttachment Programme (Program Usahawan Sangkut),Mentor Mentee Programme (Program MentorMentee), Vendor Programme (Program Vendor),Corporate Technocrat Programme (Program TeknokratKorporat), Women Entrepreneur Programme (ProgramUsahawan Wanita), Batik Entrepreneur Programme(Program Usahawan Batik) and Craft EntrepreneurProgramme (Program Usahawan Kraf).

Loan approvals increased significantly by 54.3% toRM9 billion in 2004 (2003: RM5.8 billion), mainly dueto the increase in approval of loans for infrastructurefinancing. Meanwhile, total loans disbursed rose toRM2.6 billion (2003: RM2.2 billion), also attributed tothe increase in disbursement of infrastructure loans.

Bank Pembangunan managed 23 Government funds in2004. Loan approvals and loan disbursements underthese funds rose by 60.7% to RM801.3 million and34.1% to RM442.6 million respectively. The TourismInfrastructure Fund and New Entrepreneurs Fund 2were the main beneficiaries with approvals of RM205million and RM193.3 million respectively.

Gross NPLs rose by RM5.1 million to RM917.7 millionas at end-2004. Due to the enlarged loan base, thegross NPL ratio fell to 7.9% as at end-2004 (end-2003:9%). Meanwhile, the net NPL ratio stood at 2.8%(2003: 3.4%).

The bank recorded a significant growth of 35.4% in itsinvestment portfolio to RM1.3 billion (7.9% of totalassets) as at end-2004. The increase was attributedprimarily to the increase in the holdings of private debtsecurities, which amounted to RM1.1 billion.Placement of deposits with financial institutionstotalled RM3.3 billion and accounted for 19.5% oftotal assets.

Bank Pembangunan sourced most of its fundingrequirements through borrowings from theGovernment (RM5.5 billion), deposits accepted fromGovernment agencies and public enterprises(RM4.1 billion), borrowings from multilateral andinternational agencies (RM1.2 billion), debt securitiesissued (RM1 billion) and Government grants andsubsidies (RM700.5 million). These constituted73.3% (2003: 73.5%) of the bank’s total resources.In 2004, the bank’s shareholders’ funds rose byRM362.9 million to RM2.9 billion as at end-2004,reflecting an increase in retained earnings andoperating profit.

Bank Industri & Teknologi Malaysia BerhadBank Industri’s lending activities registered a positivegrowth in 2004 as against a decline in the previousyear. Total loans outstanding increased by 12% toRM937.5 million as at end-2004. Lending to themanufacturing sector grew by 12.3% or RM44.6million, while financing extended to the maritimesector increased marginally by 0.3% or RM1.3million. The bulk of the loans were extended to twomain sectors namely the maritime sector comprisingshipbuilding, shipyard and marine-related industries(50.6%) and the manufacturing sector (43.5%),while the balance was to environmental-relatedsector (5.9%). Total loans outstanding accountedonly for 23.1% of the total assets of RM4.1 billionas at end-2004.

Total loans approved in 2004 almost tripled (RM745.5million) the amount approved in 2003 (RM253.4million), attributed to a marked increase in approvalsfor lending to the maritime sector (395.5% orRM301.8 million) mainly involving the purchase andconstruction of merchant vessels. Loans disbursed alsoincreased significantly to RM358.1 million(2003: RM143.2 million).

Bank Industri managed a total of 13 Governmentfunds during 2004, which accounted for 32% of thetotal loans outstanding of the bank. Loan approvalsand disbursements under the funds increased sharplyby 256.1% (RM86.3 million) and 68.6% (RM30.1

Graph 7.1 Bank Pembangunan dan Infrastruktur Malaysia Berhad: Direction of Lending as at 31 December 2004

Others 12.5%

Manufacturing 7.9%

Utilities 10.6%

Construction 30.2%

Transport & communication

38.8%

182

million) respectively. The increase in loan approvals wascontributed primarily by the New Ship Financing Facility(RM30.8 million) and the High Technology Fund(RM24.6 million).

Gross NPLs declined by RM70.2 million to RM253.4million, representing 27% of total loans outstanding asat end-2004 (end-2003: RM323.6 million or 38.7%),partly due to the conversion of a non-performingshipping loan into equity. Consequently, the net NPLratio declined significantly to 8.1% (2003: 18.4%).

The bulk of the bank’s assets (46.2% as at end-2004)comprised investments in subsidiaries (RM1 billion)and loans and advances extended to subsidiaries(RM846.5 million). The investment and advances weremainly in four subsidiaries, namely, MECIB, EXIMBank, Global Maritime Ventures Berhad and BI Creditand Leasing Berhad.

The activities of the bank were primarily funded byborrowings, amounting to RM2 billion or almost 50%of total resources as at end-2004, mainly from theGovernment (RM1.1 billion) and multilateral andinternational agencies (RM924 million). Depositsplaced by the Government and Government agenciesof RM741.7 million were another major source offunding for Bank Industri. While borrowingsregistered a decline of 10.2% during the year,deposits placed by Government and Governmentagencies increased by 24%. The shareholders’ fundsof the bank increased by 38.5% (RM101.5 million) toRM365 million as at end-2004 (end-2003: RM263.5million), mainly attributed to operating profit ofRM81.5 million and equity injection of RM20 millionby the Government.

Export-Import Bank of Malaysia BerhadFinancing activities of EXIM Bank grew by 15.7% toRM2.3 billion in 2004. The major activity of EXIMBank was financing provided under the Export CreditRefinancing (ECR) scheme. The Government-fundedECR scheme managed by EXIM Bank offerscompetitive rates to banks participating in thescheme for on-lending to exporters. Total loansoutstanding under the ECR scheme, whichconstituted 52.5% of total loans outstanding andwhich was extended mainly to the palm oil products,rubber products and chemical products industries,increased by 5.4% to RM1.2 billion as at end-2004.Disbursements under the scheme recorded anincrease of 2.4% in 2004 to RM6.8 billion(2003: RM6.6 billion), in tandem with the growthof Malaysia’s exports.

Export financing (8.3% of total loans outstanding as atend-2004) and the financing of overseas projects(39.2% of total loans outstanding as at end-2004)were the other major activities of EXIM Bank whichrecorded positive growth of 123.7% and 19.2%respectively during the year. Nearly one-half of totaloverseas project financing was channelled to projectsin South-East Asia and another 30.7% in the Africancontinent. Approximately 64.9% of total overseasproject financing and 27% of export financing werechannelled to non-traditional markets.

The bank’s gross NPLs, excluding loans provided underthe ECR scheme, declined to RM306.6 million as atend-2004, representing 28.4% of total loansoutstanding (end-2003: 39.2%). Overseas projectfinancing accounted for the largest component(93.3%) of the NPLs. The net NPL ratio was 1.3%.

Graph 7.2 Bank Industri & Teknologi Malaysia Berhad: Direction of Lending as at 31 December 2004

Shipyard 12.0%

Marine-related industries

5.6%

Shipping 33.0%

Others 5.9%

Manufacturing 43.5%

Graph 7.3 Export-Import Bank of Malaysia Berhad: Credit Facilities as at 31 December 2004

ECR scheme 52.5%

Overseas project financing 39.2%

Export financing 8.3%

183


While the loan portfolio represents the main asset ofEXIM Bank with a share of 62.9%, deposit placementsaccount for another 35.5% of the bank’s assets.

During the year, shareholders’ funds increased by29.8% (RM74.9 million) to RM326.6 million as atend-2004. Borrowings from the Government declinedmarginally by 0.6% to RM2 billion, whilst borrowingsfrom international agencies increased by 67.7% toRM500.1 million and borrowings from its parentcompany, Bank Industri, declined by 19.1% toRM302.4 million. Borrowings from the Governmentwere utilised solely for the ECR scheme.

Malaysia Export Credit Insurance BerhadMECIB, which provides insurance cover andguarantee facilities to facilitate Malaysia’s exports andoverseas investment, recorded significant growth inits activities in 2004, in tandem with Malaysia’s exportgrowth. Total exposures increased by 36.6% toRM675.2 million as at end-2004, largely due to a150.2% increase in short-term export credit insurancefacilities. However, guarantees issued declinedmarginally by 1.2%. Approximately 45.7% of MECIB’stotal exposures were export credit insurance coversand the remaining were guarantees. The small size ofits shareholders’ funds constrained MECIB’s ability inproviding coverage for large medium-term and long-term businesses.

Reflecting MECIB’s efforts to promote thediversification of Malaysia’s export markets, 67.2% ofthe total guarantee and insurance coverage wereprovided to facilitate export to countries categorisedunder non-traditional markets. In terms of distributionby regions, 42.3% of MECIB’s total exposures have

been channelled to countries in East Asia, followedby Africa (11%), Western Europe (10.2%) and theMiddle East (9.8%).

Deposits placed with financial institutions, whichformed its largest asset class (47.1%), increased by27.4% to RM98.1 million in 2004, while investmentsin securities, declined by 19% to RM69.9 million. Inorder to meet its obligations, MECIB continued to relyon its shareholders’ funds, which had declined slightlyto RM75.2 million as at end-2004. The losspercentage, indicating the ratio of claims paid topremiums received, deteriorated to 38.8% as atend-2004 (end-2003: 29.3%).

Bank Kerjasama Rakyat Malaysia BerhadFinancing and deposit mobilisation activities of BankRakyat, or People’s Cooperative Bank of Malaysia,recorded strong growth in 2004. The total assets ofBank Rakyat increased markedly by 29.9% toRM22.3 billion in 2004, in which financing activities,represented 55.3% of total assets. Total financingoutstanding grew by 24.1% to RM12.4 billion as atend-2004, mainly attributed to the property sector(61.7% to RM3.1 billion), in line with favourablegrowth of the housing sector. Similarly, consumptioncredit registered an increase of 12.2% to RM7.7billion as consumer spending revived strongly duringthe year. In terms of sectoral distribution, 62.2% ofthe financing outstanding was for consumptioncredit, 24.9% was extended to the property sector,followed by the transport and communication(5.3%) and general commerce (3.6%) sectors.Lending to members accounted for 78.2% of totalfinancing outstanding. During the year, newfinancing approved and disbursed amounted to

Graph 7.4 Malaysia Export Credit Insurance Berhad: Contingent Liabilities as at 31 December 2004

Medium-and long-term guarantee

47.9%

Short-term guarantee 6.4%

Medium-and long-term insurance

0.1%

Short-term insurance 45.6%

Graph 7.5 Bank Kerjasama Rakyat Malaysia Berhad: Direction of Financing as at 31 December 2004

Others 2.0%

Consumption credit 62.2%

Purchase of motor vehicles

5.3%

Manufacturing 0.8% Property

24.9%

Share financing 0.7%

General commerce 3.6%

Agriculture 0.5%

184

RM4,815.2 million and RM4,842.8 millionrespectively (2003: RM3,727.8 million andRM3,666.4 million respectively).

Gross non-performing financing (NPF) increasedmarginally to RM1,088.1 million as at end-2004(end-2003: RM1,066.1 million). However, the grossNPF ratio improved to 8.8% from 10.7%, due to theenlarged loan base. The net NPF ratio has alsoimproved to 4.4% from 5.2%.

Financing activities of the bank were largely funded bydeposits which amounted to RM17.1 billion as atend-2004, representing 76.7% of the bank’s totalfunds. Deposits mobilised by the bank registered astrong growth of 30.6% (RM4 billion) in 2004 mainlydue to the relatively attractive returns offered by thebank. Deposit placements by business enterprises rosemarkedly by 31.9% to RM11.5 billion, of which privateenterprises accounted for 63.4% while the balancewas from public enterprises. Deposits mobilised fromindividuals also grew strongly in 2004, recording anincrease of 34.1% to RM2.2 billion as at end-2004.

The bank’s shareholders’ funds rose to RM3.5 billion asat end-2004 (end-2003: RM2.5 billion) attributed tothe substantial growth in members’ shares andsubscription funds, which increased by 47.1%(RM623.6 million) to RM1.9 billion as at end-2004.During the year, the individual membership of BankRakyat increased by 84,836 to 714,743 whilstcooperative membership increased by 105 to 1,172.The increase in membership was attributed mainly tothe ability of the bank to pay relatively attractive ratesof dividend and the privilege loan rate offered tomembers. The bank’s improved performance (profitbefore tax and zakat increased from RM401 million in2003 to RM460 million in 2004) also contributed tothe increase in shareholders’ funds.

Bank Simpanan NasionalDeposits mobilised by BSN, or National Savings Bank, aswell as retail loans to small borrowers and micro creditextended by BSN recorded strong growth during the year.As at end-2004, BSN operated through 393 branches and599 ATMs covering both the urban and rural areas.

Deposits outstanding increased by 16.4% or RM1.6billion during the year to RM11 billion. Savings ofindividuals, which formed the largest component(71.7%) of the deposit base, recorded a growth of8.5% (RM619.7 million) to RM7.9 billion, partlyreflecting the requirement of BSN for micro creditborrowers to maintain an account with the bank.

Deposits from business enterprises meanwhile, rose by65.6% (RM635.8 million) contributed by an increase infixed deposits from Government-controlled businessenterprises. Saving deposits represented 47.6% of thetotal deposits, while fixed deposits comprised 42.4%and the remaining was general investment deposits.The number of account holders increased from 10.3million as at end-2003 to 11.4 million as at end-2004.About one-half of deposits accepted were invested insecurities, amounting to RM5.6 billion as at end-2004,of which RM3.3 billion were investments inGovernment securities. The balance was largely utilisedto finance lending operations.

Loans outstanding registered a strong growth of 30.4%during the year from RM2.4 billion to RM3.2 billion as atend-2004, due mainly to the significant growth ofpersonal loans from RM126.5 million to RM738.8million, benefiting from BSN’s vigorous promotion of itsrepackaged personal loan scheme that attracted moreborrowers. Apart from personal loans, the bulk of loansoutstanding as at end-2004 was mainly in the form ofhousing loans (RM1,135.9 million), micro credit(RM610.7 million) and purchase of motor vehicles(RM446.8 million). In 2004, the micro credit schemerecorded an increase of RM195.1 million or 46.9%.Since the launch of the micro credit scheme in June2003, a total of RM723 million has been disbursed to82,657 applicants mainly to food stall businesses, retailtrading activities and business services.

Gross NPLs increased by RM151.2 million to RM449.9million as at end-2004, attributed to an increase inNPLs of micro credit and housing loans. The gross NPLratio deteriorated to 14.1% (end-2003: 12.2%) whilstthe net NPL ratio increased to 7.7%, as at end-2004(end-2003: 6.7%).

Graph 7.6 Bank Simpanan Nasional: Total Deposits Accepted as at 31 December 2004

Individuals 71.7%

Others 4.2%

Financial institutions 0.9%

Government- controlled business

enterprises 13.4%

Private-controlled business enterprises

1.2%

Government agencies 8.6%

185


Bank Pertanian MalaysiaBPM, or Agriculture Bank of Malaysia, registered afavourable growth in its financing activities in 2004.Consistent with its role to provide financing topromote sound agricultural development in thecountry, BPM provided financing for variousagricultural activities namely, production, processingand marketing of agriculture products. In 2004, totalloans outstanding grew by 14.8% to RM3.1 billion(2003: RM2.7 billion), attributed largely to the stronggrowth (318.8%) for loans to agro-based processingand support services industries. While BPM continuedto provide financing support to the more establishedagriculture sector, such as oil palm, there was increasedfocus in 2004 on new areas of financing in theagro-based processing and support industries. Duringthe year, loans outstanding to the oil palm industrydeclined to RM661.2 million to account for 21.5% oftotal loans outstanding (2003: RM696.2 million or26% of total loans outstanding).

Small farmers remained the main beneficiaries ofBPM loans, accounting for 98.4% of total number ofborrowers. In 2004, BPM approved loans totallingRM1.1 billion involving 46,843 borrowers. Excludingloans for micro credit scheme, loan approvals in2004 increased by 62.5% to RM1,091.5 million(2003: RM671.6 million), whilst loans disbursedincreased by 65.7% to RM918.5 million (2003:RM554.4 million). During the year, BPM managed 12funds established by the Government to promote theagriculture sector. Since the launch of the micro creditscheme in June 2003, BPM has approved 17,729applications with a value of RM202 million as at end-2004. A total of RM199.3 million was disbursed toborrowers, mainly involved in agro-based projects,marketing, cash crop cultivation and livestock rearing.

In 2004, the loans outstanding for the micro creditscheme declined by 31% or RM52.5 million as theRM200 million allocated for the micro credit schemehad been fully utilised.

Gross NPLs increased to RM1.2 billion as at end-2004representing 40.3% of total loans (end-2003: RM887.6million or 33.1%). The increased ratio was largelyattributed to the change in NPL classification policy,from 12 months to 6 months of default. Net NPL ratioincreased to 22.8% as at end-2004 (end-2003: 15.3%).

Loans remained the largest asset component,representing 47.3% of the total assets of RM6.5 billion,followed by investments which formed 26.3% (RM1.7billion) of total assets. The investments were mainly inprivate debt securities (38.3%), unit trusts (32.5%) andcommercial papers/promissory notes (18.3%).

The main sources of funding for BPM were depositsmobilised through its network of 181 branches and5,135 mobile units nationwide. In 2004, depositsmobilised increased by 8.7% to RM4.1 billion(2003: RM3.8 billion) accounting for 63.3% of totalresources. Borrowings from the Government whichwere mainly for the various Government financingschemes increased by 4.5% to RM1.6 billion as atend-2004 (end-2003: RM1.5 billion).

Malaysian Industrial Development Finance BerhadFinancing activities of Malaysian IndustrialDevelopment Finance Berhad (MIDF) aimed atpromoting the development of the manufacturingsector, recorded a marginal increase in 2004. As one ofthe implementing institutions to manage and disbursefunds for the Government, MIDF was designated asthe disbursing channel for the new Soft Loan Schemefor Information and Communication Technology in2004. The main emphasis of this scheme is to improvethe competitiveness and efficiency of SMEs throughthe usage of information and communicationtechnology. MIDF also introduced the Fund for CrossBorder Investment in Manufacturing in June 2004. Theobjective of the fund is to assist Malaysian companiesto establish or expand their operations offshore to takeadvantage of lower labour costs, especially in countrieswithin the ASEAN region.

Total loans outstanding increased marginally by 0.9%or RM9.8 million to RM1.1 billion as at year-end due tocompetitive financing package offered by bankinginstitutions. Loans outstanding of the manufacturingsector shrunk from RM932.7 million to RM918.7million as at end-2004, accounting for 80.6% of total

Graph 7.7 Bank Pertanian Malaysia: Direction of Lending as at 31 December 2004

Fishery 9.9%

Forestry 3.2%

Tobacco 2.2%

Rubber 1.4%

Others 36.3%

Oil palm 21.5%

Livestock 12.9%

Food crops 12.6%

186

loans (end-2003: 82.5%). The major beneficiaries inthe manufacturing sector were the fabricated metalproducts and machinery industry (18.7%), woodproducts industry (16.6%) and basic iron and steel andnon-ferrous products industry (11%). Meanwhile,loans outstanding to manufacturing SMEs accountedfor 48.8% of total loans.

During the year, total loans approved decreased by5.6% to RM466.1 million (2003: RM493.7 million).The major decrease in the manufacturing sector wasrecorded in the transport equipment industry (82.9%or RM41.4 million), basic iron and steel and non-ferrous products industry (49.9% or RM18.9 million)and food, beverages and tobacco industry (26% orRM17.7 million). Consequently, loans disbursed formanufacturing also decreased by 10.3% to RM241.9million (2003: RM269.7 million).

Based on a 3-month classification policy, gross NPLsincreased to RM362 million, accounting for 31.7% oftotal loans as at end-2004 (end-2003: RM337.9 millionor 29.9%). The net NPL ratio increased to 10.4% from3.3% in 2003.

Shareholders’ funds and borrowings remained themain sources of funds for MIDF. Shareholders’ fundsincreased to RM1.4 billion as at end-2004(end-2003: RM1.3 billion) mainly attributed to thedividend income received from subsidiaries andprofit from the sale of its subsidiaries arising from itsGroup restructuring exercise. Meanwhile,borrowings which totalled RM1.1 billion, registereda decline from RM1.2 billion as at end-2003. Theborrowings included RM689.9 million sourced

directly or indirectly from the Government to beon-lent for socio-economic purposes. MIDF alsorelied on funds from the capital market to fund itslending activities. As at end-2004, funds raised fromthe capital market amounted to RM400.3 million(end-2003: RM528.8 million).

Credit Guarantee Corporation Malaysia BerhadCGC continued to contribute favourably towardsensuring continuous access to financing by the SMEs,through the provision of a wide range of guaranteeschemes and ancillary services to facilitate financing bythe banking institutions to the SMEs. To supplementthe financial assistance offered through the guaranteesprovided, CGC launched its Client Service Centre (CSC)in August 2004, particularly to cater for enquiriespertaining to matters such as information on theguarantee schemes offered and application proceduresby potential borrowers, as well as enquiries fromthe banking institutions about the status ofapplications and claims.

Total guarantees outstanding increased by 9.9%(2003: 18.3%) to RM3.3 billion as at end-2004 withthe continued strong growth registered by the majorguarantee schemes, namely, the Direct AccessGuarantee Scheme (DAGS) as well as the revised NewPrincipal Guarantee Scheme (NPGS) and IslamicBanking Guarantee Scheme (IBGS), which togetherrecorded a growth of 144.1% (2003: 158.3%). Thestrong growth was partly attributed to the revised NPGSand IBGS that have enabled SMEs from all economicsectors to obtain higher financing to a maximum ofRM10 million from the financial institutions (previously:a maximum of RM5 ~ 7.5 million for SMEs from all

Graph 7.8 Malaysian Industrial Development Finance Berhad: Direction of Lending as at 31 December 2004

Manufacturing 80.6%

Non-metallic mineral products 7.6%

Basic iron & steel and non-ferrous products

11.0%Plastic products 7.9%

Wood products 16.6%

Food, beverages & tobacco

7.7%

Non-manufacturing 19.4%

Electrical & electronic products 7.1%

Fabricated metal products

& machinery 18.7%

Others 23.4%

187


other sectors, except the manufacturing sector).Increasing preferences of SMEs for Islamic financing alsocontributed to the favourable performance of the IBGS.

Reflecting the continuous support provided to thesmaller SMEs, loans below RM250,000 continued toform the largest component of loans to havebenefited from CGC’s guarantee schemes,accounting for 81.7% (2003: 88.2%) of the totalnumber of loans guaranteed. In terms of valueguaranteed, loans of between RM500,000 to RM1million accounted for 32% of total guaranteesoutstanding, followed by those between RM250,000to RM500,000 (27%) and loans of belowRM250,000 (24.3%). Guarantees provided for loansof above RM1 million remained the lowest at 16.7%of total guarantees outstanding. In terms ofguarantee coverage by sector, SMEs involved in thegeneral business sector remained the mainbeneficiaries of CGC’s guarantee schemes. Theguarantee coverage extended to this sectoraccounted for three quarters of total guaranteesoutstanding, followed by those extended tothe manufacturing (24%) and agriculture(1.3%) sectors.

Total provision for claims increased by 8.3% toRM469.6 million as at end-2004 (end-2003: RM433.6million), reflecting the increase in loans guaranteedthat had turned non-performing. Total claims paid tothe banking institutions also increased by 33.6% toRM123.7 million in 2004 (2003: RM92.5 million).

Loans outstanding under the various special loanschemes administered by CGC declined by 35.2% toRM593.2 million as at end-2004 (end-2003: RM915.8million). This was due mainly to the decline in loans

outstanding sourced from Bank Negara Malaysiafunds following the change in the fundingarrangements since November 2002. Bank NegaraMalaysia has now channelled the funding for thesespecial loan schemes directly to the bankinginstitutions for lending to SMEs.

CGC continued to rely on its shareholders’ funds(RM2.1 billion) and borrowings from theGovernment (RM1.8 billion), which togetheraccounted for 85.9% of the total source of funds, toback the guarantees issued and fund its lendingoperations. The funds were largely placed withbanking institutions (RM3.8 billion).

Lembaga Tabung HajiLTH, or Pilgrims Fund Board, recorded a growth in itsdeposit mobilisation activities in 2004. Total depositsoutstanding increased by 7.1% or RM798.8 million toRM12.1 billion while the number of depositorsincreased from 4.7 million to 4.9 million. As part ofthe continuous efforts to improve its service todepositors in 2004, LTH has increased its collectingagents to nine from the previous six and openedanother branch office to increase the number to 119.In addition, in October 2004, LTH was awarded MSISO 9001: 2000 Quality Management Systems for itscounter services.

Total investments of LTH increased by 8.6% to RM8.7billion and represented 65.8% of total assets as atend-2004. Deposits placed with financial institutionsincreased by 34.3% to RM1.9 billion whilstinvestments in subsidiaries and associates increased by12.1% to RM1.4 billion. Investment in sharescontinued to form the largest component, accountingfor 45.8% or RM4 billion of total investments

Graph 7.9 Credit Guarantee Corporation Malaysia Berhad: Guarantee by Sector as at 31 December 2004

General business 74.7%

Manufacturing 24.0%

Agriculture 1.3%

Graph 7.10 Lembaga Tabung Haji: Investments as at 31 December 2004

Shares 45.8%

Private debt securities 12.9%

Investment in subsidiaries

and associates 16.7%

Deposits placed 22.4%

Other investment 2.2%

188

(2003: 47.6% or RM3.8 billion), followed by depositsplaced with financial institutions which represented22.4% of total investments. LTH also providedfinancing to its subsidiaries and other businessenterprises, all totalling to RM1.9 billion as at end-2004 (end-2003: RM1.7 billion).

Sabah Development Bank BerhadLending activities by Sabah Development Bank Berhad(SDB) turned around in 2004 with total loansoutstanding increasing by 17.1% to RM1.5 billion asat end-2004 (end-2003: RM1.2 billion), mainly onaccount of the strong increase in loans extended tothe manufacturing, wholesale and retail trade, realestate, and construction sectors. Loans continued toaccount for the largest share (75.2%) of the totalassets of SDB. As at end-2004, 45.1% of the loansoutstanding was for real estate financing, while10.8% was channelled to the construction sector and8.7% to the business services sector. During the year,the amount of loans approved and disbursedincreased significantly to RM381.5 million andRM314.3 million respectively (2003: RM250.6 millionand RM184.3 million respectively).

While gross NPLs increased to RM517.5 million (2003:RM492 million), the gross NPL ratio improved slightlyto 35.7% (2003: 39.7%) owing to the larger loanbase. A major share (68.7%) of the NPLs were loans tothe real estate and business services sectors. Net NPLratio was lower at 1.4% (2003: 4.6%).

SDB continued to rely on borrowings from financialinstitutions and deposits from the Government andGovernment-controlled business enterprises, whichcollectively contributed to RM1.1 billion or 57.5% of

total resources (2003: RM890.6 million or 54%). Thebank’s shareholders’ funds which had increased toRM257.3 million in 2004 (2003: RM228.9 million)also supported SDB’s operations.

Sabah Credit CorporationLending activities of Sabah Credit Corporation (SCC)expanded at a more moderate pace in 2004, with totalloans outstanding increasing by 9.1% to RM690.3million as at end-2004 (end-2003: 18.9% to RM632.8million). Loans remained the largest asset component,accounting for 93% of total assets of RM742.1 millionas at end-2004. The expansion was attributed mainly toconsumption credit loans which grew by 28.3%. Ridingon the sustained consumer demand, consumption creditloans overtook the declining housing loans financingactivity, to account for the largest loan component in2004. The bulk of the consumption credit loans was forexecutive loans (72.1%) and the balance for hirepurchase financing. Total loans approved and disbursedreduced slightly to RM209.7 million and RM209.2million respectively (2003: RM236.5 million andRM223.8 million respectively).

Gross NPLs increased to RM92.6 million (2003: RM86.2million), attributed mainly to the higher non-performing consumption credit loans. The gross NPLratio however reduced slightly to 13.4% (2003:13.6%), relatively due to increase in the loan base. Ona net basis, the NPL ratio was at 5.4% (2003: 5%).

Borrowings from the State Government (RM328.8million) and banking institutions (RM219 million)remained the major sources of funding for SCC,accounting for a combined share of 73.8% oftotal resources.

Graph 7.11 Sabah Development Bank Berhad: Direction of Lending as at 31 December 2004

Others 20.5%

Agriculture, forestry & fishery

7.1%

Real estate 45.1%

Construction 10.8%

Business services 8.7%

Manufacturing 7.8%

Graph 7.12 Sabah Credit Corporation: Direction of Lending as at 31 December 2004

Others 2.7%Industrial development

9.6%

Hire purchase 13.1%

Executive loans 34.0%

Housing 39.5%

Agriculture 1.1%

189


Borneo Development Corporation (Sabah)Sendirian BerhadProperty development activities undertaken byBorneo Development Corporation (Sabah) SendirianBerhad (BDC Sabah) slowed down in 2004. Theproperty development expenditure and progressbillings of BDC Sabah, which formed 66.8% of itstotal assets, declined by 3.1% to RM93.1 million asat end-2004 (end-2003: RM96.1 million).

Due to competitive lending rates offered bybanking institutions, total loans outstandingdeclined further to RM8.9 million as at end-2004and there was no new lending during the year.Loans to individuals accounted for 69.9% of theamount outstanding, while business enterprisesaccounted for the balance.

Gross NPLs increased to RM2.7 million, accountingfor 30.7% of total loans as at end-2004 (end-2003:RM2.4 million or 25.4%). This was attributedmainly by high NPLs for the purchase ofnon-residential property, which constituted 94.5%of total gross NPLs.

Borrowings from financial institutions remainedthe major source of funding for BDC Sabah,which amounted to RM86.7 million or 62.3%of total resources.

Borneo Development Corporation (Sarawak)Sendirian BerhadProperty development and construction activitiesremained the principal activities of Borneo DevelopmentCorporation (Sarawak) Sendirian Berhad (BDC Sarawak)in 2004. The amount of stocks and work-in-progressrecorded a further increase of 28% (2003: 63.6%) toRM70.3 million as at end-2004 to account for thelargest share (68.1%) of BDC Sarawak’s total assets.

Amidst increased competition from the bankinginstitutions, end-financing activities for the purchase ofhouses remained stagnant for the second consecutiveyear. As a result, total loans outstanding whichcomprised largely loans to its staff (97.9%) for thepurchase of residential property, declined further toRM0.9 million as at end-2004 (end-2003: RM1 million).Meanwhile, total investments in subsidiary and associatecompanies totalling RM9.6 million or 9.3% of totalassets, recorded a slight decrease (-2.7%) in 2004.

BDC Sarawak sourced its funding mainly from itsshareholders’ funds (RM37.2 million) and borrowings fromfinancial institutions (RM11 million), which accounted for acombined share of 46.7% of total resources (2003:62.3%). Deposits by house buyers, totalling RM45.2million, have also increasingly become an important sourceof funds for BDC Sarawak, representing 43.8% of totalresources (2003: 25.6% or RM24.5 million).

192 Discount Houses 192-193 Provident and Pension Funds193-196 Venture Capital 196-197 Unit Trust Industry

Other Financial Institutions

192

Discount HousesIn 2004, the operations of discount housescontinued to expand, albeit at a slower pace. Totalresources of discount houses increased by RM1.7billion or 5.6% (2003: RM2.8 billion or 10.3%). Theincrease was due mainly to the 18.3% growth oftotal deposits during the year. Fixed depositsrecorded a large increase of RM3.9 billion or 23.4%(2003: RM2.4 billion or 16.5%) with the bulk of theincrease being in deposits for maturities of betweenone to nine months. Meanwhile, call deposits grewat a more moderate pace of 15.2% during the year(2003: 34.2%). Amidst the availability of largesupply of funds from deposits, there was lessreliance on the interbank market as a source offunds during the year. This was reflected in theRM2.9 billion decline in interbank borrowings.

There was a distinct shift in the uses of funds duringthe year. Investments in securities declined byRM4.1 billion due mainly to the reduction of holdingsof private debt securities and Cagamas debt securities.This shift reflected the discount houses’ preference forshorter-term placements in the interbank moneymarket on expectation of higher future interest rates.The decline in PDS holdings also arose out of profittaking activity when yields trended downwards in thesecond-half year. As a result, the discount houses’interbank placements expanded by more than two-foldto account for 37.8% of the consolidated total assets(2003: 19.2%).

As part of the measures to promote acomprehensive regulatory and supervisoryframework for financial institutions, two keyprudential requirements were imposed on licenseddiscount houses in 2004 to safeguard their financialsoundness amidst greater competition in thefinancial sector. Firstly, beginning from September2004, discount houses’ capital adequacyrequirements would incorporate their market riskpositions and comply with the minimum riskweighted capital ratio (RWCR) requirement of 8%under the revised RWCR framework and the MarketRisk Capital Adequacy framework. Upon fullcompliance in the second quarter of 2005, therevised RWCR framework would align thecounterparty risk weights of the existing discounthouses’ RWCR framework with that of the otherlicensed banking institutions. This would ensure a

level playing field with respect to the provision ofcapital under the RWCR framework. Secondly,effective from 1 October 2004, discount houses weresubjected to the Single Customer Credit Limit (SCCL)requirement under Section 61 of the Banking andFinancial Institutions Act 1989 (BAFIA) with respect toall their investments in private debt securities (PDS).This would ensure that discount houses are not overlyexposed to a single issuer in their holdings of PDS.

During the year, discount houses’ fee-based activitymoderated in line with the lower PDS issuance in thecapital market. The industry arranged, lead-managedand co-managed the issuance of PDS worth RM5.9billion (2003: RM9.8 billion). Meanwhile, the totalamount underwritten by the discount houses wasRM1.4 billion (2003: RM2.6 billion) for 42 PDS issues(2003: 31 issues).

Provident and Pension FundsTotal resources of the provident and pension funds(PPFs) surveyed by Bank Negara Malaysia expandedfurther by 9.3% to RM291.3 billion in 2004. TheEmployees Provident Fund (EPF), as the largest fund,


Table 8.1Discount Houses: Sources and Uses of Funds

Annual change At

end-2003 2004 2004

RM million

Sources:Approved capital funds 84 238 2,611Deposits 3,847 4,344 28,094Interbank borrowings -1,169 -2,944 615Others 46 57 564

Total 2,807 1,695 31,885

Uses:Investment in securities: 9 -4,146 19,109

Government debt securities -571 475 1,804MGS held -262 572 1,407

Khazanah bonds 123 -173 324BNM bills 16 -365 0Private debt securities 2,397 -3,033 10,897Bankers acceptances -2,752 822 4,059Negotiable instruments of

deposit 752 -289 559Cagamas debt securities 610 -1,093 1,076Others1 -567 -491 391

Interbank palcements 1,921 6,230 12,039Others 877 -389 738

2002 2003 2004

Number of discount houses 7 7 7

1 Includes Danaharta and Danamodal bonds.Note: Total may not add up due to rounding.

193


accounted for 82.5% of the total funds of PPFs. As atend-2004, the accumulated contributions, whichaccounted for 90.1% of the total resources of thePPF, increased by 9.3% (2003: 9.2%). The stronggrowth in accumulated contributions was mainlyattributed to the significant increase of 22.2% individends credited in 2004 (2003: 15.7%).Meanwhile, net new contributions to the PPFscontinued to grow, albeit at a slower rate of 3.2% in2004 (2003: 16.2%). The slower growth was due tohigher withdrawals during the year.

During the year, gross contributions of the PPFssurveyed increased by 8.2% (2003: 1%), in line withgrowth in the number of contributors. Withdrawalsincreased by 13.1% in 2004 (2003: -10.5%),attributable largely to withdrawals from the EPF forinvestment purposes, which increased by 47.9% in2004 (2003: 8.7%). This increase was consistentwith the higher sales of unit trust funds during theyear. Withdrawals for housing purposes also grewstrongly, by 10.9% in 2004 (2003: 2.1%), reflectingthe robust demand for residential properties.Meanwhile, growth in EPF withdrawals bypensionable employees, which accounted for thelargest share (36.8%) of total EPF withdrawals,moderated to 12.3% in 2004 (2003: 19.1%).

Higher investment income enabled the PPFs todistribute higher dividends to contributors in 2004. TheEPF declared a dividend rate of 4.75% in 2004 (2003:4.5%) as the investment income of the EPF grew by7.1% to RM11.8 billion on the back of higher returnsfrom investments in private debt securities and from itslending activity. Income from equity investments was

Table 8.2Provident and Pension Funds: Selected Indicators

2003 2004p

RM millionAs at endNumber of contributors (’000) 20,698 21,152

of which: EPF 10,490 10,706 : SOCSO 9,997 10,239

Accumulated contributions 240,334 262,584Assets 266,538 291,331

of which: Investments in MGS 91,596 100,317

During the yearNet new contributions 12,014 12,400

Gross contributions 24,247 26,238Withdrawals 12,234 13,839

Dividends credited 9,324 11,391Investment income 12,893 13,447

p Preliminary

Source: Employees Provident Fund, Pension Trust Fund, Social SecurityOrganisation, Armed Forces Fund, Malaysian Estates Staff ProvidentFund, Teachers Provident Fund and three other private provident andpension funds.

also higher due to the stronger performance of theMalaysian stock market. In total, investments in debtand equity instruments contributed 52.2% of the totalinvestment income of the EPF in 2004.

In terms of the asset composition of the PPFs, therewas a marginal decline in the holdings of depositsand money market papers, given the low interestrate environment. Higher allocation was given forinvestments offering higher returns. Thus, the shareof private debt securities and loans increased to13.6% and 16.3% respectively, while the share ofdeposits and money market papers declined to10.3% as at end-2004.

As announced in the 2005 Budget, the EPF tooksteps to allocate RM800 million to external fundmanagers. Another RM1.75 billion per annum will bechannelled over the next three years to local fundmanagement companies. As a result, fundsoutsourced to local fund managers will increase toRM12 billion. This initiative is expected to enhanceinvestment returns, as well as to promote thedevelopment of a larger pool of skilled investmentmanagement professionals to foster greater depth inthe Malaysian fund management industry, asenvisaged under the Capital Market Masterplan.

Venture CapitalThe venture capital (VC) industry in Malaysiaprogressed further as a new source of financing forthe economy in 2004. Further expansion wasrecorded in 2004, in terms of the total size of funds,total investments from both local and foreignsources, number of venture capital fund

Graph 8.1 Provident and Pension Funds: Major Asset Composition

% of total assets RM billion

MGS

Equity

Total Assets (RHS)

Loans

Deposits & Money Market

Private Debt Securities

Others

30.3 31.9 31.3 34.4 34.4

11.7 10.7 12.214.8 16.3

8.9 11.4 11.512.5 13.6

24.525.4 26.2

25.2 22.9

20.4 18.0 16.0 10.7 10.3

0

20

40

60

80

100

2000 2001 2002 2003 2004

50

0

100

150

200

250

300

350

194

management companies and number of investeecompanies. Total available funds for VC investmentsgrew by 7% to RM2.3 billion. While investmentfrom domestic sources recorded an increase of15.4%, investment from foreign sources recorded asignificant growth of 55.4%. By the end of 2004,the total number of investee companies hadincreased to 332 companies, involving a totalinvestment of RM1.1 billion.

The Government gave further support for thedevelopment of the VC industry. In the 2005 Budget,the Government announced that foreign VC playerswould now be allowed to own 100% equityparticipation in venture capital and venture capitalfund management corporations in Malaysia. Themove, among others, is expected to encourage higherinflows of funds and skilled workforce, as well aspromote technology transfer.

The Cradle Investment Program (CIP), which wasadministered and managed by the Malaysia VentureCapital Management Berhad (MAVCAP), continued toprovide pre-seed funding and entrepreneurial supportto aspiring entrepreneurs with the commitment todevelop and commercialise their ideas. As at end-February 2005, grants totalling RM7 million were givento 141 recipients. In terms of sectors, CIP investmentwas mostly concentrated in software (26.95%),consumer/business products (12.77%) and e-services(7.1%). In addition, CIP also collaborated with severalkey Government bodies to further tap the country’spool of budding entrepreneurs and innovators. CIPcurrently has 16 ‘community partners’, which includeGovernment Ministries and agencies, and private

sector organisations. These ‘community partners’ areexpected to support CIP’s objectives through jointinitiatives and activities, such as the entrepreneurdevelopment programme, and mentoring andcommercialisation partnerships.

MAVCAP continued to offer financing to local high-growth information and communications technologycompanies throughout 2004. As at end-February2005, MAVCAP had invested RM300 million andnurtured 60 companies.

While funds from Government sources remainedhigh, the contribution of funds for VC investmentscoming from domestic private sector entitiesrecorded a significant increase of 35.1% in 2004.Funds from the insurance companies also increasedsubstantially to RM27 million in 2004, from RM2.4million in 2003. Funds available from foreign sourcesincreased substantially to RM170.3 million. Funds

Table 8.3Key Statistics on the Venture Capital Industry

As at end-2003 As at end-2004

Venture capital funds (RM million) 2,118.1 2,266.0Total investment (RM million)1 878.7 1,058.0

Local sources (RM million) 769.0 887.7Foreign sources (RM million) 109.6 170.3

No. of venture capitalcompanies/funds 432 38

No. of venture capital fundmanagement companies 312 34

No. of investee companies 298 332

During 2003 During 2004

Total investment (RM million) 227.2 289.3Local sources (RM million) 192.5 248.4Foreign sources (RM million) 34.8 40.9

No. of investee companies 115 139

1 Including divestment activities2 Based on Bank Negara Malaysia’s definition

Source: Securities Commission

Graph 8.2 Sources of Venture Capital (% share, as at end-2004)


Private individuals 10.5%

Foreign entities 1.0%

Pension and provident funds 0.1%

Insurance companies 1.2%

Other private sector entities

31.8%

Banks 12.9%

Government 42.5%

Total: RM2,266 million

Table 8.4Investment by Stages during 2004

No. of Investee Companies 139

Business Stage RM mil % share

Seed capital 16.1 5.6Start-up capital 19.3 6.7Early stage 48.9 16.9Expansion, Growth 105.8 36.6Bridge, Mezzanine, Pre-IPO 67.2 23.2Management buy-out 19.2 6.6Management buy-in … …Cashing-out (Secondary purchase) 0.6 0.2Other types of investment 12.1 4.2

Total 289.4 100.0


195


from Government sources constituted a lower shareof 42.5% in 2004 (2003: 54.2%).

In terms of stages, VC investments, during the year,were mainly focussed on the expansion/growth,bridge/mezzanine/pre-IPO and the early stages. Theseinvestments represented 76.7% of all VC investmentsin 2004. Investments in the more risky stages,including the seed capital and the start-up capitalstages, declined from 29.8% in 2003 to 12.3% in2004. Investments in other stages also declined.

In terms of outstanding investments by stages, theexpansion/growth, bridge/mezzanine/pre-IPO andstart-up capital stages received the bulk of VCinvestments since 2002.

0 5 10 15 20 25 30 35 40

Other types of investment

Cashing-out (secondary purchase)

Turnaround

Management buy-out

Management buy-in

Bridge, mezzanine, pre-IPO

Expansion, growth

Early stage

Start-up capital

Seed capital

Graph 8.3 Outstanding Investment by Stages (% share)


As at end-2002

As at end-2003

As at end-2004

Graph 8.4 Investment in 2004 (% share of total)


Others 9.4%

Wholesale, retail trade, restaurant and hotels

0.1%

Electricity, power generation, gas and water

1.4%

Education 11.9%

Manufacturing 12.6%Life sciences

17.2%

Total Investment: RM289.4 million Number of Investee Companies: 139

Information and communications technology

47.5%

In terms of investments by sector, the information andcommunications technology (ICT), life sciences andmanufacturing sectors continued to receive most ofthe financing. In total, the amount of VC investment inthese three sectors constituted 77.3% of totalinvestment made in 2004. In terms of the outstandingsize of funding at end-2004, the sectors whichreceived most of the VC investment were the ICTsector (42.2% of total), the manufacturing sector(25.4%) and the life sciences sector (18.4%). Thethree sectors accounted for RM910.1 million or86.0% of total funds invested. During the year,domestic VC funds were concentrated in ICT (48.7%),education (13.8%), and manufacturing (12.9%)sectors, while foreign VCs mainly invested into lifesciences (49.9%), ICT (39.8%) and manufacturing(10.2%) sectors. Compared with 2003, there was anapparent shift in investment preference as the bulk of

Table 8.5Outstanding Venture Capital Investment bySectors

As at end-2004

RM mil % share

Information and communications technology 446.2 42.2Manufacturing 269.2 25.4Life sciences 194.7 18.4Education 38.4 3.6Electricity, power generation, gas and water 17.4 1.6Wholesale, retail trade, restaurant and hotels 10.3 1.0Financing, insurance, real estate and business

services 6.8 0.6Construction 0.1 0.0Transport, storage and communications 0.0 0.0Others 74.9 7.1

Total 1,058.1 100.0


196

the domestically-sourced VC investments were morefocussed on the ICT sector, a move away from theprevious focus on the manufacturing sector, whileforeign VCs shifted their preference from the ICTsector to the life sciences sector.

The development of VC financing will continue to bekeenly promoted in view of its significance in nurturingnew growth areas as well as to serve as an alternativesource of financing to the economy as a whole. Furtherefforts will be directed towards greater capacity buildingin terms of skills upgrading and access to private sectorfinancing. To accelerate the development of the VCindustry, a sound network of business angels, diversifiedsources of funds and a large pool of highly skilledknowledge workers are being developed. Constraints inthe supply of innovations would be addressed with theimprovement of deal flows through the development ofa critical mass of high growth-potential investees. Inorder to assist the cultivation of better entrepreneurshipculture, efforts are being directed at providing thenecessary business and regulatory environment,ensuring access to financing at the earlier stages ofinnovation and reviewing existing policies relating to thecommercialisation of ideas.

Unit Trust IndustryThe unit trust industry experienced significant growthin 2004, reflecting the growing acceptance of unittrusts as an important investment vehicle for thepublic. During the year, a total of 62 new unit trustfunds were launched (2003: 44), bringing the totalnumber of funds to 281 as at end-2004 (end-2003:

Graph 8.6 Unit Trust Industry - Gross Sales, Repurchases and Net Sales

RM million

0

2000

4000

6000

8000

10000

12000

14000

Gross Sales

2001 2002 2003 2004

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Repurchases Net Sales

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Graph 8.5 Unit Trust Industry - NAV, Units in Circulation and Number of Funds

Net Asset Value, (RM billion) Units in Circulation (billion)

Number of Funds

0

20

40

60

80

100

120

140

0

50

100

150

200

250

300

Net Asset Value

No. of Units in Circulation

Number of Funds

219). The level of gross sales was consistently highthroughout the year, resulting in total gross sales forthe year rising by 33.4% (2003: 37.5%). Whilerepurchases were also generally higher comparedwith previous years, the industry neverthelessregistered its strongest annual net sales of RM12.6billion (81.9% higher than in 2003).

One of the main factors contributing to the growingdemand is the availability of a greater variety of unittrust funds, which cater to the diversified risk andreturn requirements of different investors. The fundsapproved by the Securities Commission (SC) in 2004ranged from general equity and bond funds, to fundsthat invest significantly in more risky securities/instruments. In addition, there were also fundsdesigned exclusively for institutional investors whichcarried a higher minimum initial investment amount.Other new unit trust funds introduced included thosedifferentiated by investment strategy, asset allocation,level of risk and distribution policies.

Reflecting stronger investor demand for Islamicfinancial products, the Islamic unit trusts industrycontinued to grow at a rapid pace. In 2004, 15 newIslamic funds were launched (2003: 14), bringing thetotal number of Islamic funds to 65. The net assetvalue (NAV) of Islamic funds, which grew by 42.3% in2004, accounted for 7.7% of total NAV of the unittrust industry as at end-2004 (end-2003: 6.8%).

Real estate investment trusts, or REITs (previouslyknown as property trust funds), were first establishedand launched in Malaysia in 1988. Recognising the

197


potential of REITs as an alternative investment vehicleto facilitate financial planning by Malaysian investors,as well as its potential in enhancing liquidity in thelocal property market, the Government undertook aseries of measures in 2004 to spur the developmentof REITs. These measures included favourable taxtreatment as announced in the 2005 Budget, and theintroduction of the Guidelines on Real EstateInvestment Trust by the SC to attract new players and

Graph 8.7 Islamic Unit Trusts - NAV, Units in Circulation, and Number of Funds

Net Asset Value (RM billion) Units in Circulation (billion)

0

2

4

6

8

10

12

14

2000 2001 2002 2003 20040

10

20

30

40

50

60

70

Number of Funds

Net Asset Value No of Units in Circulation

Number of Funds

enhance awareness amongst local industry playersand property owners/developers on the benefits ofestablishing a REIT.

There remains great potential for the Malaysian unittrust industry to expand further despite its significantgrowth in the last few years. The penetration level, asmeasured by the ratio of the net asset value of theunit trust industry to equity market capitalisation,remains low in Malaysia relative to countries withmore mature financial systems, such as the UnitedStates and United Kingdom. Greater investorawareness and knowledge of financial planning andavailable financial products is essential for more rapiddevelopment of the unit trust industry. Towards thisend, the authorities, in collaboration with industryplayers and associations, have undertaken continuouseducation programmes such as seminars, workshopsand road shows on financial planning, and on unittrust investments in particular.

In addition, efforts to widen the distributionchannels, such as through the introduction of theGuidelines on Online Transactions and OnlineActivities in Relation to Unit Trusts to enable the useof the internet and other electronic mediums forpromoting, distributing and providing information toinvestors, would also help to spur further expansionof the Malaysian unit trust industry.

200-201 Overview 201-203 Money Market203-204 Foreign Exchange Market204-206 Equity Market207-208 White Box: Key Capital Market Measures in 2004209-213 Bond Market213-215 Exchange-traded Derivatives Market

Financial Markets

200

OverviewIn 2004, the financial markets continued tofunction effectively in mobilising and allocatingfunds to serve the needs of investors andcorporates, and to facilitate market-basedcompetitive financing for Malaysian businesses andthe public sector. Total funds raised from the capitalmarket in 2004 continued to be significant. Afteraccounting for redemptions, net funds raised from

Financial Markets

significant, accounting for 23.7% of total privatesector financing obtained through PDS and loans.

In the equity market, fund raising activity wassupported by the positive market performance andthe improved economic fundamentals. The KualaLumpur Composite Index (KLCI) rose by 14.3% toreach 907.43 points as at end-2004, the highestyear-end level since the Crisis in 1997. Total funds

The financial markets continued to play an important role as avital source of financing for the economy. Efforts were undertakento further develop the financial markets as an efficient allocatorand mobiliser of investible funds.

0

10

20

30

40

50

60

2000 2001 2002 2003 2004

Public Sector Private Sector

Graph 9.1 Net Funds Raised in the Capital Market by the Public and the Private Sectors

RM billion

Table 9.1Funds Raised in the Capital Market

2003 2004p

RM million

By Public SectorGovernment Securities (gross) 41,262 43,173

Less Redemptions 18,600 18,200Less Government holdings 0 0

Equals Net Federal receipts 22,662 24,973

Khazanah Bonds (net) 346 -1,198Government Investment Issues (net) 1,729 1,423Malaysia Savings Bond/Merdeka

Savings Bond (net) -9 1,474

Net Funds Raised by Public Sector 24,729 26,671

By Private SectorShares 7,772 6,475

Debt securitiesIssuance (gross) 50,975 36,340

Less Redemptions 33,123 26,814

Equals Net Issues 17,853 9,526

Net Funds Raised by Private Sector 25,624 16,001

Total Net Funds Raised 50,353 42,672

Short-term papers and notes (net)1 3,753 -3,208

Total 54,106 39,465

1 Refers to Commercial Papers and Cagamas Notes. For 2003, include MediumTerm Notes

p Preliminary

the capital market remained high at RM42.7 billion(2003: RM50.4 billion). The Federal Governmentcontinued to tap the domestic market to finance itsdevelopment activity, given the ample liquiditysituation. The public sector raised a higher netamount of RM26.7 billion (2003: RM24.7 billion),accounting for 62.5% of total funds raised fromthe capital market. Meanwhile, net funds raised bythe private sector through the equity and bondmarkets declined by 37.6% to RM16 billion, duemainly to the lower issuance of private debtsecurities (PDS). A major reason for this decline wasthe completion of most corporate restructuringactivity, and the bulk of the new funds sourcedwere to finance new activities. Overall, financing ofthe economy through PDS issuance remained

raised from the equity market amounted to RM6.5billion, arising mainly from the listing of 72companies on the Bursa Malaysia, the highest since1998. The higher number of new listings, especiallyby small to medium capitalised companies, reflectedthe improvement in domestic investment activity,especially in the new growth areas of the economy.

201

Financial Markets

In the PDS market, the low inflation and interestrates environment coupled with the strengtheningeconomic fundamentals were the main factorscontributing to the continuous supply of new PDS,with a total issuance of RM36.4 billion. The PDSmarket remained the preferred avenue forfinancing by companies involved in the utilities andconstruction sectors, which accounted for 59.5%of the total funds raised by the private sector(excluding Cagamas Berhad). In terms of utilisationof bond proceeds, 46.5% of total issuances werefor financing new activity, the highest sharerecorded since the Crisis. This encouragingdevelopment provided further evidence ofimprovement in private investment activity in theMalaysian economy. A significant development inthe domestic bond market was the introduction ofnew asset classes. Several new instrumentsincluding the Residential Mortgage BackedSecurities and ringgit bonds by the multilateraldevelopment banks were issued during the year.

In terms of market transaction and trading activity,both the Kuala Lumpur interbank foreign exchangemarket and the exchange-traded derivatives marketrecorded robust activity with volumes increasing by44% and 32%, respectively. In the equity, bondand money markets, trading volume declinedslightly during the year. Trading of money marketpapers during the year was influenced largely bychanging market expectations on the prospects foreconomic growth and the direction of interest rate.

The increased transactions in the Kuala Lumpurforeign exchange market can be attributed toincreased trade and investment activity, as well asgreater volatility in the major currencies. Theincreased volatility in the foreign exchangemarkets encouraged currency traders todiversify and to hedge portfolios as well as totrade on opportunities arising from exchangerate movements.

On Bursa Malaysia Derivatives, trading activity wasconcentrated on CPO futures and KLCI futures,which together accounted for 93.7% of total trade.Of significance was the higher annual growth of229% recorded in the KLCI futures, due mainly tothe better performance in the underlying equitymarket as well as measures taken by Bursa MalaysiaDerivatives to reduce margin requirements andtransaction costs in late 2003. To further enhancethe risk management tools for palm oil traders, thePalm Kernel Oil Futures was launched, allowing

market participants to better manage theirexposures to palm oil prices.

On the developmental front, the Government andthe relevant authorities continued to support thefurther growth and strengthening of the domesticfinancial markets towards achieving higher levels ofefficiency, resilience and competitiveness. Ofsignificance, several liberalisation measures wereintroduced to allow foreign stockbrokers, futuresbrokers and fund managers to operate in Malaysia.In addition, non-resident companies were exemptedfrom withholding tax on interest income earned onholdings of ringgit-denominated debt securitiesissued by the Government as well as debt securitiesapproved by the Securities Commission. Thesedevelopments continued to further widen theinvestors’ profile in the domestic capital market.Details are contained in the white box on KeyCapital Market Measures in 2004.

Money MarketActivity in the money market was slightly lower in2004, as reflected by the decline in the trading volumeof both interbank deposits and money market papers.

Amidst an environment of stable interbank rates andcontinued ample liquidity throughout the year, thevolume of transactions in the interbank depositmarket declined by 2.5% in 2004 as marketparticipants had less incentive to source funds fromthe interbank market. Compared to 2003, the dailyweighted average overnight interbank ratefluctuated within a narrower range of 2.65 – 2.74%,averaging at 2.70%.

Table 9.2Money Market1

2003 2004

Volume Annual Volume Annual(RM change (RM change

billion) (%) billion) (%)

Total money markettransactions 1,541.0 5.2 1,487.0 -3.5

Interbank deposits 1,084.7 7.2 1,057.5 -2.5

Money market papers 456.3 0.6 429.5 -5.9Bankers Accecptance (BAs) 37.3 -27.4 48.0 28.7Negotiable instrument of

deposits (NIDs) 43.0 17.3 36.3 -15.7Malaysian Government

Securities (MGS) 231.4 -5.2 193.3 -16.5Khazanah bonds 18.7 20.7 17.8 -5.1Treasury bills 9.9 17.7 17.1 73.1Bank Negara bills 74.5 36.9 74.1 -0.4Cagamas bonds 25.6 -12.4 38.6 51.0Cagamas notes 16.0 16.2 4.4 -72.7

1 All data are sourced from the Bond Information and Dissemination System,except for BAs and NIDs which are sourced from money market brokers.

202

Trading of money market papers during the yearwere influenced largely by changing marketexpectations about the prospects for economicgrowth and interest rate direction. In the firstquarter, the low inflation rate and assurances ofunchanged domestic monetary policy spurredtrading in MGS, as both domestic and foreigninvestors raised their exposure in fixed incomesecurities. Consequently, the volume of MGS tradedrose substantially from RM1.7 billion in December2003 to RM13.8 billion in March 2004 with a shiftin preference towards long-term fixed incomeinstruments. The stronger demand pushed yieldsdown for 3-year and 5-year MGS by 51 basis points(bps) and 20 bps to 3.25% and 4.08% respectively.Trading in treasury bills was also high at an annualrate of 173.7% in the first quarter of 2004, whilethe yield for the 3-month treasury bills declined by23 bps compared to the end-December 2003 level.

Subsequently, bond yields began to trend upwards inthe second quarter of 2004. The release of the strongfirst quarter GDP growth and rising US Treasury yields

amidst expectations that the strong growth in the USwould prompt the Federal Reserve to increase interestrates, changed market expectations over the directionof interest rates in Malaysia. This led to sellingpressure in the MGS market and caused the3-year and 5-year MGS yields to increase to 3.72%and 4.41% respectively as at end-June, the highestyields recorded in 2004.

However, in the second half of the year, the trendin bond yields reversed and trended downwardsagain, mainly influenced by the escalating crude oilprices and their negative impact on prospects forglobal growth. Demand for ringgit-denominatedfixed income securities rose on investor confidencethat the inflation outlook in Malaysia remainedsubdued and on expectations of realignments ofcurrencies in Asia against US dollar. This wasfurther reinforced by the declining US Treasuryyields following indications by the Federal OpenMarket Committee (FOMC) that the increase in theinterest rate in the US would be at a moderate paceand the exemption of withholding tax on interestearned on holdings of ringgit-denominated debtsecurities issued by the Government as well assecurities approved by the Securities Commission.The strong interests in ringgit-denominated assetsled to a steep decline in the yields, particularly inshort-term papers. Between end-October andend-November, yields on 1-year MGS dropped by76 bps, while yields for 3-month treasury billsdeclined by 51 bps.

Jan-

03

Feb-

03M

ar-0

3A

pr-0

3M

ay-0

3Ju

n-03

Jul-0

3A

ug-0

3Se

p-03

Oct

-03

Nov

-03

Dec

-03

Jan-

04Fe

b-04

Mar

-04

Apr

-04

May

-04

Jun-

04Ju

l-04

Aug

-04

Sep-

04O

ct-0

4N

ov-0

4D

ec-0

4

Graph 9.2 Yields of Money Market Instruments

Yield %

1.5

2.0

2.5

3.0

3.5

4.0

4.5

3-month MTBs 3-year MGS

1-year MGS 5-year MGS

Graph 9.3 Volume of Traded MGS

(RM billion)

0

5

10

15

20

25

30

35

Jan-

03

Feb-

03M

ar-0

3A

pr-0

3M

ay-0

3Ju

n-03

Jul-0

3A

ug-0

3Se

p-03

Oct

-03

Nov

-03

Dec

-03

Jan-

04Fe

b-04

Mar

-04

Apr

-04

May

-04

Jun-

04Ju

l-04

Aug

-04

Sep-

04O

ct-0

4N

ov-0

4D

ec-0

4

Overnight

Weekend

1-week

1 to 3-month

Others

0

10

20

30

40

50

60

70

80

90

100

Graph 9.4 Interbank Deposits

% Share of Total Volume Traded

67.5 69.1

18.4 18.9

4.7 4.38.6 0.4

0.9

7.2

2003 2004

203

Financial Markets

2003

2.2

2004

%

0

10

20

30

40

50

60

70

80

90

1004.1

9.5

9.2

8.2

15.8

51.0

4.0

4.18.4

10.0

11.2

17.3

45.0

MGS

Cagamas

NIDs

MTBs

BNB

BAs

Khazanah Bonds

Graph 9.5 Money Market Instruments

Share of Total Volume Traded

A notable development during the year was thesignificant movements in the trading of Cagamasdebt securities. The trading in Cagamas notesdeclined by 73%, due mainly to the lower issuanceof only RM1 billion in 2004 compared to almostRM10 billion in 2003. Meanwhile, trading inCagamas bonds increased significantly following theremoval of regulatory incentive of Cagamas debtsecurities in September 2004, which resulted inmarginal increase in yields of Cagamas bonds.

Foreign Exchange MarketIn the Kuala Lumpur interbank foreign exchangemarket, the average daily volume of interbankforeign exchange transactions (spot and swap)increased by 44% compared to 2003. There was agreater increase in spot transactions of 57%,compared to a 36% increase in swap transactions. Ingeneral, changes in volume and composition in theforeign exchange market can be attributed toincreased trade and investment and greater volatilityin the major currencies during the year. Amid theincreased volatility among major currencies, currencytraders sought to diversify, adjust and hedge theirportfolios and trade on profit opportunities createdby the movements of exchange rates.

The increased trade and investment activity had adirect positive impact on the volume of both spotand swap transactions. In 2004, Malaysian exportsand imports grew by 20.8% and 26.3%respectively, as compared to 11.3% and 4.4% in

2003. The KL foreign exchange market also sawhigher activity following a marked increase inportfolio inflows. Higher volatility in the foreignexchange markets amid a depreciating US dollarand the resultant adjustments of world currenciesalso led to a rise in hedging activity by marketparticipants to manage their exposure tocurrency risks.

By composition, the Kuala Lumpur foreignexchange market comprised mainly transactionsinvolving the ringgit, yen, euro, Singapore dollarand pound sterling against the US dollar. The USdollar is used widely in the settlement of trade,services and capital account transactions, thus thecontinued domination of transactions in the US

0

1,400

1,200

1,000

800

600

400

200

RM billion RM billion

Graph 9.6 Volume of Interbank Transactions in the Kuala Lumpur Foreign Exchange Market

0

1,400

1,200

1,000

800

600

400

200

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Spot Swap Total

Note: Data from 2002 onwards is based on the new Ringgit Operations Monitoring System (ROMS), whereas observations for previous years are based on transactions of the eight Authorised Dealers.

Graph 9.7 Transactions in the Kuala Lumpur Foreign Exchange Market by Currency

2004 (RM464.7 billion)

78.5%

0.03%

6.3%

4.2%

8.4%

2.6%

US$/RM

2003 (RM323.6 billion)

81.7%2.6%

4.2%

8.7%

2.9%

US$/SGD

US$/YEN

US$/EURO

US$/GBP

Others

204

dollar against the ringgit. Nonetheless, the share ofsuch transactions in total foreign exchangetransactions decreased from 81.7% in 2003 to78.5% in 2004. Similarly, the share of transactionsinvolving the yen and Singapore dollar against theUS dollar decreased by 3% and 10% respectively. Bycontrast, there was a significant increase intransactions involving the pound sterling against theUS dollar, which became the third largest tradedcurrency pair in 2004. Euro transactions against theUS dollar also increased to 4.2% of totaltransactions in 2004 compared to 2.6% in 2003. Tosome extent, the shift can be explained by a moreactive diversification from lower yielding currenciessuch as the dollar and yen, into higher yielding onessuch as the pound sterling and the euro.

Equity MarketIn 2004, the Malaysian equity market performedwell with most major market indices ending the yearhigher. The Kuala Lumpur Composite Index (KLCI)ended the year at 907.43 points or 14.3% higherthan the end-2003 level. Total market capitalisationincreased to RM722.04 billion, an increase of 12.8%compared to the end-2003 level. Market activityremained significant as the annual market turnoveramounted to 108 billion units valued at RM216.7billion. Regionally, the KLCI was one of theoutperformers in the Asian region.

Market liquidity declined slightly in 2004 as theaverage daily turnover decreased to 435.5 millionunits, from 456 million units in 2003. Market

Jan-

03Fe

b-03

Mar

-03

Apr

-03

May

-03

Jun-

03Ju

l-03

Aug

-03

Sep-

03O

ct-0

3N

ov-0

3D

ec-0

3Ja

n-04

Feb-

04M

ar-0

4A

pr-0

4M

ay-0

4Ju

n-04

Jul-0

4A

ug-0

4Se

p-04

Oct

-04

Nov

-04

Dec

-04

Graph 9.8 Kuala Lumpur Composite Index (KLCI), Second Board Index, MESDAQ Market Composite Index (MCI) and Bursa Malaysia's Trading Volume

Index (Jan 2003=100) Volume (billion units)

KLCI Second Board Index

MCI Trading Volume

40

60

80

100

120

140

160

180

200

220

5

0

10

15

20

25

30

35

40

Source: Bursa Malaysia

Table 9.4Bursa Malaysia: Performance of Sectoral Indices

2003 2004

Annual change (%)

Kuala Lumpur Composite Index 22.8 14.3EMAS 24.4 9.6Second Board 43.2 -21.2MESDAQ Composite Index 82.9 -19.3

Finance 33.2 15.3Trading / Services 18.3 14.3Industrial 31.3 10.9Plantation 19.3 9.4Syariah 23.2 8.9Consumer Products 28.8 7.3Mining 74.8 6.7Industrial Products 23.4 4.6Properties 38.8 -4.5Construction 24.6 -8.9Technology 33.9 -28.5


sentiments, on the whole, were negativelyinfluenced by unfavourable external factors, suchas the high oil prices and the rising US interestrates. However, stronger overall economic growthand rising corporate earnings buoyed investors’interest in the Malaysian equity market. Thereorientation of Government-linked companies(GLCs) towards greater shareholder value creation

Table 9.3Bursa Malaysia: Selected Indicators

2003 2004

Price Indices:Composite 793.94 907.43EMAS 195.57 214.26Second Board 140.64 110.87MESDAQ 152.25 122.84

Total Turnover:Volume (billion units) 112.2 108.0Value ( RM billion) 183.9 216.7

Average Daily Turnover:Volume (million units) 456.0 435.5Value (RM million) 747.5 873.7

Market Capitalisation (RM billion) 640.5 722.0Market Capitalisation / GDP (%) 162.5 161.3

Total No. of Listed Companies: 906 963Main Board 598 622Second Board 276 278MESDAQ 32 63

Market Liquidity:Turnover Value / Average Market

Capitalisation (%) 33.4 31.9Turnover Volume / Number of Listed

Securities (%) 43.2 36.4

Market Concentration:*10 Most Highly Capitalised Stocks / MarketCapitalisation (%) 31.6 34.4

Average Paid-Up Capital ofStockbroking Firms (RM million) 170.9 167.0

* Based on market transactions only.


205

Financial Markets

Better market performance and broader investor interest resultedin 72 IPOs, the highest since 1998, further evidence of the growingimportance of the stock market as a source of equity capital tofinance growth in the economy.

Graph 9.9: Performance of the Kuala Lumpur Composite Index in 2004

670

690

710

730

750

770

790

810

830

850

870

890

910

930

950KLCI

Positive outlook by foreign and local research houses on Bursa Malaysia

7 Jan Appointment of new Deputy Prime Minister and cabinet reshuffling

25 Feb Announcement of 2003 GDP growth at 5.3% in 2003 and 6.3% in 4Q03

22 March BN landslide victory in the Malaysia's General election

Buying interest following reinstatement of Malaysia to CALPERS' permissible mkt investment list

23 Apr BNM announced new interest rate framework

26 May Announcement of 1Q04 GDP at 7.6%

Resurgence of SARS cases in China

* Concerns over the US interest rate hike * Rising of global crude oil prices which may affect Malaysian exports

17 May Lowest point of the year for the KLCI at 781.05

10 Aug US increased interest rate by 25bps to 1.50%

21 Sep US increased interest rate by 25bps to 1.75%

10 Sep 2005 Budget - Liberalisation measures announced

* Fears of rising global oil prices * Concerns over US interest rates hike * Slowdown of China economy

Concerns over the rising global crude oil prices and impact on global economic growth

Fall in oil prices

30 Nov Announcement of 3Q GDP at 6.8%

14 Dec US increased interest rate by 25bps to 2.25%

2 Dec KLCI recorded its highest point reached at 919.97

Fall in global oil prices and renewed speculation on ringgit peg review

US increased interest rate by 25bps to 1.25%

US increased interest rate by 25bps to 2% 17 Dec

Moody's upgraded Malaysia's foreign currency ratings

8 Nov Fitch upgraded Malaysia's sovereign rating to A- from BBB+

11 May Standard & Poor's

affirmed Malaysia's currency and

sovereign credit ratings

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

and the initiatives taken by the Government toimprove the delivery system of the public sector inorder to drive greater efficiency andcompetitiveness of the economy attracted foreignfunds to increase weightings in Malaysia.

Investors were further encouraged by theannouncement of new liberalisation measures toallow foreign stockbrokers, fund managers andventure capitalists to operate in Malaysia. Thesemeasures are expected to enhance market liquidity,boost competitiveness and strengthen Malaysia’scapital market.

The performance of the equity market was supportedby strong growth in corporate earnings andstrengthened financial position of the corporate sector.From a sample of 351 listed non-financial corporations(representing close to 75% of Bursa Malaysia’s totalmarket capitalisation), profits for 2004 grew by 19%.Annualised return-on-equity for the sample rose to

9.1% in the fourth quarter of 2004 (Q4 2003: 8.2%).Earnings growth was particularly strong in thetelecommunications, transport and timber sectors, aswell as in selected manufacturing sub-sectors (steelproducts, rubber products, and electronics). Theimprovement in profitability was also driven by thesuccessful turn-around of a number of companies thathad completed their restructuring exercises in the lastfew years.

In line with the earnings improvement, cash flowsfrom the operations of the corporate sector rose in2004. Stronger cash flows enabled firms to fund alarger portion of their capital expenditure frominternally generated funds. As a result, corporateindebtedness remained stable. Stronger cash flows,together with stable leverage and low interestrates, resulted in stronger debt servicing capacity ofthe corporate sector. Stronger cash flows alsoenabled some large corporations to increase theirdividend payments to shareholders.

206

The equity market remained a significant source offinancing for the private sector in 2004. Positivemarket performance coupled with strong economicfundamentals encouraged a larger number of smallto medium capitalised companies to raise equityfunds in the market. More companies sought listingon the MESDAQ Market and Second Board duringthe year, with the total number of new listings onthe Bursa Malaysia rising by 72, the highest since1998. Of the total, 31 companies were listed onthe MESDAQ Market, 26 on the Second Board andthe remaining 15 on the Main Board. Mostcompanies that were listed were from thetechnology and high growth sectors as well asconsumer and industrial products sectors. Two largecompanies sought listing during the year whichenhanced market capitalisation by 0.8%. Thehigher number of new companies listed on Bursa

Malaysia in 2004 provided further evidence ofimprovement in private investment activity,especially in the new growth areas of the economy.The total number of companies listed in BursaMalaysia was 963 by the end of 2004. In terms ofthe number of listed companies, Bursa Malaysiaranks second, after Hong Kong China in the EastAsia (excluding Japan) region.

Total funds raised through the equity market,however, were slightly lower at RM6.5 billion,compared with RM7.8 billion in 2003. The bulk ofthese funds were raised through initial publicofferings (IPOs) and rights issues, amounting toRM4 billion and RM1.5 billion, respectively. Thefunds raised were lower, due to the smaller size ofthe IPOs. However, most of the IPOs during theyear were oversubscribed reflecting strong investorinterest in new listings. Funds raised in the equitymarket constituted about 40% of the total netfunds raised by the private sector in the capitalmarket in 2004.

Recognising the significance of equity market as animportant source of financing for the economy, theGovernment and relevant authorities introducedseveral measures to further strengthen the equitymarket. The new liberalisation measures were aimedat increasing global competitiveness, promotinginnovation and widening market coverage. Othermeasures introduced in 2004 were targeted ateasing the listing process, enhancing disclosure bylisted companies, enhancing stockbrokingcompanies’ resilience and improving investorprotection. Details of the measures introducedduring the year are contained in the white box onKey Capital Market Measures in 2004.

12 6

2216 15

26

14

2222 26

7 20

31

0

10

20

30

40

50

60

70

80

2000 2001 2002 2003 2004

Total:38

Total:20

Total:51Total:58

Total:72

Main Board

Second Board

MESDAQ Market

Graph 9.10 Bursa Malaysia: Number of New Listings

No.of Companies

US DJIA

Taiwan TWSE

US Nasdaq

Korea KOSPI

Hong Kong HSI

Malaysia KLCI

Singapore STI

Indonesia JCI

Graph 9.12 Performance of Selected Stock Markets Indices (% change from end-2003 to end-2004)

-13.5

3.1

4.2

8.6

10.5

13.2

44.6

14.3

17.1

-20 -10 0 10 20 30 40 50 (%)

Thailand SET


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2000 2001 2002 2003 2004

Bond Market

RM million

Graph 9.11 Funds Raised by the Private Sector in the Capital Market

Equity Market

207

Financial Markets

Key Capital Market Measures in 2004

Capital market measures introduced in 2004 were aimed at further strengthening the capital market, improvingthe intermediary process and protecting investors. Key measures introduced in 2004 were as follows:

Strengthening the Bond Market• Effective 1 April, Bank Negara Malaysia liberalised the foreign exchange administration rules to allow

Multilateral Development Banks (MDBs) or Multilateral Financial Institutions (MFIs) and MultinationalCorporations to raise ringgit-denominated bonds in the Malaysian capital market, in line with Malaysia’son-going efforts to enhance development of the domestic bond market. In facilitating the issuance of theringgit-denominated bonds issued by MDBs or MFIs, various flexibilities were accorded. Among others,Bank Negara Malaysia classified ringgit-denominated bonds issued by MDBs and MFIs as liquefiable assetsunder the new liquidity framework for banking institutions, accorded 0% risk weight under the risk-weighted capital ratio framework and allowed deduction from eligible liabilities for the computation ofstatutory reserves requirements. In addition, for resident insurers, ringgit-denominated bonds issued byMDBs and MFIs are qualified as low risk assets to support their margin of solvency. Similarly, the SecuritiesCommission (SC) also provided various flexibilities, which among others, included accepting internationalcredit ratings and exempting MDBs or MFIs from various requirements of the PDS Guidelines.

• On 26 July, the Guidelines on the Offering of Islamic Securities (IS Guidelines) were introduced bythe SC to further facilitate the issuance of Islamic securities in Malaysia. With the release of the ISguidelines, the PDS Guidelines were no longer applicable with regards to the issuance of Islamic securities.

• On 3 September, Bank Negara Malaysia revised the regulatory treatment accorded to newCagamas debt securities issued after 4 September. The aim was to promote more market-basedpricing and increase investors’ interest in the new Cagamas debt securities. The revised regulatorytreatment for all new Cagamas debt securities were as follows:i. Holdings by banking institutions qualified for a 20% risk weight for capital adequacy purposes and

Class-2 liquefiable asset status under the liquidity framework. In line with this, the threshold forClass-2 liquefiable assets recognised under the liquidity framework was increased to 50%;

ii. Cagamas debt securities would be subjected to the Single Customer Credit limit of 35% of totalcapital funds of banking institutions;

iii. Holdings by insurance companies were classified as ‘credit facilities’ and would continue to beaccorded admitted asset status; and

iv. Primary issuance of Cagamas debt securities would be market driven.

• Effective 11 September, tax exemption was given on interest income derived by non-residentcompanies from ringgit-denominated Islamic securities and debentures, excluding convertible loanstocks, approved by the SC and securities issued by the Government of Malaysia.

Widening Market Coverage for the Equity and Derivatives Markets• As announced in the Budget 2005 on 10 September, the Government announced several liberalisation

measures to strengthen the equity and derivatives markets by increasing global marketcompetitiveness, promoting innovation and widening market coverage; as follows:i. allow five major foreign stockbrokers to operate in Malaysia;ii. allow five leading global fund managers to participate in the institutional segment of the

Malaysian fund management industry;iii. allow 100 percent foreign ownership in futures broking companies;iv. allow local stockbroking companies which have merged with at least one other stockbroking company

to establish four additional branches or Electronic Access Facilities Permitted Activities; andv. abolish the limit on the number of foreign dealer representatives.

208

Easing the Listing Process• On 9 February, the SC announced some amendments to Schedule 1 of the Securities Commission

Act 1993, which allowed public companies to undertake bonus issues, employee shareschemes and employee share option schemes (ESOS) without the need for a prior approvalfrom the SC.

Enhancing Disclosure by Listed Companies• From 1 April, listed companies that delay the submission of their financial statements for a

period exceeding three months will be subjected to trading suspensions.

• On 19 May, the SC released the “Prospectus Guidelines – Guidelines Supplement 1 for listing ofForeign-Incorporated Companies” to enhance the disclosure requirements for foreigncorporations seeking listing in Bursa Malaysia.

• On 30 November, Bursa Malaysia Securities Berhad amended the Listing Requirements in relationto listed companies with unsatisfactory financial conditions and levels of operations. The amendments,among others, required listed companies to submit their regularisation plans within eight months inlieu of trading suspensions and de-listment from the Bursa Malaysia.

Enhancing Stockbroking Companies’ Resilience• On 28 October, the SC announced revisions to the capital requirements framework for

stockbroking companies to provide the stockbroking industry with greater flexibility inmanaging their capital requirements as well as to enhance the overall competitiveness. The newcapital requirements framework, among others, reduced the minimum paid-up capital forUniversal Brokers (UBs) to RM100 million from RM250 million previously and required a minimumlevel for shareholders’ funds unimpaired by losses of RM20 million for non-UBs and RM100million for UBs.

Improving Investors Protection• On 25 February, the SC announced several amendments to the securities laws to better

safeguard investors’ interests and further enhance corporate governance. The securities lawsincluded the Securities Industry (Amendment) Act 2003 (SIA), the Securities Commission (Amendment)Act 2003, the Futures Industry (Amendment) Act 2003 and the Securities Industry (CentralDepositories) (Amendment) Act 2003. The amendments were aimed at:i. enhancing client’s asset protection;ii. introducing whistle blowing provisions;iii. strengthening the framework on investment advice;iv. enhancing civil and administrative action powers; andv. strengthening clearing and settlement arrangements.

Promoting the Fund Management Industry• On 28 April, the SC issued a guidance note to the unit trust guidelines that allowed more

Malaysian-incorporated licensed banks and licensed merchant banks to act as guarantors forguaranteed funds. The guidance note, which aimed at promoting the growth of the unit trustindustry in Malaysia, requires the guarantor to have a minimum long-term rating that indicatesadequate safety for timely payments of financial obligations and have a credit profile which isregarded as adequate by any global or domestic rating agency.

• On 24 November, the SC released a set of guidelines to facilitate unit trust managementcompanies (UTMC) to establish online transactions of unit trusts.

209

Financial Markets

Bond MarketThe ringgit bond market remained an importantsource of financing for the economy in 2004. Totalgross financing amounted to RM85.8 billion. Aftertaking into account redemptions during the year,total net funds raised in the bond marketamounted to RM36.2 billion. As a result, totaloutstanding ringgit bonds grew by 10.7% to

Table 9.5Funds Raised in the Bond Market

2003 2004p

RM million

By Public SectorGovernment Securities (gross) 41,262 43,173

Less Redemptions 18,600 18,200Less Government holdings 0 0

Equals Net Federal Receipts 22,662 24,973

Government Investment Issues (net) 1,729 1,423Khazanah Bonds (net) 346 -1,198Malaysia Savings Bond/Merdeka

Savings Bond (net) -9 1,474

Net Funds Raised 24,729 26,671

By Private SectorPrivate Debt Securities (gross) 50,975 36,340

Straight Bonds 27,983 4,313Bonds with Warrants 0 60Convertible Bonds 3,177 4,301Islamic Bonds 8,143 9,104Asset Backed Securities 3,487 2,958Medium Term Notes1 0 7,315Cagamas Bonds 8,185 8,290

Less Redemptions 33,123 26,814Private Debt Securities 27,971 19,648Cagamas Bonds 5,152 7,166

Net Funds Raised 17,853 9,526

Net Funds Raised in the Bond Market 42,582 36,197

Private Debt Securities, excludingCagamas (gross) 42,790 28,050

Net Funds Raised in the Bond Market,excluding Cagamas 14,820 8,402

Net Issues Short Term Securities,Commercial Papers2 3,753 -3,208

Total 46,335 32,9901 Compilation of medium-term notes began in 2004.2 Refers to Cagamas Notes and Commercial Papers. For 2003, includes

Medium-Term Notes.p Preliminary

RM363 billion, equivalent to 81% of GDP. Thegeneral market conditions remained favourable forboth issuance and trading activities, given the lowinflation and interest rates environment and thestrengthening of economic fundamentals. Asignificant development for the bond market was the

Developments in the bond market were positive and supportedthe increase in domestic private investment activity in 2004.

2000 2001 2002 2003 200420

30

40

50

60

70

80

90

0

50

100

150

200

250

300

350

400

103 117 125 149 175

142161 153

179188

81

38353530

39

71

83 8377

% of GDP

Public Sector

Private Sector

Public Sector over GDP

Private Sector over GDP

Total Ringgit Bonds over GDP

Graph 9.13 Total Bonds Outstanding

RM billion

4145

4248 42

introduction of new assets classes, which widenedthe breadth of the market. During the year, twoMultilateral Development Banks issued ringgit bonds,while Cagamas MBS Berhad issued the ResidentialMortgage Backed Securities (RMBS). The inauguralissuance of the Asian Development Bank (ADB)’sPutra bonds (RM400 million) and the InternationalFinance Corporation (IFC)’s Wawasan Islamic bonds

(RM500 million) reflected the confidence of theinternational institutions in the Malaysian capitalmarket as a reliable source of competitive funds. TheADB and IFC bond issuances were oversubscribed by6.5 and 4.3 times respectively.

In the primary market, the public sector raised netfunds of RM26.7 billion. The Federal Governmentissued and reopened a total of fourteen MalaysianGovernment Securities (MGS) and three GovernmentInvestment Issues (GIIs). Funds raised by theGovernment were used to finance developmentactivity. In an effort to further lengthen thebenchmark yield curve, the Government issued a15-year MGS through an open tender to provide theprivate sector a new benchmark for longer-maturityinstruments. As the development of the Islamic bondmarket runs parallel with the conventional market,the Government had also increased the nominalissuance size of GIIs to RM4.1 billion in 2004 fromRM2 billion in 2003. In addition, the GII maturitystructure was lengthened from 5-year to 7-year withthe objective of developing an Islamic benchmark

210

yield curve. During the year, BNM launched theMerdeka Savings Bond (MSB), providing a newinvestment instrument to senior citizens and retireduniformed personnel. Subsequently, the MSB wasalso made available to Malaysian citizens who haveretired on medical grounds. Since its launch, fourseries of MSBs were issued in 2004 with net fundsraised amounting to RM1.9 billion. As at end-2004,total outstanding public sector bonds amounted toRM175.4 billion, equivalent to 39% of GDP.

Favourable market conditions, a low inflation andinterest rates environment, coupled with strengtheningeconomic conditions in 2004 were the main factorscontributing to the continuous supply of new PDS.Total gross funds raised by the private sector remainedsignificant at RM36.3 billion. A total of 89 companiessourced financing from the PDS market and raisedRM28 billion, while Cagamas Berhad raised thebalance of RM8.3 billion. Compared to total newissuances of RM51 billion in 2003, there was a declinein new issuances of PDS in 2004. Between 1999 to2003, the bulk of new issuances of PDS (70% of total,excluding Cagamas bonds) were for restructuring andrefinancing purposes. By 2004, the corporate sectorhad successfully undertaken most of its restructuringexercise and the need to use bond market to financeits restructuring activity declined. The corporate sectorcontinued to register strong earnings and hasstrengthened its balance sheets since the Crisis.Stronger cash flow positions have enabled firms toembark on new investment activities, as evidencedfrom the increase in their capital expenditures.Reflecting this development and the continuedincrease in domestic private investment activity,issuance of PDS to finance new business activityincreased significantly in 2004 and accounted for46.5% of total issuances. Corporations in theinfrastructure and utilities sectors were the main

issuers for this purpose. Meanwhile, issuances forrefinancing purposes accounted for 32.1% of totalissuance, of which 20% were issuances ofasset-backed securities.

After netting out redemptions during the year, netfunds raised by the private sector amounted to RM9.5billion. As at end-2004, total outstanding privatesector bonds had increased to RM187.6 billion,equivalent to 42% of GDP or 51.7% of totaloutstanding bonds in the market. The share of PDSfinancing (excluding Cagamas) to the private sectorremained significant, at 23.7% of total PDS and loansfinancing to the private sector.

Companies from the construction and utilitiessectors were the main issuers of PDS, raising 31.5%and 28% of the total funds respectively. Majorissuers within these sectors were the majordevelopers of infrastructure projects, water projectsand independent power producers that requiredlong-term and flexible financing.

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0

44.3

22.7

13.3

6.6

32.1

11.3

7.0

46.5

Refinancing

Restructuring

Merger and acquisition

13.13.2Others

New activities

% of total

2003 2004

1 Excluding Cagamas

Graph 9.14 Utilisation of Bond Proceeds1

Table 9.6New Issues of Private Debt Securities by Sector1

Sector2003 2004p

RM million % share RM million % share

Agriculture, forestry and fishing 993.1 2.3 0.0 0.0Mining and quarrying 0.0 0.0 0.0 0.0Manufacturing 9,072.4 21.2 3,264.5 11.6Construction 6,049.7 14.1 8,844.9 31.5Electricity, gas and water supply 3,410.5 8.0 7,480.2 28.0Transport, storage and communication 8,603.8 20.1 796.0 2.8Financing, insurance, real estate and business services 8,372.8 19.6 4,767.8 17.0Government and others 6,288.1 14.7 1,315.4 4.7Wholesale and retail trade,restaurants and hotels 0.0 0.0 1,221.1 4.4

Total 42,790.4 100.0 28,049.9 100.0

p Preliminary1 Excluding Cagamas

211

Financial Markets

During the year, new PDS issues with tenuresbetween one to ten years accounted for 88.5% oftotal value issued, reflecting investors’ preference forshort to medium-term securities. A notabledevelopment during the year was the lengthening ofthe PDS maturity profile. PDS issued with tenuresbetween 20 - 28 years represented 3% of totalvalue issued in 2004, compared with 0.9% in theprevious year.

In terms of the types of instruments, Islamic PDS(including Islamic Medium Term Notes) was the mostpreferred form of funding, accounting for 49.4% oftotal issuance. Over the years, greater demand fromboth Islamic and conventional institutional investors forIslamic PDS has led to more competitive bidding forthese bonds and resulted in lower costs for the issuers.Another reason for this development was theimplementation of tax incentives for Islamic products,

as announced in the 2004 Budget, which also resultedin several new structures of Islamic PDS products. TheSecurities Commission also introduced new guidelinesfor Islamic securities in 2004, which facilitated thedevelopment of a more innovative and sophisticatedIslamic capital market.

During the year, Cagamas Berhad maintained itsposition as an active issuer in the PDS market,accounting for 22.8% of total PDS issuance. Cagamasmade 18 issues of debt securities with a total value ofRM9.3 billion (including two issues of short-termCagamas notes totalling RM1 billion). In terms of thetypes of instruments, fixed rate bonds recorded ahigher share of 71.8% of total issuance, while thebalance were Sanadat Cagamas and short-termCagamas discount notes.

Bank Negara Malaysia revised the regulatorytreatment of Cagamas securities to promote a morecompetitive capital market. Cagamas successfullyissued a Sanadat Cagamas for the first time througha book building process in October. The SanadatCagamas, an Islamic instrument based onBai-Bithaman Ajil was issued to purchase Islamichousing and hire-purchase debts, totalling RM1.6billion, the highest volume of Islamic debt everpurchased by Cagamas. Cagamas Berhad through itssingle purpose and wholly-owned subsidiary,Cagamas MBS Berhad (CMBS) successfully made thefirst issuance of RMBS backed by the Government’sstaff housing loans in October. RMBS issuanceaugured well for the development of thesecuritisation market in Malaysia. The RMBS isexpected to create a yield curve for mortgage-backed securities and serve as a benchmark forother Asset Backed Securities (ABS) issues.

Concurrently, in the securitisation market, four newABS amounting to RM3 billion, which were backed by

1 Excluding Cagamas.

Graph 9.15 PDS Issues by Tenure1

5.1 - 10 yrs 42.9%

10.1 - 15 yrs 8.5%

20.1 - 28 yrs 3.0%

1 - 5 yrs 45.6%

Graph 9.16 PDS Issues by Type of Instrument (excluding Cagamas)

Islamic Bonds 32.5%

Convertible Bonds 15.3%

Bonds with Warrants 0.2%

Straight Bonds 15.4%

ABS MTN 0.1%

Islamic MTN 16.9%

Asset Backed Bonds 10.5%

Conventional MTN 9.0%

2001 2002 2003 2004-

1,000

2,000

3,000

4,0005,0006,000

7,000

8,000

9,000

10,000

Graph 9.17 ABS Outstanding (2001-2004)

RM million

212

credit card receivables, loans, as well as property andmortgage receivables, were issued during the year. Intotal, there were fifteen ABS (including onecommercial paper ABS) outstanding, amounting toRM8.7 billion.

During the year, the Rating Agency Malaysia (RAM)and the Malaysian Rating Corporation Berhad (MARC)rated a total of 139 new PDS issues, valued atRM38.7 billion. The long-term issues represented68.2% of the total gross value rated. In terms ofrating profiles, the issues were distributed throughoutthe AAA, AA and A categories. Although singleA-rated PDS recorded the highest number of issues,the AAA-rated PDS accounted for the largest share interms of value. Investors’ preference for companieswith good credit qualities and strong credit profileshad resulted in companies with high ratings tappingthe PDS market at competitive pricing. Throughoutthe year, RAM and MARC conducted 244 ratingreviews on the existing long-term debt securities. Atotal of 213 issues were reaffirmed, 17 wereupgraded and seven were downgraded.

In the secondary market, for the first three quarters,the MGS bond yield movements and marketsentiments were influenced mainly by investors’expectations on the direction of interest rates. Bondyields shifted downwards in the first quarter, asinvestors began to rebuild their portfolios, leading to ahigher demand for debt securities. In an environmentof low inflation, investors were confident that domesticinterest rate would remain low. Bond yields, however,reversed direction and trended upwards in the secondquarter on improving economic outlook following the

release of several positive economic indicators pointingto stronger growth. The rising yields on US Treasurysecurities arising from expectations of interest ratehikes also influenced domestic bond yields.

However, in the second half of the year, the bondyields trended downwards again, mainly influencedby the escalating crude oil prices and their negativeimpact on prospects for global growth. Demand forfixed income securities rose on investor sentimentsthat the inflation outlook in Malaysia remainedsubdued and on expectations of realignments ofcurrencies in Asia against the US dollar. This wasfurther reinforced by the declining US Treasury yieldsfollowing indications by the Federal Open MarketCommittee (FOMC) that the increase in the interestrate in the US would be at a moderate pace. Inaddition, the exemption of withholding tax oninterest income earned on holdings of ringgit-denominated debt securities issued by theGovernment as well as securities approved by theSecurities Commission generated higher demand forfixed income securities. The strong interest inringgit-denominated assets led to a steep declinein the yields.

Trading in the ringgit bond market amountedRM355.9 billion (2003: RM436.8 billion) withactivities concentrated in the short- to medium-endtenures. The highest trading activity was recorded inJuly arising from the larger supply of Governmentpapers in June. In September, trading activity rosefollowing the exemption of withholding tax oninterest income, which attracted higher foreigninvestor participation in the bond market. The mostactively traded papers were MGS, accounting for54.3% of total trades. Turnover for corporate bondsaccounted for 18.1% of the total trades and weremainly high investment grade papers. Liquidity, as

1 2 3 4 5 6 7 8 9 10

Graph 9.19 MGS Benchmark Yields

%

2.5

2.0

3.0

3.5

4.0

4.5

5.0

Years to Maturity

Dec-04Mar-04 Jun-04 Sep-04

-69.4bps

-76.5bpsDec 04 3-year: 3.0230 5-year: 3.6430 10-year: 4.7400

Jun 043-year: 3.7170 5-year: 4.4080 10-year: 5.1920

-45.2bps

Graph 9.18 Rating Distribution of Outstanding PDS (As at end-2004)

%

5

0

10

15

20

25

30

35

40

45

AAA AA A BBB BB B C D

% of total value

% of total issues

Sources: RAM and MARC

213

Financial Markets

measured by the ratio of trading volume to totaloutstanding bonds, was highest for GII and Khazanahbonds, at 3.94 times and 1.78 times, respectively.Liquidity for corporate bonds, however, was thelowest at 0.4 times the outstanding amount.

On the international front, spreads of Malaysia’sforeign currency sovereign and corporate bondstightened during the year. Standard & Poor’s affirmedMalaysia’s currency and sovereign credit ratings inMay, Fitch International upgraded Malaysia’ssovereign rating from BBB to A- in November andMoody’s Investors Services upgraded Malaysia’sforeign currency ratings in December, reflectingstrengthening economic fundamentals.

Several measures were introduced in 2004 to furtherstrengthen the bond market. The detailed bondmarket measures are explained in the white box onKey Capital Market Measures in 2004.

Graph 9.21 Turnover of Selected Debt Securities (Jan-Dec 2004)

Khazanah bonds 5.0%


10.1%

ABS 1.4%

Other unlisted bonds 16.5%

Cagamas bonds 11.4%

Listed PDS 0.2%

Danaharta 1.1%

Malaysian Government

Securities 54.3%

Total: RM355.9 billion

Jan-

04

Feb-

04

Mar

-04

Apr

-04

Jun-

04

Jul-0

4

Aug

-04

Sep-

04

Oct

-04

Nov

-04

Dec

-04

May

-04

0

5,000

10,000

15,000

20,00025,00030,000

35,000

40,000

45,000

50,000

Graph 9.20 Monthly Trading Volume

RM million

Exchange-traded Derivatives MarketThe Malaysian derivatives market continued toregister encouraging growth in 2004. This positivedevelopment was attributed to the continued hightrading interest in Crude Palm Oil (CPO) Futures, andthe significantly stronger interest in KLCI Futures andthe 3-year MGS Futures. The total volume ofcontracts traded on Bursa Malaysia Derivativesincreased by 32% from the previous year, as a resultof greater awareness and knowledge on the use ofderivatives as well as higher activity in the underlyingmarkets. The annual trading volume reached a newrecord of 2.6 million contracts, from a previousrecord of 2 million contracts in 2003.

The favourable performance of the commodityfutures market, coupled with continued rapidgrowth of the palm oil industry, induced BursaMalaysia Derivatives to launch the Palm Kernel OilFutures (CPKO) on 20 February 2004. The launch of

Table 9.7Sovereign Over US Treasury Benchmark

Dec-03 Mar-04 Jun-04 Sep-04 Dec-04

MALAYSIA 09 80 86 97 62 48

MALAYSIA 11 131 151 156 108 90

CHINA 11 123 123 119 116 98

INDONESIA 06 288 243 312 134 43

KOREA 08 38 54 48 18 1

PHILIPPINES 10 494 556 470 444 377

THAILAND 07 126 110 125 110 53

PETRONAS 06 104 92 100 63 48

Source: Bloomberg

Graph 9.22 Bursa Malaysia Derivatives: Total Monthly Volume and Month-end Open Interest

Contracts Contracts

-

100,000

200,000

300,000

400,000

500,000

600,000

40,000

50,000

60,000

70,000

80,000

Volume (LHS)

Open Interest (RHS)

Source: Bursa Malaysia Derivatives

Jan-

03Fe

b-03

Mar

-03

Apr

-03

May

-03

Jun-

03Ju

l-03

Aug

-03

Sep-

03O

ct-0

3N

ov-0

3D

ec-0

3Ja

n-04

Feb-

04M

ar-0

4A

pr-0

4M

ay-0

4Ju

n-04

Jul-0

4A

ug-0

4Se

p-04

Oct

-04

Nov

-04

Dec

-04

214

this new product allowed market participants tomore effectively monitor, manage and control thepricing of palm oil products. With the launch of thisnew product, a total of eight products are nowbeing traded on the Bursa Malaysia Derivatives. Tofurther improve the products and services in thecapital market, restrictions on foreign equityownership in futures broking companies were lifted,by allowing 100 percent foreign ownership inthese companies.

As in the previous year, the CPO Futures remained themost actively traded product on Bursa MalaysiaDerivatives in 2004, accounting for 52.3% of thetotal volume transacted during the year. The pricerange for the benchmark 3-month CPO contract wasbetween RM1,372 and RM1,993 per tonne in 2004, adifference of RM621 (2003: RM622). Nevertheless,the performance of the newly-launched CPKO Futureswas subdued due to a lack of market participants.

The 3-month CPO Futures prices began the year ona strong note at RM1,766 per tonne, and ralliedfurther in the first quarter to register the highestdaily traded price of RM1,993 per tonne on4 March. Thereafter, prices reversed their earliertrends and declined to RM1,550 on 30 June, on theback of subdued buying interest from overseas

0

20

40

60

80

100

120

140

160

180

200

-100

200

500

800

1,100

1,400

1,700

2,000

Lots

Open interest

3-month average futures prices (RHS)

Source : Bursa Malaysia Derivatives

Graph 9.23 Crude Palm Oil Futures

Lots ('000) Price (RM/tonne)

Jan-

03

Feb-

03

Mar

-03

Apr

-03

May

-03

Jun-

03

Jul-0

3

Aug

-03

Sep-

03

Oct

-03

Nov

-03

Dec

-03

Jan-

04

Feb-

04

Mar

-04

Apr

-04

May

-04

Jun-

04

Jul-0

4

Aug

-04

Sep-

04

Oct

-04

Nov

-04

Dec

-04

Table 9.8Performance of Bursa Malaysia Derivatives Products

Share of total Turnover

volume in

2003 2004Bursa Malaysia

ProductsDerivatives (%)

Number ofAnnual Average

Number ofAnnual Average

lotschange daily

lotschange daily 2003 2004

(%) volume (%) volume

CPO Futures 1,429,959 57.3 5,813 1,378,334 -3.6 5,603 71.5 52.4Open interest position

(as at end-year) 21,149 28,314

Palm Kernel Oil Futures 449 n.a. 2 n.a. …

KLCI Futures 331,218 41.6 1,346 1,088,419 228.6 4,424 16.6 41.3Open interest position

(as at end-year) 8,993 10,092

KLCI Options - - - - - - - -

3-month KLIBOR Futures 119,659 86.1 486 141,969 18.6 577 6.0 5.4Open interest position

(as at end-year) 18,977 27,418

3-year MGS Futures 1/ 781 n.a. 3 4,327 454 18 … 0.2

5-year MGS Futures 118,635 47.5 482 19,494 -83.6 79 5.9 0.7Open interest position

(as at end-year) 127 -

10-year MGS Futures 1/ 11 n.a. … - - - … …

1/ Introduced in September 2003n.a. Not available… NegligibleSource: Bursa Malaysia Derivatives

investors (that accounted for about 44% of totalvolume traded) as well as increased CPO productionin the major producing countries. In the second halfof the year, an increase in Malaysian palm oil stocksand better-than-expected soybean harvests in the USfurther influenced the downward trend in prices. As

215

Financial Markets

a result, prices consolidated to a range ofRM1,400 – 1,500 per tonne in the third quarter,before declining further in the fourth quarter toregister the lowest daily traded price of RM1,372 pertonne on 18 October. The 3-month CPO Futuresended the year at RM1,387 per tonne, 21.5% lowerthan the price at the start of the year.

The KLCI Futures was the best performing derivativesproduct on Bursa Malaysia Derivatives in 2004.Trading activity in KLCI Futures registered asignificantly higher annual growth of 229%. Thederivatives liquidity ratio (DLR), which represents theratio between the turnover value of futures againstthe turnover value of the underlying KLCI componentstocks, increased to 46.9% in 2004 (2003: 40.3%).The higher volume was attributed to the betterperformance of the underlying equity market duringthe year. In addition, the modification of the contractsize and the increase in tick sizes since September2003, encouraged more participation by bothdomestic and foreign investors. These measures

effectively reduced the margin requirements and thecost of trade. In terms of market participant, domesticretail investors and foreign institutions accounted for80% of the total trading volume.

Activity in the financial futures market in 2004 wasmixed and continued to mirror developments in theunderlying markets, which were influenced bychanging expectations on economic growthprospects and the direction of interest rates.Participation in the financial futures marketcontinued to be dominated by domestic institutions,which accounted for more than 93% of totaltrading. The 3-month KLIBOR Futures continued torecord a positive growth of 18.6%, in terms ofvolume traded for the year. The total turnover ofMGS Futures, however, registered a decline of 80%,following slightly lower total trading activity in theunderlying market. As trading activity in theunderlying market was concentrated mainly in theshorter-end tenures, the total turnover of 3-yearMGS futures improved significantly.

The Payment andSettlement Systems

218 Introduction 218-220 Enhancing Efficiency220-222 Enhancing Payment Systems Safety223-224 Migration to e-Payments

218

INTRODUCTION

An efficient, reliable and smooth functioning paymentsystem contributes to the growth of the economy,soundness of the financial system and smooth functioningof financial markets. Given its importance, there is strongpublic interest in ensuring that the Malaysian paymentsystems operate in an effective, safe and efficient manner.

Bank Negara Malaysia performs three roles in the area ofpayment systems in Malaysia, namely, as the operatorand overseer of the payment systems, and facilitator tothe payment system services. In this regard, the thrust ofBank Negara Malaysia policies and initiatives in paymentsystems are aimed at improving the efficiency andenhancing the safety of payment systems. Theseinclude promoting the migration from apredominantly paper-based system to electronicpayments, improving the efficiency of the paymentsystems, and promoting the awareness of paymentsystem issues and the protection of consumer interests.

The Payment and Settlement Systems

Bank Negara Malaysia’s policies and initiatives in paymentsystems are aimed at improving the efficiency and enhancingthe safety of payment systems, as well as promoting themigration to electronic payments.

ENHANCING EFFICIENCY

The efficiency of payment systems is characterised bythe competitive price of services, availability of thevarious different payment modes to the consumers, andexpediency of settlement undertaken within a particularsystem or between systems. The efficiency of a paymentsystem is influenced by the accessibility of the paymentsystem to service providers, market players and users.With wider reach to service providers, market playersand users, the payment system would provide morevalue to the participants of the system as a whole. In2004, the efficiency of payments system in Malaysia wasfurther improved through wider access andenhancements made to the systems.

To achieve greater efficiency in payment systems,access to the electronic payments were addressed inseveral ways in 2004. The thrust in policy was topromote a fair and open access to the main paymentsystems in the country and minimise the industry’srisk exposure. Notable developments in this area

were the revision of the access policy for the RENTASsystem, the real-time gross settlement system forMalaysia, and participation of the additionalmembers in the Interbank Giro (IBG) and the sharedautomated teller machines (ATM) network operatedby the Malaysian Electronic Payment System (1997)Sdn. Bhd. (MEPS). Access points for businesses andconsumers to make Internet-based payments werealso enhanced with the introduction of the FinancialProcess Exchange (FPX).

(i) RENTASRENTAS is the major wholesale payment systemin the country, settling funds and scriplesssecurities between participating institutions on areal-time basis. As at end-2004, there were 51participants in RENTAS, comprising Bank NegaraMalaysia, commercial banks, Islamic banks,merchant banks, discount houses, financecompanies, universal brokers and CagamasBerhad, the national mortgage corporation.

In 2004, Bank Negara Malaysia revised the accesspolicy to the RENTAS system. The objectives of therevision was to improve operational efficiencies and toreduce settlement risk in the financial system with themajor financial market participants having directaccess to the central real-time payment systemoperated by Bank Negara Malaysia. New participantswould have the same ability of settling financialobligations and receiving funds through the use of thecentral money, that is, the settlement account held atBank Negara Malaysia. The revised eligibility criteria toparticipate in the RENTAS system are as follows:

i. Financial institutions regulated by Bank NegaraMalaysia and universal brokers regulated by theSecurities Commission;

ii. Major clearing houses that facilitate settlementin the money market and capital market; and

iii. Institutions that are active players in the moneymarket or capital market, and whose averageshare of settlement consistently exceeds 0.1%of the value of RENTAS transactions.

219


The RENTAS system settled 1.9 million transactionsamounting to RM17.9 trillion in 2004, an increase of4.1% in volume and 29.8% in value of transactionsfrom 2003, indicating its continued significance asthe main payment system for financial settlement.The Interbank Funds Transfer System (IFTS) saw anincrease of 4% and 30.4%, in terms of volume andvalue respectively, while transactions through theScripless Securities Trading System (SSTS) increasedby 5.8% and 23.1% respectively.

To improve the efficiency and resilience of the RENTASsystem, the system’s hardware was upgraded with thelatest Tandem S Series, which offers 2.3 timesadditional capacity. As a result, the processing timeimproved by about 20% and the end-of-day batchprocessing cycle has been shortened by two hours.

(ii) Sistem Penjelasan Imej Cek Kebangsaan (SPICK)Besides facilitating greater flexibility in access tothe RENTAS system, Bank Negara Malaysia had

also in 2004, improved the efficiency of the SPICKsystem. A web-based reporting system wasimplemented to improve processing of unpaiditems (UPI) in December 2004. The new UPI systemallows all participating banking institutions toquickly process the reversals of UPI.

The system was implemented at SPICK centres inKuala Lumpur and Pulau Pinang, and will beextended to Bank Negara Malaysia‘s SPICK centrein Johor Bahru by March 2005. At SPICK PulauPinang and Johor Bahru, submission of diskettesfor the UPI file will be replaced with an onlinesubmission, improving the delivery time andprocess cycle for cheque clearing.

Volume of cheques processed in the country,excluding in-house cheques rose by 2.6% to 202.2million in 2004 while the value of cheques processedrose by 7.5% to RM1.4 trillion. While concertedefforts are being undertaken in promoting the usageof electronic payment channels, Bank NegaraMalaysia recognises that cheques would remainimportant. As such, Bank Negara Malaysia willembark on a number of initiatives in 2005 to improvethe efficiency of cheques as a payment instrument, soas to reduce further the processing time.

(iii) Interbank Giro System (IBG)In the retail payments arena, the IBG systemoperated by MEPS facilitates bulk credit transfers tobe made between banks electronically on either aT+0 or T+1 basis. The IBG system, which is largelyaccessible through the commercial banks, has thepotential to become a major retail payment systemthat would reduce the use of cheques given itsincreasing popularity with businesses and consumers.

0

2

4

6

8

10

12

14

16

18

2000 2001 2002 2003 2004

Graph 10.1RENTAS - IFTS Turnover

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Volume (million)

IFTS Volume IFTS Value

Value (RM trillion)

2000 2001 2002 2003

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Graph 10.2 RENTAS - SSTS Turnover

Volume ('000) Value (RM trillion)

0

20

40

60

80

100

120

140

0.02004

SSTS Volume SSTS Value

188

190

192

194

196

198

200

202

1.10

1.15

1.20

1.25

1.30

1.35

1.40

2001 2002 2003 2004

Volume (million) Value (RM trillion)

Graph 10.3 Volume and Value of Cheques Processed in Malaysia

Volume Value

220

Recognising that a widely accessible IBG isbeneficial, Bank Negara Malaysia promoted anopen access policy to IBG by encouraging theremoval of barriers of entry to include institutionsother than the domestic banking institutions. InDecember 2004, a locally incorporated foreignbank (LIFB) announced its participation in theIBG. This brings the number of participants in theIBG system to 13. In 2004, the IBG systemrecorded a significant growth in terms of volumeand value of 187.6% and 88.8% respectively,compared to the previous year.

To further spur the growth of IBG usage in thecountry, an IBG Review Team comprising ofrepresentatives from Bank Negara Malaysia,MEPS, the banking industry and relevantGovernment agencies had been formed inNovember 2004. The IBG Review Team willformulate a five-year road map to address keyissues and formulate specific strategies toencourage users of cheques to migrate to usingthis electronic channel.

(iv) Shared ATM NetworkAs at end-2004, there were 5,565 ATMs in Malaysia.Domestic banking institutions own 4,098 ATMs,Islamic banks own 280 while 327 ATMs are owned

by LIFBs. The development financial institutions (DFIs)collectively own 860 ATMs. The MEPS shared ATMnetwork allows member institutions to leverage oneach other’s ATMs, resulting in cost savings ininfrastructure deployment while allowing customerswider accessibility through a larger pool of ATMs. Inan effort to enhance efficiency in the financial systemand increase connectivity between different types offinancial players, a DFI joined the MEPS shared ATMnetwork in June 2004, facilitating customers of theparticipating banks to have access to an expandedMEPS shared ATM network of 4,416 ATMs.

(v) Financial Process Exchange (FPX)The FPX was introduced by MEPS in October 2004as an Internet-based payment system that allowsparticipants such as corporations to makepayments electronically. The FPX leverages on thebanking institutions’ Internet banking services toprovide online payments and accompanyingpayment references for reconciliation purposes.

Bank Negara Malaysia has supported thedevelopment of the system, as part of the effort toelevate Malaysia’s e-commerce facilities in tandemwith the various private sector and Governmente-commerce initiatives. The use of an industry-widepayment platform as in the FPX has a comprehensivereach of users. All banking institutions areencouraged to participate in the FPX to be able toprovide efficient payment services to their corporateand retail customers, while at the same timeforging alliances in a common infrastructurebuilding effort for the benefit of the nation.Currently, there are four banking institutions andfive merchants participating in the FPX. As atend-2004, the FPX processed a total of 87transactions amounting to RM2.6 million.

ENHANCING PAYMENT SYSTEMS SAFETY

The safety and efficiency of the payment systems areimportant to ensure consumers’ confidence in paymentsystems. Bank Negara Malaysia, in safeguarding the

0

2

4

6

8

10

12

14

16

2001 2002 2003 2004

Graph 10.4 Interbank Giro Transactions

Volume (million) Value (RM billion)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Volume Value

Table 10.1Automated Teller Machines

2000 2001 2002 2003 2004

Number of ATMs1 3,944 4,161 4,213 5,241 5,565

Volume of cash withdrawals (million)2 146.1 174.9 193.5 215.6 264.3Value of cash withdrawals (RM billion)2 62.0 71.8 77.6 86.3 110.8

1 Figures in 2000-2002 comprise domestic commercial banks, LIFBs, Islamic banks and finance companies. Figures in 2003-2004 include the DFIs.2 Figures in 2000-2003 represent transactions involving the domestic commercial banks, LIFBs and finance companies. Figures in 2004 include

Islamic banks transactions.

221


public interest, exercises its regulatory powers andoversight function through the Payment Systems Act2003. Payment system operators are required to obtaina notification from Bank Negara Malaysia beforeoperating a payment system while issuers of adesignated payment instrument (DPI) are required toobtain the necessary approval from Bank NegaraMalaysia prior to the issuance of the DPI. Bank NegaraMalaysia supervises the activities of the operators ofpayment systems and issuers of DPI through on-siteexaminations, as well as off-site reviews of their financialstatus. In 2004, a total of 14 payment systems operatorswere given notification for operating payment systemsand approvals were given to three issuers of DPI. BankNegara Malaysia also conducted on-site examinationson two major payment system operators.

To enhance the safety of payment systems, measureswere taken to mitigate the risk of fraud and reducethe system’s vulnerabilities to operational risk. In thisregard, Bank Negara Malaysia and relevant paymentsindustry players have collaborated in a number ofareas to ensure that the large value and retailpayment facilities are safe and secure. Notabledevelopments in 2004 include the continuedmigration to a chip-based environment for ATMcards and credit cards, aimed at reducingcounterfeiting of cards by way of skimming andcloning. Measures to address Internet banking fraudby way of ‘phishing’, security guideline on chequesand business continuity planning mechanismswere also introduced in 2004.

(i) ATM CardsAll LIFBs and two DFIs had completed the fullmigration of their ATMs and ATM cards to achip-based environment in July 2004. Thisfollowed the successful adoption of the chipinfrastructure by the Government for thenational identity card, MyKad, which carries anATM capability, issuance of Bankcard bydomestic banking institutions and completion ofthe ATM upgrade in 2003. To date, themigration to a chip-based ATM infrastructurehas resulted in the elimination of ATM fraud dueto counterfeiting. As at end-2004,approximately 11.7 million chip-based ATMcards had been issued while 4,966 ATMs hadbeen upgraded to a chip-based platform.

(ii) Credit CardsCredit card issuers and acquirers in the bankingindustry, under the stewardship of Bank NegaraMalaysia and the Association of Banks in

Malaysia, had adopted the Europay-MasterCard-Visa (EMV) standard for credit card issuance byend-2004 and the conversion of card acceptancedevices (CADs) by end-2005. The conversion of6.2 million credit cards to the EMV chip-basedcards by end-2004 has sent a strong signal thatMalaysia is committed in combating credit cardfraud. Banking institutions have accorded highpriority in upgrading the CADs at high-riskmerchant locations well ahead of the end-2005deadline. As at end-2004, 80% of the 60,000CADs at retail outlets were EMV-compliant.

Malaysia is one of the few countries in theregion that has adopted the EMV standard inorder to improve the confidence of consumers,foreign visitors and retailers in the usage andacceptance of credit cards at retail outlets. Thisis necessary as the number of credit cards issuedin Malaysia was 6.6 million with totaltransactions amounting to RM34.9 billion in2004. In contrast, charge card operations arerelatively small in Malaysia, with 0.3 millioncharge cards in circulation and total transactionsamounting to RM2 billion in 2004.

To address the high level of credit card fraudtaking place at petrol stations, which constitutedalmost 22% of the value of credit card fraud in2004, petrol companies had taken a positive stepto convert terminals located at petrol pumps to beEMV-compliant and disabled the acceptance ofmagnetic stripe credit cards at self-service pumpson 31 December 2004.

2000 2001 2002 2003 20040

1

2

3

4

5

6

7

0

5

15

10

20

25

30

35

40

No. of Credit Cards

No. of Charge Cards

Value of Credit Card Transactions

Value of Charge Card Transactions

No. of cards (million) Value (RM billion)

Graph 10.5 Credit Card and Charge Card Operations in Malaysia

222

Besides skimming card information from themagnetic stripe, wire-tapping can also be used tosteal cardholder’s information. In this respect, BankNegara Malaysia required the banking industry totake several preventive measures, including theimplementation of a line encryption system tocombat wire-tapping fraud. The Malaysian bankingindustry is one of the few in the Asia Pacific region totake a firm stand by investing in the necessaryinfrastructure to combat credit card fraud.

(iii) Internet BankingIn line with the growing prominence of Internetbanking in Malaysia, efforts were made to preserveconsumers’ confidence in using the Internet toaccess banking services. In 2004, an industry-basedInternet Banking Task Force was established byBank Negara Malaysia to develop industry-widebest practices and collaborate with relevantagencies to handle security infringement incidences.Special emphasis was given to thwarting ‘phishing’and other forms of identity theft fraud, that is,illegally obtaining personal information of accountholders for financial gain. During the year, one bankintroduced an additional password protection fortheir Internet banking customers through atime-limited one-time use password. This measurehas been proven to be successful in counteringInternet banking fraud.

Currently, there are 14 banking institutionsproviding Internet banking services to 2 million

subscribers. The number of subscribers increasedby 15.4% from the previous year, reflecting thegrowing acceptance of Internet banking as aconvenient and safe delivery channel foraccessing banking services.

The use of the Internet as a delivery channelshould become more pervasive in the future, asmore Internet-based systems and paymentgateways are introduced. Besides the MEPSpayment gateway, one bank had implementedits own payment gateway in 2004 and threeothers are making similar arrangements in orderto enhance their services to customers. Thenumber of transactions processed by the MEPSpayment gateway increased by 650% from 0.2million in 2003 to 1.5 million in 2004 while thevalue of transactions processed rose by 1,219%to RM663.3 million. The surge in the use of theMEPS payment gateway was due to theparticipation of several major merchants activein online offerings.

(iv) Minimum Security Standards for ChequesIn July 2004, Bank Negara Malaysia issued the‘Guideline on Minimum Security Standards forCheques’ to reduce incidences ofcounterfeiting and fraudulent alteration oncheques, and to facilitate detection of suchcheques. The Guideline specifies minimumrequirements for banks in their roles as payingor collecting banks. The Guideline providesspecific requirements on governancearrangements, physical security features oncheques, cheque fraud detection facilities,security management in cheque printing andconsumer protection.

(v) Business Continuity PlanningBank Negara Malaysia places high priority onBusiness Continuity Planning (BCP) to provideuninterrupted availability of the paymentsystems through contingency procedures at itsrecovery centre for the RENTAS and SPICKsystems. Apart from conducting monthly liveruns for the two payment systems, a review ofthe financial institutions’ BCP arrangementswas also conducted in 2004 to identify thestrengths and weaknesses of the arrangementsin the event of a crisis. Financial institutionshave been advised to regularly test their BCPsand several procedural requirements had beenput in place to strengthen recovery strategiesand minimise disruptions.

4.2%7.0% 7.9%

57.4%58.8%

39.3%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2002 2003 20040

10

20

30

40

50

60

70

No. of Internet banking (IB) subscribers

No. of Internet subscribers

Penetration rate of IB subscribers to population

Penetration rate of IB subscribers to Internet subscribers

Graph 10.6 Internet Banking: Growth and Penetration

No. of subscribers (million) %

Source: Bank Negara Malaysia and the Malaysian Communications and Multimedia Commission

223


MIGRATION TO E-PAYMENTS

The migration to electronic payments, whilerequiring investments in infrastructure development,will facilitate cost savings by being able to leverageon new cost effective infrastructure and tocontinuously meet consumers’ payment needsthrough innovative facilities and products. Therelatively faster settlement cycle of electronicpayment systems as compared to paper-basedsystems improves the efficiency of the financialsystem and the economy.

The overall increase in the usage of non-paperbased payment facilities was encouraging in 2004.As a percentage of the total payment instrumentsvolume (excluding cash), the usage of the credittransfers such as IBG, and e-purse for toll paymentsexpanded in 2004 compared to 2003. Paymentcards, particularly credit cards, are becoming aconvenient alternative to cash and cheques, sinceauto-debit facilities for paying basic utility bills andInternet payments are commonly offered throughcredit cards. Cheque as a mode of payment saw adecline in its share of value and volume as otherpayment instruments became more widely used.However, due to its wide reach, cheque issuanceremains popular and its value constitutes 95.7% oftotal non-cash payments in 2004.

Financial institutions are therefore, encouraged tosupport the migration efforts by intensifyingdevelopment and adoption of various electronicpayment mechanisms and addressing specificimpediments that hinder the adoption ofelectronic payments. These include promoting theirdelivery channels in mobile banking, andpayment instruments such as the debit card andelectronic purse.

(i) Mobile bankingMobile banking services provide an innovative andconvenient way to access banking facilities. Thecurrent range of services offered include balanceinquiry, funds transfer, bill and financingpayments, mobile prepaid airtime reload, andrequests for statements and cheque books. Therange of mobile banking services can be furtherexpanded to take advantage of the increasingnumber of mobile phone users in recent years. Asat end-2004, the mobile phone subscriberpenetration rate in Malaysia was 55.9% of thetotal population. However, mobile banking is stillin its infancy with only six banks currently offeringthe services with a subscriber base ofapproximately 25,000. Nevertheless, the bankingindustry is confident that mobile phone subscriberswill be attracted to mobile banking as moreservices are added to the current suite of facilities.

(ii) Debit cardsWhile there is a potential for debit cards to be aviable alternative to cash, its adoption inMalaysia is still low. Debit cards offer benefitsparticularly to consumers who are notcomfortable with paying by credit or are noteligible for credit card facilities such as students.With debit cards, the cardholder’s account willbe directly deducted when making purchases,benefiting the cardholder who needs to carryless cash and able to enjoy the efficiency andsecurity offered by debit card payments.Retailers would benefit from lower feescompared to the fee that is being chargedthrough credit card payments. With 10.8 millionBankcards in circulation, there is a potential fordebit payments to grow once the benefit ofusing this electronic payment mode is fullyappreciated by consumers.

Table 10.2

Non-Cash Payments in Malaysia

2003 2004

Value (%) Volume (%) Value (%) Volume (%)

Cheques 96.67 34.04 95.65 28.75

Credit cards 2.48 27.68 3.03 25.74

Credit transfers (IBG) 0.63 0.24 1.10 0.57

Charge cards 0.16 1.42 0.16 1.03

E-purse - Toll payments 0.05 36.40 0.06 43.69

E-purse - Retail ... ... … 0.01

Debit cards 0.01 0.22 … 0.21

… Negligible.

224

(iii) Electronic PurseThe MEPS Cash electronic purse, which isincorporated in the Bankcard and MyKad, is analternative electronic payment mode to using cashfor making retail payments. As at end-2004,banking institutions and third party acquirers haddeployed more than 16,000 CADs at variousmerchants to accept MEPS Cash. The volume ofMEPS Cash transactions increased from 0.02million in 2003 to 0.09 million in 2004, while thevalue of transactions increased from RM0.1 millionto RM0.3 million during the same period. Whilethe usage of MEPS Cash is still low compared toother electronic payments, continuous efforts arebeing made to promote MEPS Cash usage. Sinceearly 2004, payments using MEPS Cash areaccepted at various closed communities such asBank Negara Malaysia, Universiti Utara Malaysia,Cyberjaya and Putrajaya.

The use of another electronic purse, the Touch‘n Go card in the transportation sector willfacilitate the reduced use of cash and coins inthe sector. Following the Government’s decisionto designate Touch ’n Go cards as the onlyelectronic payment method at toll plazas, thevolume and value of Touch ‘n Go transactionsincreased by 45.2% and 29.6% respectively in2004 compared to the previous year.

National Payments Advisory Council (NPAC)As part of the efforts to promote a vibrant financialsystem and robust payment systems architecture,Bank Negara Malaysia held two NPAC meetings in2004, to facilitate discussions on major paymentsystems issues. The first NPAC meeting was held on

20 July 2004 where issues relating to the migrationto electronic payments and the proposed steps tobuild an effective e-payment infrastructure werediscussed. Following the deliberations, theInterbank Giro Review Team was formed to providedirection in promoting the use of IBG in thecountry. The meeting also deliberated on measuresto promote responsible lending and borrowing incredit card usage and measures to enhanceconsumer confidence in the use of credit cards as anon-cash payment instrument.

The second meeting was held on 8 December 2004,in which the NPAC deliberated on the appropriateregulatory approaches to address alternativeremittance systems and measures to promote theuse of formal channels for remittances. The NPACagreed that the banks should make their remittanceservices more accessible, convenient and cheaper tomigrant workers to encourage migration to theformal remittance channels. The NPAC alsodiscussed the measures in managing and reducingforeign exchange settlement risk in Malaysia and toimprove the access for international investors tosettle their trading of Malaysian papers.

Moving forward, Bank Negara Malaysia will worktogether with financial institutions to offer efficient andsecure payment transactions at lower cost so as toenable more extensive utilisation of electronic paymentschannels. Bank Negara Malaysia, together with thebanking industry and support from the Governmentsector, will continue to promote efficient and effectivedelivery channels and electronic payments, in line withenabling the payment systems to facilitate economicactivity and contribute to financial stability.

External Relations

226 Economic Surveillance226-227 International Financial Architecture 227-228 External Relations with the IMF

228 Islamic Banking 228-229 Combating Money Laundering and Terrorism Financing229-231 Financial Services Negotiations 231-232 Regional Co-operation232-233 Bilateral Co-operation

233 Technical Assistance and Information Exchange

226

Malaysia continued to participate actively at majorinternational and regional fora during the year.Discussions at the international level focused onthe global economic imbalances, rising fuel pricesand the monetary policies adopted among themajor economies. On the regional front, thefavourable economic and financial environmentprovided the catalyst for strengthening economicand financial co-operation, with emphasis onpromoting stronger financial systems and marketsamong countries in the region.

Economic SurveillanceEconomic surveillance remained integral todiscussions at the regional groupings, includingExecutives’ Meeting of East Asia-Pacific Central Banks(EMEAP), South-East Asian Central Banks (SEACEN),the Association of Southeast Asian Nations (ASEAN),and ASEAN plus People’s Republic of China (PR China),Japan and Korea (ASEAN+3). The focus of discussionsat these meetings was on global imbalances, with

emphasis on the changes in the interest rate trends,the effect of high commodity prices and possible oilprice shocks, and the progress on regional integrationand financial liberalisation. Surveillance issues werealso deliberated at the meetings of the InternationalMonetary Fund (IMF)/World Bank (WB) during the year.

Financial market trends and views on the implicationsof global interest rates on the regional financialmarkets were discussed at the 9th EMEAP Governors’meeting (comprising 11 central banks and monetaryauthorities in the East Asia and Pacific region). Whilethere was consensus that the impact of a transitionto a higher interest rate environment on the globaland Asian financial markets would be minimal,increased efforts would be directed at macro-surveillance issues in EMEAP’s regional surveillanceinitiatives. Toward this end, the EMEAP WorkingGroup on Banking Supervision is developing atemplate for financial stability map to monitorsignificant cross-border linkages and possible sourcesof vulnerability in the financial system.

External Relations

Given the importance of a sustained economicrecovery in the region in particular, and the globaleconomy in general, economic surveillance remainedthe focus of the 39th Conference of Governors ofSEACEN as well as the ASEAN Central Bank Deputies’Meeting and the ASEAN and ASEAN+3 FinanceMinisters’ Meetings. The meetings emphasised theneed for concerted efforts by the major industrialcountries to resolve the global imbalances that largelystemmed from the structural weaknesses prevailing intheir economies. Concurrently, due emphasis should begiven by the emerging market economies to policiesthat would create a conducive environment fordomestic demand-led growth, notwithstanding thatsome had already contributed to the adjustmentprocess by adopting expansionary policies to promotedomestic demand. A supportive macroeconomicenvironment that included stability in exchange ratesand efficient financial intermediation should becomplemented with an efficient delivery system in theeconomy. Equally important was capacity building in

the domestic enterprises and financial institutions toenhance their effectiveness in an environment ofderegulation and liberalisation.

International Financial ArchitectureThe momentum for reform of the internationalfinancial architecture (IFA) has slowed down inrecent years although there was some progress inthe areas of crisis prevention and resolution duringthe year. However, progress remains limited on themore fundamental issue of governance of theinternational financial institutions (IFIs). In thisregard, Malaysia continued to reiterate the need toimprove the governance of the IFIs notably that ofthe Bretton Woods Institutions (BWIs). Malaysiaexpressed its disappointment on the lack ofprogress on the institutional and structural issues ofgovernance including quotas, voting power andunder-representation of developing countries in theBWIs. The Bank also voiced its concerns on thegovernance issue and called for a review of the roleand structure, policies and operations of the BWIs

Economic surveillance remained integral to discussions at theregional groupings, with the focus on global imbalances, exchangerate stability, capacity building, and developments in regionalintegration and financial liberalisation.

227

External Relations

to meet changing global challenges and for theBWIs’ decisions to be more inclusive, representativeand accountable to their members.

A related development on governance andrepresentation at the IFIs was the signing of theMemorandum of Understanding (MoU) during the yearby Governors of the South-East Asia (SEA) Voting Groupat the IMF. The MoU outlined the new rotation schemefor the SEA Group Office for a period commencing fromNovember 2004 to April 2017, and redefined the rolesand responsibilities of each position in that office. Theframework included guidelines to improve the efficiencyand effectiveness of the SEA Group Office to betterserve its members. Similarly, the SEA Group Office at theWorld Bank also undertook a review of their rotationscheme and signed a MoU during the IMF/WB AnnualMeetings in October 2004.

In the area of transparency, the Bank continued tosupport the IMF’s Special Data Dissemination Standards(SDDS) initiative as part of Malaysia’s efforts to supportgreater transparency in the global financial system. TheSDDS was created by the IMF to guide members thathave, or might seek access to international capital

markets, in the dissemination of their economic andfinancial data to the public. Malaysia was among the firstgroup of 42 countries that subscribed to this initiativeestablished in 1996. In June 2004, the Bank jointlyorganised with the IMF a seminar on SDDS for currentand potential subscribers in the Asia and Pacific region.The seminar discussed the latest developments on SDDSoperational and observance issues and providedopportunity for an open discussion among fellow SDDScoordinators as well as the IMF on SDDS-related issues.

Further, and reflecting Malaysia’s support toward effortsby the IFIs to strengthen the financial sector, the Bankparticipated in the IMF’s Financial Soundness Indicatorscompilation exercise which commenced in August 2004.These indicators can be used together with othereconomic and financial indicators to assess the financialstrength and vulnerabilities of a country’s financial sector.

Meanwhile, there have been encouragingdevelopments in the area of crisis resolution, withprogress made toward the use of collective actionclauses (CACs) in international sovereign bonds. Theuse of CACs gained significant momentum in 2004,with nearly all the sovereign bonds issued in New

Some progress in IFA issues on crisis prevention and resolution…but still slack on the issue of governance of the IFIs.

York in the first nine months containing CACscompared with 47% in 2003. As the largest marketfor sovereign bonds is in the United States, theincreased adoption of CACs in the New York marketsignifies growing convergence toward a marketstandard. Overall, the progress recorded will providegreater predictability in the resolution of sovereigndebt problems. Malaysia had, since 2000, issuedbonds that included CACs.

The SEACEN Expert Group (SEG) on Capital Flowscontinued to monitor developments in capital flows inthe Asian region through the exchange of data oncapital flows via a standard set of templates and alsoheld a teleconference to discuss developments ofcapital flows and their outlook. As part of capacitybuilding efforts among SEACEN member countries, theBank hosted the SEACEN Workshop on VulnerabilityAssessments of the External Sector in Kuala Lumpur inDecember 2004. The workshop focused on theconcepts, framework and methodology in assessingvulnerabilities of the external sector. The workshop alsoaimed to enhance the use of data on capital flowsexchanged among SEG members, including using thedata in suitable frameworks to detect emerging risks.

External Relations with the IMFMalaysia actively engaged in the annual IMF ArticleIV consultations. The IMF’s assessment of theMalaysian economy was favourable, highlightingthat Malaysia’s economic recovery was firmlyestablished with comfortable external positions. TheIMF further commended the Bank’s approach inmanaging domestic credit that was prudent andconsistent with maintaining the peg, and sustainingprogress in enhancing the soundness and efficiencyof the financial system.

The Bank co-hosted with the IMF a high-levelconference on financial sector issues in emergingmarkets in Asia. The main focus was the role of theIMF in supporting financial system development andstability in the region. Discussions centred on issuesrelated to financial sector surveillance, the IMF’sArticle IV consultations, Financial Sector AssessmentProgramme and Report on Observance of Standardsand Codes. The Bank shared its experiences on theseissues with other Asian participants and proposedseveral measures to improve IMF’s effectiveness inthis region, and in particular, the areas ofsurveillance and capacity building.

228

Malaysia continued to assist the low-income andheavily indebted poor countries via its contributionunder the Poverty Reduction and Growth Facility(PRGF) and debt relief under the Heavily IndebtedPoor Countries (HIPC) Initiative. During the 2004IMF/WB Annual Meetings, Malaysia called for theBWI to continue its support for a debt sustainabilityframework for the low-income countries and toassist them in dealing with exogenous shocks.

Malaysia maintained its net creditor status in theIMF during the year. It was called upon to transferSDR12 million for the period March-November2004. The transfer was executed under the IMF’sFinancial Transaction Plan (FTP), a mechanismthrough which the IMF finances its lending andrepayment operations. Under the FTP, selected IMFmembers with strong balance of payments andinternational reserve positions may be called uponto provide foreign exchange resources to supportthe IMF’s financial operations.

Islamic BankingBank Negara Malaysia continued to play an activerole in the International Financial Services Board(IFSB), through its Council and TechnicalCommittee. In May 2004, IFSB initiated thepreparation of a third standard, on corporategovernance for the Islamic financial institutions, inaddition to the standards on capital adequacy andrisk management currently being finalised. Theexposure drafts of the capital adequacy standardand risk management standard are expected to becirculated for comments by the first quarter of2005. In December 2004, the Islamic DevelopmentBank (IDB) and Asian Development Bank (ADB)signed a Technical Assistance (TA) Agreement withthe IFSB to facilitate the development of Islamicprudential standards in three areas, namely,transparency and market discipline, establishmentof a financial database relating to regulatory andprudential issues in the Islamic financial industryand the preparation of a draft model trust law forIslamic sukuk markets.

During 2004, IFSB admitted the Central Bank of theUnited Arab Emirates and Bangladesh Bank as fullmembers; and the People’s Bank of China andDubai International Financial Centre FinancialServices Authority as associate members. As atend-2004, the total number of IFSB membersincreased to 65 members (15 full members, sixassociate members and 44 observer members) from36 members as at end-2003.

Combating Money Laundering and TerrorismFinancingMoney laundering and the financing of terrorismcontinued to be a challenge addressed by theinternational community. While much has been done tocombat money laundering and the financing ofterrorism, these continued to attract internationalattention and co-operation. During the year, Malaysiaparticipated actively in and enhanced co-operation withthe global anti-money laundering network, primarily theFinancial Action Task Force (FATF), the Asia/Pacific Groupon Money Laundering (APG) and the Egmont Group ofFinancial Intelligence Units (Egmont Group). Malaysiacontinued to support regional and internationalinitiatives to combat money laundering activities and thefinancing of terrorism (AML/CFT) including initiativessuch as mutual evaluations and technical assistance.

Mutual evaluation exercises are conducted to assess eachcountry’s compliance with the global standards againstmoney laundering and the financing of terrorism. Theprocess of evaluation is designed to give due recognitionwhere the standard benchmarks are met and to identifyweaknesses in the national AML/CFT programme of thecountry being assessed. Where weaknesses are identifiedin the AML/CFT programme, appropriaterecommendations are made with a view to rectificationand improvement. The Bank participated in the mutualevaluation exercises of the APG for the Philippines,Pakistan and Brunei Darussalam. The findings of theyear’s compliance assessments would be reported at thenext APG Annual Meeting scheduled for July 2005.

Malaysia also joined the APG’s Technical AssistanceDonor and Provider Group (DAP) to provide AML/CFTtechnical assistance and training to Cambodia, LaoPDR, Myanmar and Vietnam to expedite theirimplementation of the global AML/CFT standards. Theassistance provided under the DAP programme mainlyrelates to establishing financial intelligence units (FIUs)as well as formulating and implementingcomprehensive national AML/CFT programmes.

During the year, Malaysia successfully establishedbilateral and multilateral arrangements for cross-borderexchange of financial intelligence and mutual assistancein criminal matters in order to effectively combat moneylaundering, terrorism financing, and other transnationalcrime. In addition to the MoU on the sharing of financialintelligence that were signed with the Australian andthe Indonesian FIUs earlier, the Bank signed an MoUwith the Anti-Money Laundering Council of thePhilippines on 4 August 2004. The Bank is at variousstages of negotiations with other foreign counterparts

229

External Relations

to execute similar MoUs. Another milestone ininternational co-operation is the signing of a Treaty onMutual Legal Assistance in Criminal Matters by eightcountries in this region, namely, Malaysia, BruneiDarussalam, Cambodia, Indonesia, Lao PDR, thePhilippines, Singapore and Vietnam on 29 November2004. Among others, the Treaty will facilitate cross-border co-operation in criminal investigations and thegathering of evidence for court proceedings.

The Bank has benefited from its membership in theEgmont Group, which is an informal organisation(named after the location of the first meeting held inEgmont-Arenberg Palace in Brussels) for FIUs toimprove support to their respective national AML/CFTprogrammes. This support includes expanding andsystematising the exchange of financial intelligencebetween its 94 members, improving expertise andcapabilities of intelligence personnel. The EgmontGroup’s secure web fosters better communicationamong FIUs through the application of newtechnologies, and the rapid exchange of informationamong the participating FIUs. This forum provides for

the Bank and other FIUs to rapidly exchange criticalinformation on evidences of criminal activities abroad.This has facilitated access to information ontransnational crime to our domestic investigators andprosecutors in a timely and useful manner.

With respect to capacity building through exchange ofknowledge and experience, the Bank participated activelyin a number of regional and international fora. Malaysiaattended the annual meetings of the Egmont Group andthe APG, and participated in the FATF Seminar onTerrorism Financing, the APG Money Laundering Methodsand Typologies Workshop and the APG ImplementationWorkshop on Alternative Remittance System. The Bankalso participated in the 4th Annual ASEAN Senior OfficialsMeeting on Transnational Crime (SOMTC) held in BruneiDarussalam where Malaysia was assigned the task of leadshepherd in combating money laundering and sea piracy.The meeting committed SOMTC to ongoingstrengthening of resources, internal procedures andlegislative provisions to improve effectiveness of lawenforcement in combating transnational crime.Extra-regional co-operation with PR China, Japan andKorea (SOMTC/ASEAN+3) and other countries in the

The Bank is committed to co-operate with other jurisdictions andinternational bodies in the fight against money laundering andterrorism financing through sharing of financial intelligence, activeparticipation in AML/CFT initiatives, including technical assistance.

exchange of information and expertise in combatingtransnational crime helped consolidate efforts in ensuringsecurity and safety in the region.

Malaysia also participated in training activities initiatedunder the second phase of the Asia-Europe Meeting(ASEM) Anti-Money Laundering Project. The ASEMAnti-Money Laundering Project will also deliver trainingseminars for prosecutors, judicial officers and officersproviding mutual legal assistance to foreign countries.Malaysia continued to support the ASEM Anti-MoneyLaundering Project by contributing sanitised cases forthe Joint Asia Europe Money Laundering DataExchange (JAEME) project that was established at theAnti-Money Laundering Office in Thailand. JAEME willcollect and compile data on sanitised moneylaundering cases and identify money laundering trendsthat exist in Asia and Europe.

During the year, the Bank assisted the United NationsOffice on Drugs and Crime in adapting its e-learningAML/CFT CD-ROM training software to the domesticlegislative framework and in developing the Bahasa

Malaysia version for implementation in early 2005.The e-learning AML/CFT CD-ROM training softwarewould be made available for training law enforcementofficers as well as AML/CFT reporting officers from theprivate sector. In addition, the Bank hosted a numberof participants on study visits or attachments fromHong Kong China, Indonesia, Japan, the Republic ofFiji and Nepal to gain understanding on the operationsof the FIU in the Bank and to understudy Malaysia’sAML/CFT programme.

The Bank is committed to assist other jurisdictions inthe fight against money laundering and terrorismfinancing as provided under the Anti-MoneyLaundering and Anti-Terrorism Financing Act 2001 andwill continue to participate actively in regional andinternational AML/CFT initiatives.

Financial Services NegotiationsIn 2004, Bank Negara Malaysia participated innegotiations on trade in financial services at themultilateral forum of the World Trade Organisation(WTO), the regional forum of ASEAN and bilaterallythrough ongoing free trade agreements (FTAs). These

230

negotiations form part of the overall negotiations ontrade in services in the various fora. The objective ofthe negotiations is for participating countries toprogressively liberalise their services regime towardpromoting greater trade in services and investmentflows in services among the countries.

World Trade Organisation (WTO)Services negotiations at the WTO, including onfinancial services, continued to focus on the ‘requestand offer’ phase in 2004. The process generallyentailed bilateral discussions between membercountries of the WTO based on requests for marketopening. The Bank was actively involved in the servicesnegotiations, particularly in discussions relating to thefurther liberalisation of the financial services sector.

The Bank remains committed to the gradualliberalisation of the financial services sector as part ofthe steps to further develop the domestic financialsector. In managing the liberalisation process, theBank would continue to be guided by the phases ofdevelopment as set out in the Financial SectorMasterplan and the Capital Market Masterplan,consistent with the commitment in moving towardgreater market orientation and international

Framework package adopted at the WTO… established stepstoward the successful conclusion of negotiations under theDoha Development Agenda.

integration. In this regard, Malaysia has always had asignificant foreign presence in the domestic financialsector, both in terms of equity and market share.

The most significant development at the WTO in 2004was the adoption of the framework package bymember countries to move forward on the DohaDevelopment Agenda (DDA) in a range of issues,among others, on agriculture, goods, services(including financial services), implementation issuesand the ‘new issue’ of trade facilitation. With theadoption of the framework package, the timeframe forall negotiations under DDA was also extended foranother year to lead toward the next WTO MinisterialConference in December 2005 in Hong Kong China.

The framework package had established the steps tobe taken toward the successful conclusion ofnegotiations under the DDA. Malaysia’s overall stanceis to achieve a balanced outcome across all sectors thatwould also reflect the interests of developing countries.Toward this end, on negotiations to further liberalise

Graph 11.1 Foreign Participation in the Malaysian Commercial Banking Sector

No. of commercial banks %

Total no. of commercial banks (including the two Islamic banks)

No. of fully foreign-owned banks

No. of domestically-owned banks with foreign interest

Average foreign share (%) of equity across domestically-owned banks with foreign interest

Foreign share (%) of total commercial bank assets (comprising share of fully foreign-owned banks and other foreigners via equity participation in domestically-owned banks)

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004

Year

0

5

10

15

20

25

30

35

40

Total no. of insurers

No. of foreign-owned insurers

Aggregate foreign market share (%) of general insurance premiums

Aggregate foreign market share (%) of life insurance premiums

Graph 11.2 Foreign Participation in the Malaysian Insurance Industry

No. of insurers %

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004Year

0

10

20

30

40

50

60

70

80

90

231

External Relations

trade in services, Malaysia supports the call by theframework package for offers of market opening tobe made particularly in services sectors and modesof supply of export interest to developing countries.

ASEAN Framework Agreement on Services andFree Trade AgreementsThe third round of financial services negotiationsunder the ASEAN Framework Agreement on Services(AFAS) continued to proceed in 2004, with membercountries, including Malaysia, negotiating for higherlevels of commitments than those made at the WTO.Other than AFAS, financial services also fall underthe scope of overall services negotiations in ongoingdiscussions of the Malaysia-Japan FTA and theASEAN-PR China FTA in 2004.

Regional co-operation intensified… efforts being taken to enhancethe effectiveness of regional financing arrangements under theChiang Mai Initiative, significant strides were made under the AsianBond Market Initiative and the Asian Bond Fund was expanded tofurther develop the regional bond markets.

Regional Co-operationSignificant progress in strengthening regionalfinancial co-operation was achieved through thecollective effort of countries in furthering theobjectives of major initiatives under various regionalfora in 2004. These included efforts taken toenhance the effectiveness of regional financingarrangements under the Chiang Mai Initiative(CMI), advancements in the development of the

Asian Bond Market Initiative (ABMI) under theASEAN+3 forum and expansion of the Asian BondFund (ABF) under the EMEAP process. Thesepositive developments bode well towards thebroadening and deepening of regional bondmarkets to facilitate productive investment andefficient channelling of capital in the region.

In May 2004, the ASEAN+3 Finance Ministerslaunched a Working Group to explore ways toenhance the effectiveness of the CMI. In thisregard, three meetings were conducted by theWorking Group and key issues under the reviewrelated to the co-ordination, conditions andmodality for activation under the CMI. To this end,the Bank is an active member in leading Malaysia’s

participation in the Working Group in furtherdeveloping the CMI as an important element infinancial co-operation in the region.

In October 2004, the Bank renewed, for anotherthree years, the US$1 billion bilateral swaparrangement (BSA) agreement under the CMI andthe US$2.5 billion BSA agreement under the NewMiyazawa Initiative between Malaysia and Japan.

Malaysia Indonesia Philippines People's Republicof China

KoreaSingapore Thailand

Korea

Japan

People’sRepublicof China

Bilateral Swap Arrangement Agreements under the Chiang Mai Initiative

Dates indicate when the agreements have been signed and the maximum drawing amount for each agreement is indicated in parentheses.

1 A one-way swap arrangement where the requesting country under the agreement can request the swap-providing country to enter into a swap transaction.2 A two-way swap arrangement where either party could request the other party to enter into a swap transaction under the agreement.

Agreements signed between the Plus Three countries (People's Republic of China, Japan and Korea) and ASEAN countries

Agreements signed among the Plus Three countries

5 October 20011

(US$1 billion) Renewed on 5 October 2004

26 July 20022

(US$1 billion)

9 October 20021

(US$1.5 billion)

9 August 20022

(US$1 billion)

27 August 20011

(US$3 billion) Renewed on 27 August 2004

30 July 20011

(US$3 billion) Under negotiation for renewal

11 June 20022

(US$1 billion)

6 December 20011

(US$2 billion)

28 March 20022

(US$3 billion)

24 June 20022

(US$2 billion)

4 July 20011

(US$2 billion)17 February 20031

(US$3 billion)

29 August 20031

(US$1 billion)

24 December 20032

(US$1 billion)

30 December 20031

(US$1 billion)

10 November 20031

(US$1 billion)

232

Collectively, the combined size of the current 15bilateral swap arrangement (BSA) agreements underthe CMI is US$33.5 billion.1

Since its inception in December 2002 and its officialendorsement by the ASEAN+3 Finance Ministers inAugust 2003, the ABMI has made significant strides increating an enabling environment to encourageintra-regional investment as well as capacity-buildingprogrammes for development of regional bond markets.Keen collaboration among ASEAN+3 countries continuedwith regular meetings of the six working groups2, anddialogues and discussions with private sectorparticipation. The Working Group on Foreign ExchangeTransactions and Settlement Issues chaired by the Bankcontinued to examine and explore matters involving theclearing and settlement systems of ASEAN+3 membercountries in facilitating cross-border transactions andimpediments on cross-border investment and issuance.Discussions in these areas have assisted policymakers indesigning strategies for further market development.

In May 2004, the Asian Bonds Online Website3 waslaunched as an initiative under the ABMI. The Websiteis a one-stop information clearing-house on the rapidlygrowing sovereign and corporate bond markets in theregion, which also facilitates information disseminationamong issuers and investors. The objective of theWebsite is to provide the market with information onthe bond markets in the region as well as updates onthe progress made by each of the working groupsunder the ABMI.

Achievements by individual ASEAN+3 membercountries in 2004, which contributed towardfurthering the objectives of the ABMI, included theissuance of the ringgit-denominated bond amountingto RM400 million by the ADB and of the Islamicringgit-denominated bond amounting to RM500million by the International Finance Corporation inMalaysia. Other achievements included the permissiongiven to multilateral development banks to issue localcurrency denominated bonds in Thailand; creation of anew scheme of cross-country primary collateralisedbond obligations (CBO) by Japan and Korea; andprovision of credit guarantees by the Japan Bank forInternational Co-operation and the Nippon Export andInvestment Insurance for bonds issued by Asianmultinational companies.

In complementing the ABMI, the EMEAP Group hadsuccessfully launched the Asian Bond Fund 2 (ABF2)in December 2004. The newly launched ABF2 willinvest in domestic currency bonds issued by

sovereign and quasi-sovereign issuers in the EMEAPmarkets (other than Japan, Australia and NewZealand, which were deemed to be sufficientlydeveloped markets). The ABF2 built further on thefirst stage of the ABF, which only invested in USdollar denominated bonds. Members of the EMEAPGroup, including the Bank, will participate in theABF2, and are confident that it will play a catalyticrole in contributing to more efficient financialintermediation in Asia in the longer term as well assupporting overall efforts by regional countries todevelop their domestic capital markets.

The Bank continued to give its support to theSEACEN Research and Training Centre to conductcentral banking training programmes. During theyear, the SEACEN Centre focused on topics relatingto core central banking functions especially inbanking supervision, financial reforms and monetarypolicy. Besides extending training to its members,which had expanded to 13 with the admission of theReserves Bank of Fiji in April, the Centre alsoextended its training to 16 non-members. Inconducting training activities, the Centrecollaborated with central banks from developedcountries, such as the Federal Reserve System of theUnited States, the Reserve Bank of Australia and theBank of Japan. At the same time, collaboration withvarious multilateral organisations and regionalinstitutions, including the IMF, the World Bank, Bankfor International Settlements (BIS), the BaselCommittee on Banking Supervision, the FinancialStability Institute, the ADB and the Toronto Centre,was established. The collaboration helped toenhance the quality of the training programmes andtheir effectiveness in enhancing the skills ofparticipants from regional central banks as advisorsand regulators in a dynamic global environment.

Bilateral Co-operationOn 30 June 2004, Malaysia entered into an MoUwith IDB to develop a framework of co-operationamong the Organisation of Islamic Conference (OIC)Member Countries in key economic activities as partof her initiative as the Chair of the OIC. TheGovernor signed the MoU on behalf of theGovernment of Malaysia.

1 Based on the overall availability under the BSAs, where the maximum drawingamount under two-way swap arrangements is counted twice to reflect the swapamount available to both parties under the agreement.

2 The six working groups are, namely, on ‘New Securitised Debt Instruments’,‘Credit Guarantee and Investment Mechanisms’, ‘Foreign Exchange Transactionsand Settlement Issues’, ‘Issuance of Bonds Denominated in Local Currencies byMultilateral Development Banks, Foreign Government Agencies, and AsianMultinational Corporations’, ‘Rating Systems and Dissemination of Informationon Asian Bond Markets’, and ‘Technical Assistance Co-ordination’.

3 www.asianbondsonline.adb.org

233

External Relations

This MoU, which aims to enhance opportunities forgrowth among the OIC Member Countries, seeks tostrengthen financing arrangements to promote trade,provide a new focus on financing services in trade andinvestment, as well as facilitate the use of Informationand Communication Technology (ICT) to expandintra-OIC economic activities. The MoU also promotesthe development of Islamic financial markets focusingon promoting business linkages and mobilisation offunds for cross-border investments between thefinancial centres in the OIC Member Countries. In thearea of Islamic finance, the MoU aims to further expandtakaful and retakaful businesses among the OICMember Countries. The MoU also contains provisions topromote the use of insurance instruments for theexpansion of trade and investment and encourages theOIC Member Countries to adopt FTAs.

In realising the areas of co-operation embodied inthis MoU, two High Level Meetings betweenMalaysia and the IDB have been held to date. TheFirst High Level Meeting was held in Kuala Lumpuron 30 September - 1 October 2004, while theSecond High Level Meeting was held in Jeddah on20-21 February 2005. Both these High LevelMeetings, which concluded with the signing of theAgreed Minutes, deliberated at great length on theareas of co-operation in the MoU to determine andstrategise the plan of action and target deliverables.Discussions and negotiations on the implementationof the MoU will be intensified in 2005 to achieve theobjectives outlined in the MoU.

In 2004, the Bank also made further progress in thepromotion of the Bilateral Payments Arrangement(BPA) and the Gold-based Trade PaymentsArrangement (GTPA). On 18 June 2004, the Banksigned a BPA agreement with Bank Mandiri, Indonesiaand had throughout the year initiated several bilateral

Malaysia entered into an MOU with the IDB to develop a frameworkof co-operation with the aim of enhancing the opportunities forgrowth among the OIC Member Countries.

negotiations on the GTPA with interested countries.Moving forward, as part of the Bank’s effort tocontinuously promote trade with non-traditionalmarkets, the Bank is also looking into operationalisingcommercially-driven trade financing arrangements,which would target non-traditional markets, ingeneral, and OIC markets, in particular.

Technical Assistance and Information ExchangeThe Bank continued to provide capacity buildingprogrammes to interested parties. Under theMalaysia Technical Co-operation Programme (MTCP),the Bank offered places to foreign participants intwo annual programmes, namely, the CentralBanking Course (since 1984) and the BankingSupervision Foundational Course (since 2002). In2004, the Bank received a total of 22 officials from

13 central banks to participate in its programmes.The Bank has received a total of 234 foreignparticipants since the inception of the courses.

Under the D-8 fora, the Bank continued topromote the development of Islamic banking and takafulthrough its involvement to enhance the supervisory andregulatory frameworks of the insurance and takafulindustries. In addition, at the inaugural Asian IslamicBanking and Finance Summit, the Bank organised twoworkshops that covered issues on Islamic finances,particularly risk management and capital adequacy inmeeting the requirements of the IFSB and developmentof an Islamic money market. During the year, BankNegara Malaysia also briefed interested central banks andbanking institutions from Bahrain, Bangladesh, Sudan,Lebanon, Singapore and Indonesia on Islamic bankingand takaful. In addition, Malaysia organised a dialogue toshare experiences on Deposit Insurance and FinancialDisclosure among Asia-Pacific Economic Cooperation(APEC) economies in February 2004.

Organisation andHuman Resource

226-239 Organisation Development239-242 Risk Management in Bank Negara Malaysia

243 Organisation Structure

236

ORGANISATION DEVELOPMENT

OverviewThe change management programmes in 2004endeavoured to break new grounds in providingthe Bank with enhanced capacities and capabilitiesto deal with the challenges brought about by adynamic and uncertain external environment. Inparticular, the Knowledge-Based Organisation(KBO) initiatives that commenced in 2001continued during the year to improve the Bank’sability to acquire, create, use and retain knowledge.The Bank continued to promote organisation-widepractices of knowledge sharing and collaborativework within a secured and trusted environment,with the adoption and implementation of newlyformulated information security policies andprocedures. For performance improvement, theinitiatives during the year focused on programmesto modernise talent management practices,enhance learning and training, improve processes,upgrade technological infrastructure, and improvethe physical working environment.

One of the tools the Bank adopted in 2004 for thepurpose of enhancing the process of performancemanagement is the Balanced Scorecard1. TheBalanced Scorecard approach emphasises the needto view organisational performance from multipledimensions, with emphasis on inter-linkagesbetween strategy planners, decision-makers andstrategy implementers. The breadth and depth of acentral bank’s functions in our emerging marketeconomy poses unique challenges to remainfocused on strategic long-term objectives, whilegiving effective attention to tactical issues. Thealignment of internal capacity and capabilitydevelopment efforts for strategic and operationalgoals within the Bank has become more imperative,thus demanding greater levels of flexibility andinnovation in how the Bank manages its human,knowledge and technology capital.

Since the launch of the KBO programme in 2001,the Bank put in place programmes and initiatives toenrich its internal knowledge resources through awide range of human resource, knowledge andtechnology initiatives. The Bank’s corporate intranetnow provides extensive online connectivitythroughout the organisation, enabling higher levels

of organisational and process integration, personalproductivity improvement, and collaborative work. Asignificant new achievement in 2004 is thetransformation of the Bank’s library into aKnowledge Management Centre (KMC). This centregreatly enhances existing knowledge managementprocesses and promotes a more reliable and effectivemeans for the Bank to manage its knowledge assets.Any individual who needs to obtain new knowledgecan use the services of the KMC to expediteknowledge identification, acquisition and use.Furthermore, existing knowledge can easily beconverted into reusable knowledge assets, all ofwhich are being managed centrally by KMC staff.The Bank’s corporate memory, therefore, will bemore accessible to all staff.

The adoption of a strategy-focused organisation asa principal theme for organisational capacity andcapability development in 2004 has successfullypaved the way for a more deliberate managementof intellectual capital in 2005, focusing on areasrelevant to the core objectives of the Bank. Thecombined theme of strategy focused organisationand knowledge management would be at thecentre of the organisational developmentprogrammes of the Bank for 2005.

Human Capital ManagementDuring 2004, the Bank established a LeadershipDevelopment Centre programme to identify,develop and sustain leadership talent in the Bank.In an effort to improve the alignment of humancapital development with the Bank’s businessstrategies, changes were introduced to the Bank’scompetency management framework, as well as,the career management system.

Staff strength as at end-2004 was 2,335,representing an increase of 1.6% from end-2003.Staff turnover rate remained below 2% for 2004.The majority of new hires were graduates, reflectingthe Bank’s focus on bringing in knowledge workersand new talents to enhance productivity andperformance. Between 1998 and 2003, the numberof graduates increased from 798 to 1,233, that is,from 42% to 54% of staff population.

1 The Balanced Scorecard methodology was developed by Professor Robert S.Kaplan of Harvard Business School and David P. Norton of BalancedScorecard Collaborative Inc.

Organisation and Human Resource

237


Occupational safety and health was another area offocus during the year. The Bank has given greatervisibility to personal health and well-being byconducting health and environmental assessments withthe assistance of the National Institute of OccupationalSafety and Health. Staff involved in departmental Safety,Health and Environment (SHE) committees conducted aseries of First-Aid certification programmes as well asorganised internal seminars on safety and health. TheBank introduced a lactation room for mothers withnewly born babies, and is exploring options forproviding child care services for staff. These initiativescontribute to an environment where human capital canbe more productive without excessive stress.

Training and Learning ManagementGreater effort was put into integrating training andlearning management with staff performancemanagement. Relevant training and learningprogrammes for staff to acquire new knowledge andskills were executed in line with efforts in humanresource management to align human capital with theBank’s strategic needs. In particular, efforts towardenhancement of self-directed learning with customisedcontent and delivery at the individual anddepartmental levels serve to increase the overall abilityof the Bank in aligning human capital and knowledgeassets to meet new challenges faced by the Bank.

In the Bank’s effort to develop leaders from within, theBank successfully organised the first customisedLeadership Development Programme. The Bank alsoengaged external expertise from the Toronto LeadershipCentre in the area pertaining to leadership in supervision.The Bank has continued to leverage on internal resourcesfor many of its training programmes, with 290 of theBank’s staff being recognised for their contributionstowards the creation and sharing of knowledge.

The Bank invested RM8.9 million in training forknowledge and skill enhancement during the year2004, an increase of 11% compared to 2003. Thesetraining programmes include highly customisedsolutions designed to meet learning needs of linedepartments. The average training man-day per staffregistered in 2004 was 12 training days and onaverage, training investment per staff amounted toRM3,800, an increase of 9% from 2003.

Information and Communications TechnologyManagementThe thrust of the Information and CommunicationTechnology (ICT) management in 2004 was oninitiatives that promoted the use of ICT in

facilitating analysis and decision-making, enhancingefficiency and making information more accessibleand visible. The Bank has embarked on anenterprise-wide initiative to create a more unifiedand collaborative workplace environment throughthe use of technology.

A special ICT executive programme is also being put inplace to promote a more versatile adoption oftechnological solutions in driving the transformation ofbusiness processes. The Bank recognises that theimplementation of new technology solutions must bematched with enhanced capacity on the part of users anddecision-makers to adopt and work with the technology.

The Corporate Portal introduced in 2003 has provento be an effective communication channel for theBank, acting as a central gateway for staff to gainaccess to the Bank’s corporate information andapplication systems. In 2004, the portal has beenextended to all the Bank’s branches, representativeoffices and mobile users. The Bank has alsoimplemented a wireless network infrastructurewithin the Bank’s vicinity to support staff mobility.

The Bank continues to strengthen the security,reliability and resiliency of the ICT infrastructure.The design of the new state-of-the-art Data Centre,offsite from the Bank’s Head Office, is currentlybeing developed, with the ultimate aim ofproviding secure and resilient facilities to supportthe Bank’s operations.

Information Security ManagementThe Bank achieved yet another milestone in itsInformation Security Management during 2004when it successfully translated the InformationSecurity Policies and Standards into procedures thatoperationalise the classification and access controlof information in the Bank.

Where the task of classification is deemedimportant in identifying the sensitivity and criticalityof information, the procedures are expected toinstitute a form of discipline in encouragingknowledge exchange and sharing amongst staff inthe Bank. This endeavour is seen as crucial,especially amidst other strategic knowledgemanagement initiatives undertaken by the Bank.

The deliverables of the Information Security projectinclude the development of revised proceduresfor proper handling of corporate information, as wellas granting access to information based on

238

the principle of ‘need-to-know’. The guidelines alsostipulate best practice on aspects of security at variousstages of a typical information management cycle.

Knowledge ManagementThe focus of the Bank’s knowledge managementinitiatives during 2004 shifted from infrastructuredevelopment to the more challenging task ofembedding knowledge processes within the Bank’sroutine operations. Several initiatives werelaunched in order to make knowledge managementa natural part of all staff’s daily activities. The firstinitiative was to use the Bank’s corporate taxonomystandards and practices to improve governance ofthe Bank’s knowledge assets. The taxonomy makesit easier to discover knowledge that already existsin the Bank by developing an appropriateclassification for a more effective search. This alsoimproves the capacity to identify expertise withinthe Bank since authorship of papers andpresentations in the Bank becomes more visible.

The second initiative was the design of theEnterprise Portal Strategy that would be moreeffective in pulling together all the differentinformation sources and channels within the Bankunder a common information delivery platform. TheEnterprise Portal would make it easier for staff tocollaborate across departments, projects and evenwith other organisations. It would also enhance theBank’s capacity to reach out to specific stakeholdersin providing information services. The Portal wouldalso make it easier to transform business processesusing information technology, and thus improvingefficiency within the Bank.

The third initiative was the establishment of theKMC which gives more focus and specialisedresources towards the management of the Bank’sknowledge assets and processes. The coreprocesses within the KMC focus on effective accessto knowledge, maximizing reusability ofknowledge, continuous learning, creation of newbusiness knowledge and sustaining a collaborativework environment based on knowledge systems.

The KMC essentially creates processes and acomprehensive structure to systematically manageexplicit knowledge within the Bank. The Bank as awhole can leverage on the informationmanagement skills which have been extensivelydeveloped within the KMC, thus making processessuch as knowledge creation, identification,acquisition, re-use and re-packaging far moreefficient and effective.

Office Space ManagementSince 2003, the Bank has studied spacemanagement to increase efficiency and effectivenessof work, as well as provide an enhanced workingenvironment for the staff. Space is increasinglymanaged to enable staff to share tacit knowledge,be more mobile and use technology within the Bank.In 2004, the Bank fully implemented the new officelayout that more effectively addresses the needs ofthe Bank and staff in terms of functioning as aknowledge-based organisation.

During 2004, the Bank’s cafeteria was refurbished andstaff are now encouraged to use the cafeteria forinformal discussions and meetings thus creating more

KnowledgeCreation to

Business Needs

Facilities forContinuous

Learning

MaximiseReusability ofKnowledge

EffectiveAccess to

Knowledge

CollaborativeWork

Environment

The Knowledge Management Centre

• Framework• Policy• Knowledge Space• Process Enhancement• KM Systems and Tools• Measurement

KnowledgeManagement

• Knowledge Audit• Stakeholders Profiling and Need Analysis• Information Sources Profiling and Analysis• Expertise Profiling• Developing Strategic Contents• Managing Communities of Practice

Identify/Create

• Environmental Scanning• Information Acquisition

and Processing• Subject in-depth Research• Information and

Knowledge Capturing from Events• Archives Management

Acquire/Capture

• Content Management• Information Repositories• Reference Services• Industry Issues and Players Profiling• Information and Knowledge Relationship• Information Analysis and Repackaging

Analyse, Repackage,Organise

• Corporate Taxonomy Maintenance and Development• Information and Content Dissemination• Current Awareness

Service• Knowledge Sharing

Techniques and Tools

Disseminate, Use,Reuse

239


space for sharing of information and exchanging ofideas. A new Multipurpose Training Complex equippedwith complete training facilities such as lecture halls,discussion rooms, secretariat room and amenities forcatering services has also been constructed in PulauLangkawi to expand the space for learning and training.Recreational space has also been provided to supportthe Bank’s work-life balance initiatives.

The Bank has also initiated the construction of theRegional Financial Services Resource Centre (FSRC) tocater for the professional training needs of the Bankand the region, particularly in the areas of CentralBanking, Islamic Banking and Finance. Space has beendefined to support adult learning and pedagogy thatrecognises teamwork, action learning and a widevariety of interaction modes.

Corporate GovernanceThe functions and powers of the Bank are set out inthe Central Bank of Malaysia Act 1958. Several otherpieces of legislation confer the Bank with additional,specific functions. Collectively, these laws establish thebasic structures, arrangements and procedures for thegovernance of the Bank and the conduct of itsbusiness. The Bank's mission, aspirations and sharedvalues also serve as guiding principles in thegovernance of the Bank.

Based on this governance framework, 12 Board Meetingswere held during the year. In addition, the followingsenior management meetings were held – four BoardAudit Committee Meetings, 48 Management CommitteeMeetings, four Reserve Management CommitteeMeetings, four Risk Management Committee Meetings,eight Monetary Policy Committee Meetings, fourFinancial Stability Policy Committee Meetings and twoPayment System Policy Working Group Meetings. Duringthe year, two briefings to the Prime Minister and theMinister of Finance were conducted to present the Bank’sassessment of the economy and the financial sector,important financial and economic issues as well aschallenges confronting Malaysia, and the policyrecommendations that could be adopted.

AwardsHeartiest congratulations from the Board to Dr. PhangHooi Eng, Ismail bin Alowi and Cheong Kwok Yew onbeing conferred the Johan Setia Mahkota (J.S.M) onthe occasion of the birthday of His Majesty, the Yangdi-Pertuan Agong on 5 June 2004.

The Board extends its congratulations to Dato’ LatifahMerican Cheong on being conferred the Darjah Setia

Pangkuan Negeri (D.S.P.N.) on the occasion of thebirthday of His Excellency, Yang di-Pertua NegeriPulau Pinang on 10 July 2004.

The Board also congratulates Wong Puay Chen andRosli bin Sulong on their conferment of the DarjahSri Melaka and Pingat Khidmat Lama respectively, onthe occasion of the birthday of His Excellency, Yangdi-Pertuan Negeri Melaka on 9 October 2004.

The Board also extends its heartiest congratulations toDato’ Mohd Nor Mashor for being conferred theDarjah Indera Mahkota Pahang (D.I.M.P) on theoccasion of the birthday of His Royal Highness, theSultan of Pahang Darul Makmur on 24 October 2004.

As part of its recognition program, the Bank hasawarded 22 staff for their excellent performanceand contribution under seven types of awardcategories as follows: Excellent Performance;Sports; Quality Service; Social; ProfessionalDevelopment and Academic Achievement. Inaddition to individual awards, two teams wereawarded with Excellent Team Performance Awards.The awards were presented during the Bank’sAnnual Dinner held on 4 September 2004.

RetirementThe Board wishes to place on record itsappreciation and gratitude to the 35 retirees fortheir dedication and commitment while in servicewith the Bank. The staff who retired from service in2004 are listed in Table 12.1.

The Board would also like to take this opportunityto congratulate Datuk Zamani bin Abdul Ghani forhis re-appointment as Assistant Governor upon hisretirement on 19 January 2004 and his appointmentas Deputy Governor on 16 May 2004.

RISK MANAGEMENT IN BANK NEGARA MALAYSIA

In 2004, in line with the evolution of riskmanagement practices, attention turned to theneed for a review and the consolidation of the riskmanagement framework. The review built on theinitiatives that had been taken to leverage on aframework that provides for independent oversightat the supervisory and operational levels and theestablishment of policies and processes for goodpractices. A number of improvements wereintroduced in 2004 for implementation in 2005.Overall, the Risk Management Unit and the linedepartments also continued to strengthen their

240

partnership with the aim of ensuring that a risk cultureis consistently embedded in all aspects of operationalas well as strategic efforts.

Risk Management StructureThe Risk Management Committee, which is at the apex ofthe Bank’s risk management governance structure, is theleading forum for focused and regular deliberation on riskissues and is the main driver of risk management in the

Bank. The requirements for upward reporting by linedepartments and the Risk Management Unit to the RiskManagement Committee remained unchanged so as toenable the Committee to continue to provide direction foraddressing and managing potential risk in the organisation.

Risk Management PracticesIn providing the oversight on risk management, theRisk Management Committee determines and shapes

Table 12.1List of Retirees

No Name Department/Branch

1 Datuk Zamani Bin Abdul Ghani Governor’s Office

2 Dato’ Latifah Merican Cheong Governor’s Office

3 Cheong Kwok Yew SEACEN Research and Training Centre

4 Chong Lily Teh Corporate Communication

5 Christopher Fernandez Payment Systems

6 John Thomas a/l S Ebenezar Financial Mediation Bureau

7 Looi Woon Leng Economics

8 Teo Kee Tian Risk Management

9 Woo Seok Hooi Insurance Regulation

10 A. Rahman Bin Abdul Samad Strategic Management

11 Chan Hon Wai IT Services

12 Philip Aloysious Baptist IT Services

13 Lim Pek Sim International

14 Rohana Binti Yusoff International Center for Leadership in Finance

15 Sia Geok Hee Property and Services

16 Yip Lai Yok Human Resource Development Centre

17 Hasnah Binti Aziz Foreign Exchange Administration

18 Zainal Bin Kasa ERF Sdn. Bhd.

19 Tan Chwee Hock Information Systems Supervision

20 Abdul Ghani Bin Mohd Yusoff Currency Management and Operation

21 Henry Arunkumar a/l Ponniah Insurance Regulation

22 Hu Faik Seng Bank Supervision II

23 Rosna Binti Osman Bank Negara Malaysia Kuala Terengganu

24 Abot Bin Abong Bank Negara Malaysia Kuching

25 Arbaiah Binti Ahmad Governor’s Office

26 Ismail Bin Muhd. Nor Corporate Services

27 Lim Chwee Neo IT Services

28 Ismail Bin Che Teh Security

29 Aziah Binti Maulud Bank Regulation

30 Abdul Kadir Bin Aziz Security

31 Hassan Bin Serah Bank Negara Malaysia Kuching

32 Juanis Bin Edong Bank Negara Malaysia Kota Kinabalu

33 Mohd Hilmey Mohd Said @ Jangkim Bin Tawayon Bank Negara Malaysia Kota Kinabalu

34 Goh Hooi Choo Bank Negara Malaysia Pulau Pinang

35 Khor Ah Eng Bank Negara Malaysia Pulau Pinang

241


the standards and requirements to ensure thatappropriate strategic and operational risk managementmeasures are embedded into all programmes, projectsand policy making. In 2004, the Committee continuedassessing the departments’ risks, controls and riskissues so as to exercise constant vigilance on the bank’soverall risk profile and emerging risk issues. TheCommittee also deliberated with the departments ontheir policy and strategic focus and the optimalapproaches to address existing and potential risks. Atthe functional level, the Department Directors have thedirect responsibility for ensuring that risk managementpractices are integral to daily operations. Thedepartments continued to make an annual declarationto Management on their review of the risk profiles oftheir operations and assessment of the adequacy ofrisk management. The Risk Management Unit alsocontinued providing technical support and performedits coordination and oversight role by assisting thedepartments in their management reporting.

With the increased maturity of the risk managementfunction in the Bank, the role of the Risk ManagementUnit was reviewed and expanded in 2004 to includetwo additional functions. The Risk Management Unitnow performs an independent assessment of risks ofthe line departments to complement the existing self-assessment approach performed by departments.Secondly, the Risk Management Unit also assesses theorganisational risk which could affect the achievementof the strategic aims and objectives of the Bank asoutlined in the Corporate Strategy Map. Throughassessment of the Bank’s execution of its criticalfunctions and responsibilities, and consultation withthe relevant departments in the Bank, organisationalrisk issues are identified and assessed for tabling to theRisk Management Committee. The combination of allthree assessments mentioned is expected to result in aholistic view of risk in the Bank. This approach isexpected to enhance organisational alignment andstrengthen inter-linkages throughout the Bank.

Policy RiskThe policy-making mechanism in the Bank is designedwith the objective of achieving the desired policyoutcome. To this end, a structured framework is inplace to manage policy risk at the Bank. Thisframework covers the processes for discussion anddeliberation of all issues related to policy from theconceptualisation stage through to the developmentand implementation stages. The high level committeesthat preside over policy making are the MonetaryPolicy Committee, the Financial Stability Committeeand Management Committee. Chaired by the

Governor, the common objective of these committeesis to allow for and provide a platform for high-levelcross-functional deliberation and consultation toensure sound and efficacious policies. Anothercomponent featured in the policy framework is thePolicy Working Groups, membership of which compriseAssistant Governors and directors of all the relevantdepartments, which represent the working leveldeliberations on the policy issues.

The rules governing the operation of the Policy WorkingGroups were tightened in 2004 with focus given toadditional resources for stakeholder impact analysis,alternative perspectives and public communications. Thisis expected to improve oversight of the policy makingprocess, thus allowing the Bank to ensure a moreexhaustive process which considers all implications andconsequences to stakeholders related to theimplementation of policies.

Financial RiskThe Middle Office is directly responsible for managingthe Bank’s financial risks arising from the managementof international reserves. To ensure a consistentmanagement and assessment of risks across the Bank,the Middle Office works closely with the Internal AuditDepartment and the Risk Management Unit to monitorcompliance with investment guidelines, credit andoperational procedures. The risk managementframework for treasury activities continues to evolve andgrow in line with developments in reserve managementactivities. With the continued growth of reserves,expansion of investment horizons and progress ininvestment practices, strengthening of overall riskmanagement necessarily becomes a continuous process.Increased specialisation, improved methodologies andthe upgrading of risk assessments, monitoring processesand system infrastructure are among the key areas offocus. Exposure and training on the complexities ofvarious products and instruments remains a constantfeature for the staff of the front, middle and backoffices. Thus, prudent management of the financial risksof reserve management will continue while investmentopportunities are optimised.

Enterprise Operational RiskTraditionally, the operational risk managementapproach of the Bank requires ownership of risks,self-assessment, continual review, escalation of keyrisk issues and accountability for controlimprovement and issue resolution. In 2004, thisframework was further enhanced. In recognising theneed to step up efforts in value added initiatives, themove was made to increase involvement of the Risk

242

Management Unit in risk management in therespective departments. While the main focus of theUnit was previously on providing the coordinationand oversight role, the Unit would now play a moreproactive role and work in a collaborative mannerwith line departments. This realignment of effortaims to ensure that there is no over-concentration ofthe risk management effort in operational risk withmore attention paid to long-term, high levelstrategic risks. The closer partnership forged by thisarrangement is expected to lead to a more accurate,efficient risk identification and assessment andhence better management and it is expected tocover risks which may not be apparent due tofamiliarity with the operations.

To this end, efforts are currently underway to fine-tunethe risk toolkit to help widen the current focus andelevate risk management practices to a new level.Although the overall coverage will expand, theultimate aim for risk management remains the same,that is, to ensure that regular monitoring takes formto enable prescription of prompt corrective andpre-emptive actions in all areas of risk.

Business Continuity ManagementThe Business Continuity Management (BCM)framework at the Bank, designed for planning,preparing, responding to and managing a crisis, is

aimed at containing any threats of disruptions tomonetary and financial system stability whetherphysical (system breakdowns) or non-physical(financial crisis) in nature. The two high levelcomponents of this framework are the CrisisManagement Committee and the Crisis ManagementTeam which are responsible for ensuring BCMpractices are observed and performed in the Bank.The Crisis Management Committee, which reports tothe Governor, is chaired by a designated DeputyGovernor and symbolises high level endorsement ofthe Business Continuity programme in the Bank. TheCrisis Management Team has membership comprisingdirectors from all identified critical departments andsupport teams who meet twice a year to enablemembers to be updated on developments in theBank’s Business Continuity arrangements, practices,and to discuss all emerging Business Continuityissues. This forum helps to streamline recovery plansand allows premeditated cooperation between thecritical departments to produce an integrated andcoordinated bank-wide arrangement.

In 2004, in addition to its practice of conductingstandard live-run exercises, the Bank conductedlive-run exercises over an extended period of time toboth prepare the Bank and to enable periodicassessment of the Bank’s state of readiness to ensurethe Bank’s ability to respond to crisis situations.

243


Dat

o' M

ohd

Nor

bin

Mas

hor

Ng

Cho

w S

oon

Abu

Has

san

Als

hari

bin

Yaha

ya

Kam

ari Z

aman

bin

Juh

ari

Dat

o' M

ohd

Razi

f bi

n A

bd. K

adir

Don

ald

Josh

ua J

agan

atha

n

Baka

rudi

n bi

n Is

hak

Che

Zak

iah

bint

i Che

Din

Sant

hini

a/p

Cha

ndra

pal

Dat

o' M

ohd

Razi

f bi

n A

bd. K

adir

Dat

uk Z

aman

i bin

Abd

ul G

hani

Azi

zan

bin

Haj

i Abd

Rah

man

Chu

ng C

hee

Leon

g

Sani

bin

Ab.

Ham

id

Ram

li bi

n Sa

ad

Ahm

ad H

izza

d bi

n Ba

haru

ddin

Ahm

ad H

izza

d bi

n Ba

haru

ddin

Nor

Sha

msi

ah b

inti

Moh

d Yu

nus

Dr.

Zeti

Akh

tar

Azi

z

Hon

g Ya

ng S

ing

Mio

r M

ohd

Zain

bin

Mio

r M

ohd

Tahi

r

Lim

Lai

Hon

g

Lim

Foo

Tha

i

Dat

o' M

ohd

Nor

bin

Mas

hor

Ahm

ad b

in M

ansu

r

Teng

ku Z

aib

bin

Raja

Ahm

ad

Dat

o' M

oham

ad D

aud

bin

Hj.

Dol

Moi

n

Dat

o' O

oi S

ang

Kua

ng

Muh

amm

ad b

in Ib

rahi

m

Wan

Han

isah

bin

ti W

an Ib

rahi

m

Mah

di b

in M

ohd.

Arif

fin

Vaca

nt

Dr.

Sukh

dave

Sin

gh

Gop

ala

Kris

hnan

Sun

dara

m

V. V

ijaya

ledc

hum

y

Ism

ail b

in A

low

i

Abd

ul A

ziz

bin

Abd

ul M

anaf

Cha

n Ya

n K

it

Zulk

ifli b

in A

bd R

ahm

an

Inte

rnal

Aud

itH

or W

eng

Ken

g

Smal

l and

Med

ium

Ent

erpr

ise

Mar

ianu

s Vo

ng S

hin

Tzoi

@ Jo

seph

Von

g

Secr

etar

y to

the

Boa

rd

Gov

erno

r's

Off

ice

Cor

pora

te C

omm

unic

atio

ns

Bank

Reg

ulat

ion

Insu

ranc

e Re

gula

tion

Isla

mic

Ban

king

and

Tak

aful

DFI

Reg

ulat

ion

Risk

Man

agem

ent

ASS

ISTA

NT

GO

VER

NO

RRE

GU

LATI

ON

DEP

UTY

GO

VER

NO

R

Bank

Sup

ervi

sion

I

Bank

Sup

ervi

sion

II

Insu

ranc

e Su

perv

isio

n

Info

rmat

ion

Syst

ems

Supe

rvis

ion

Paym

ent

Syst

ems

Prop

erty

and

Ser

vice

s

ASS

ISTA

NT

GO

VER

NO

RSU

PERV

ISIO

N

BO

AR

D O

F D

IREC

TOR

S

GO

VER

NO

R

Hum

an R

esou

rce

Man

agem

ent

IT S

ervi

ces

Hum

an R

esou

rce

Dev

elop

men

t C

entr

e

Stra

tegi

c M

anag

emen

t

Cor

pora

te S

ervi

ces

Secu

rity

Cur

renc

y M

anag

emen

t an

d O

pera

tion

Bran

ches

(6)

Lond

on R

ep. O

ffic

e

New

Yor

k Re

p. O

ffic

e

ASS

ISTA

NT

GO

VER

NO

RO

RGA

NIS

ATI

ON

AL

DEV

ELO

PMEN

T

DEP

UTY

GO

VER

NO

R

ASS

ISTA

NT

GO

VER

NO

RIN

VES

TMEN

T A

ND

OPE

RATI

ON

S

Inve

stm

ent O

pera

tions

and

Fin

anci

al M

arke

t

ASS

ISTA

NT

GO

VER

NO

REC

ON

OM

ICS

Mon

etar

y A

sses

smen

t an

d St

rate

gy

Lega

l

Econ

omic

s

Inte

rnat

iona

l

Fina

nce

Fore

ign

Exch

ange

Adm

inis

trat

ion

Stat

istic

al S

ervi

ces

BA

NK

NEG

AR

A M

ALA

YSI

AB

AN

K N

EGA

RA

MA

LAY

SIA

Org

anis

atio

n S

tru

ctu

re

Spec

ial I

nves

tigat

ion

Fina

ncia

l Int

ellig

ence

Koi

d Sw

ee L

ian

Contents

1. Foreign Exchange Administration Policies P12. Funds Administered/Funded by Bank Negara Malaysia: Fund Utilisation P93. Licensed Banking Institutions (as at 31 December 2004) P104. Financial Institutions Offering Islamic Banking Services P125. Shariah Advisory Council Members For Islamic Banking and Takaful

Session 2004-2006 P14

Key Economic and Financial Statistics

Chapter 1: The Malaysian Economy in 2004A.1 Gross Domestic Product by Kind of Economic Activity in Constant 1987 Prices P17A.2 Growth in Manufacturing Production (1993=100) P18A.3 Production of Primary Commodities P19A.4 GNP by Demand Aggregates P20A.5 Savings-Investment Gap P21A.6 Balance of Payments P22A.7 Principal Markets for Manufactured Exports P24A.8 Principal Export Markets for Electronics P25A.9 Principal Export Markets for Electrical Products P25

A.10 Principal Export Markets for Chemicals and Chemical Products P26A.11 Principal Export Markets for Manufactures of Metal P26A.12 Principal Export Markets for Optical and Scientific Equipment P27A.13 Principal Export Markets for Petroleum Products P27A.14 Export Prices of Major Commodities P28A.15 Principal Export Markets for Palm Oil P28A.16 Principal Export Markets for Rubber P29A.17 Principal Export Markets for Saw Logs P29A.18 Principal Export Markets for Sawn Timber P30A.19 Principal Export Markets for Crude Oil P31A.20 Principal Export Markets for LNG P31A.21 External Debt and Debt Servicing P32A.22 Gross Overseas Investment by Country P33A.23 Consumer Price Index (2000=100) Sub-groups of Food P34A.24 Producer Price Index (1989=100) P34A.25 New Supply of Purpose-Built and Retail Space in Malaysia P35A.26 Average Monthly Rentals for Prime Office and Retail Space in the Klang Valley P35

Chapter 2: Monetary and Fiscal DevelopmentsA.27 Broad Money (M3) P36A.28 Money Supply: Annual Change and Growth Rates P37A.29 Interest Rates (%) P38A.30 Consolidated Public Sector Finance P39

Chapter 3: Outlook and PolicyA.31 Major Industrial Countries: Key Economic Indicators P40A.32 East Asia: Key Economic Indicators P41

Chapter 4: The Financial SystemA.33 Sources and Uses of Funds of the Financial System P42

Annex

Chapter 5: The Banking SystemA.34 Commercial Banks: Commitments and Contingencies P43A.35 Finance Companies: Commitments and Contingencies P44A.36 Merchant Banks: Commitments and Contingencies P45A.37 Commercial Banks: Income and Expenditure P46A.38 Finance Companies: Income and Expenditure P46A.39 Merchant Banks: Income and Expenditure P47A.40 Commercial Banks and Finance Companies: Lending Guidelines to the Priority Sectors P47A.41 Commercial Banks: Direction of Lending P48A.42 Finance Companies: Direction of Lending P49A.43 Merchant Banks: Direction of Lending P50A.44 Commercial Banks: Non-performing Loans by Sector P51A.45 Finance Companies: Non-performing Loans by Sector P52A.46 Merchant Banks: Non-performing Loans by Sector P53A.47 Banking System: Selected Indicators P54A.48 Banking System: Key Data P56A.49 Housing Credit Institutions P57A.50 Outstanding Housing Loans P58A.51 Approved Housing Loans P58

Chapter 6: The Islamic Financial SystemA.52 Islamic Financial Institutions: Branches/Counters P59A.53 Islamic Banking System: Sources and Uses of Funds P59A.54 Islamic Banking System: Commitments and Contingencies P60A.55 Islamic Banking System: Income and Expenditure P61A.56 Islamic Banking System: Financing Activities P62A.57 Islamic Banking System: Financing to Small and Medium Enterprises P62A.58 Islamic Banking System: Direction of Financing P63A.59 Islamic Banking System: Non-performing Financing by Sector P64A.60 Islamic Banking System: Deposits by Type and Institution P65

Chapter 7: Development Financial SystemA.61 Development Financial Institutions: Sources and Uses of Funds P66A.62 Development Financial Institutions under DFIA: Sources and Uses of Funds P67A.63 Development Financial Institutions: Direction of Lending P68A.64 Development Financial Institutions under DFIA: Direction of Lending P69A.65 Bank Industri & Teknologi Malaysia Berhad P69A.66 Export-Import Bank of Malaysia Berhad P70A.67 Malaysia Export Credit Insurance Berhad P71A.68 Bank Simpanan Nasional P72A.69 Bank Kerjasama Rakyat Malaysia Berhad P72A.70 Bank Pembangunan dan Infrastruktur Malaysia Berhad P73A.71 Bank Pertanian Malaysia P73A.72 Other Development Financial Institutions: Core Activities P74A.73 Development Financial Institutions: Selected Data P75A.74 Development Financial Institutions: Government Special Funds P76A.75 Development Financial Institutions: Bank Negara Malaysia Funds P77A.76 Development Financial Institutions: Funds From Multilateral and International Agencies P78

Chapter 8: Other Financial InstitutionsA.77 Leasing Companies: Sources and Uses of Funds P79A.78 Leasing Companies: Income and Expenditure P80A.79 Leasing Companies: Financing by Sector P80

A.80 Factoring Companies: Sources and Uses of Funds P81A.81 Factoring Companies: Income and Expenditure P81A.82 Factoring Companies: Financing by Sector P82

Chapter 9: Financial MarketsA.83 Capital Market Debt Securities: Amount Outstanding P83

Annex

P1

Foreign Exchange Administration Policies

The objective of foreign exchange administration is to provide an appropriate framework that will influence capitalflows and facilitate currency risk management to promote financial and economic stability of the country. In linewith the objective, the foreign exchange administration rules are being further liberalised and simplified witheffect from 1 April 2005 (refer to the White Box: ‘Liberalisation of the Foreign Exchange Administration Rules’ inChapter 3). All rules continue to be applied uniformly to transactions with all countries, except the State of Israelfor which special restrictions apply. With these relaxations, the following are the rules affecting foreign exchangetransactions:

I Current Account Transactions

(a) Payments for Import of Goods and Services

• There is no restriction on payments to non-residents for import of goods and services. Such paymentsmust be made in foreign currency with the exception of the currency of the State of Israel (RestrictedCurrency).

• There is no restriction for residents to enter into a forward foreign exchange contract with licensed onshorecommercial and Islamic banks (licensed onshore banks) or approved merchant banks to buy foreigncurrency against ringgit or another foreign currency to make payment for import from a non-resident.

(b) Proceeds Arising from Export of Goods (Export Proceeds)

• All export proceeds are required to be repatriated to Malaysia in accordance with the payment scheduleas specified in the sales contract, which should not exceed six months from the date of export.

• Export proceeds must be received in foreign currency and must be sold for ringgit or retained in exportforeign currency accounts (FCA) with licensed onshore banks. There is no limit on the amount of fundsretained in the export FCA.

• Residents may enter into a forward foreign exchange contract with a licensed onshore bank to sellexport proceeds for ringgit or another foreign currency, provided the maturity of the forward contract isnot later than six months after the intended date of export.

• Only resident exporters with annual gross exports exceeding the equivalent of RM50 million are requiredto submit quarterly reports to the Controller of Foreign Exchange (the Controller).

(c) Import and Export of Currency by Travellers

• Resident travellers are allowed to import or export ringgit notes up to RM1,000, including demonetisedRM1,000 and RM500 notes, and to export foreign currency notes, including traveller’s cheques, up to anequivalent of RM10,000. Resident travellers are required to obtain permission from the Controller anddeclare in the Traveller’s Declaration Form (TDF) when they:

- Carry into or out of Malaysia, ringgit notes exceeding RM1,000.

- Carry out foreign currency notes, including traveller’s cheques, exceeding the equivalent of RM10,000.

Permission is given within one day of application.

• There is no restriction for residents to bring into Malaysia any amount of foreign currency notes.

• There is also no restriction for non-residents to bring in any amount of foreign currency notes and/ortraveller’s cheques. Declaration in the Arrival/Departure Card (IMM.26) issued by the ImmigrationDepartment is only required for amounts in excess of the equivalent of US$2,500.

• Non-residents would need to seek permission from the Controller if the amount of foreign currencynotes to be carried out of Malaysia exceeds the amount brought into Malaysia, provided the amount tobe taken out is more than the equivalent of US$2,500.

P2

• Non-residents must obtain permission from the Controller and declare ringgit notes exceeding RM1,000being brought into or out of Malaysia.

II Capital Account Transactions

(a) Investment in Malaysia by Non-residents

• There is no restriction on repatriation of capital, profits, dividends, interest, fees or rental by foreigndirect investors or portfolio investors.

• Ringgit assets purchased by residents from non-residents may be settled in ringgit or foreign currency,other than Restricted Currency. However, all remittances abroad must be made in foreign currency otherthan Restricted Currency.

(b) Investment Abroad by Residents

• Licensed onshore banks and approved merchant banks may invest abroad as long as they comply withthe Banking and Financial Institutions Act 1989 or Islamic Banking Act 1983 and their approved foreigncurrency net open position limit. Remittances for investment abroad must be made in foreign currency,other than Restricted Currency.

• Residents, companies and individuals, with no domestic borrowing are free to invest abroad. Theinvestment may be made through the conversion of ringgit or from foreign currency funds retainedonshore or offshore.

• Residents with domestic borrowing are also free to invest abroad their foreign currency funds maintainedonshore or offshore. In addition, they are allowed to convert ringgit into foreign currency up to thefollowing limits for overseas investments, including extension of foreign currency credit facilities to non-residents:

(i) Up to RM10 million per calendar year by companies on a per corporate group basis; and

(ii) Up to RM100,000 per calendar year by individuals.

For companies converting ringgit for overseas investments, they must have a minimum shareholders’funds of RM100,000 and must be in operation for at least one year.

For individuals, they may convert ringgit into foreign currency up to the amount required for investmentin foreign currency securities under the Employee Share Option/Purchase Scheme offered by theiremployers’ overseas parent or related companies.

• Residents, with or without any domestic credit facilities, may also finance in aggregate up to RM10million equivalent their overseas investments with foreign currency borrowing.

• Resident unit trust management companies may invest abroad up to the full amount of the Net AssetValue (NAV) attributed to non-residents and up to 30% of the NAV attributed to residents. Differentfunds of a unit trust management company or funds of different companies may be pooled to benefitfrom economies of scale when investing abroad. Such investments are required to be in line with theSecurities Commission’s prudential guidelines.

• Resident fund/asset managers may invest abroad up to the full amount of investments by their non-residentclients as well as resident clients without any domestic credit facilities and up to 30% of investments byresident clients with domestic credit facilities. These funds by different clients or companies may be pooled tobenefit from economies of scale when investing abroad. Such investments should be based on the mandateof their clients and in compliance with the Securities Commission’s prudential guidelines.

• Resident insurance companies and takaful operators may invest abroad up to 5% of their margin ofsolvency and up to 5% of their total assets respectively.

• Resident insurance companies and takaful operators may also invest abroad up to 30% of the NAV ofthe investment-linked funds that they market. These investments are subject to compliance withprudential insurance and takaful regulations issued by Bank Negara Malaysia.

Annex

P3

(c) Credit Facilities Obtained by ResidentsForeign Currency Credit Facilities

• Residents may obtain trade financing facility of any amount in foreign currency from licensed onshorebanks and licensed merchant banks.

• In addition, resident companies may obtain credit facilities in foreign currency up to the equivalent ofRM50 million in aggregate on a corporate group basis from licensed onshore banks, licensed merchantbanks and non-residents.

• Resident individuals may also obtain credit facilities in foreign currency up to the equivalent of RM10million in aggregate from licensed onshore banks, licensed merchant banks and non-residents.

• Any amount of credit facility exceeding the above permitted limits would require the prior permission ofthe Controller. Where the aggregate amount exceeds the equivalent of RM1 million and up to thepermitted limit, the resident (company or individual) is required to register the credit facility with theController, prior to drawing down on the facility.

• Residents may only utilise up to an aggregate of RM10 million equivalent of the foreign currency creditfacilities to finance overseas investment activities.

• There is no restriction for the repayment or prepayment of credit facilities as long as such credit facilitieshave been obtained in accordance with the relevant foreign exchange administration rules. Residentborrowers, however, are required to register with the Controller any proposal to prepay the creditfacilities prior to effecting the prepayments.

Ringgit Credit Facilities

• Residents are required to seek prior permission of the Controller to obtain any amount of credit facility inringgit from non-residents, including from non-resident shareholders or directors.

(d) Extension of Credit Facilities to Non-residentsForeign Currency Credit Facilities

• Licensed onshore banks and approved merchant banks may extend credit facilities in foreign currency tonon-residents for any purpose. However, credit facilities extended for the purchase or construction ofimmovable property in Malaysia would be subject to similar requirements as for ringgit credit facilitiesoutlined below.

• Residents, companies and individuals, with no domestic borrowing are free to extend credit facilities inforeign currency to non-residents. The extension of credit facility may be made through the conversionof ringgit or from foreign currency funds retained in Malaysia or abroad.

• Residents with domestic credit facilities may also extend credit facility in foreign currency to non-residents subject to the permitted limits for investment abroad by residents.

Ringgit Credit Facilities

• Non-bank residents may extend credit facilities in ringgit not exceeding an aggregate of RM10,000 to anon-resident.

• Resident stockbroking companies may extend margin financing facilities to non-resident clients for thepurchase of shares listed on Bursa Malaysia, provided they comply with all the relevant regulationsimposed by Bursa Malaysia.

• Licensed onshore banks may extend ringgit intra-day and overnight overdraft facilities in aggregatenot exceeding RM200 million to a non-resident stockbroking company or a non-resident custodianbank. The facilities are strictly for financing funding timing gaps due to unforeseen or inadvertent/technical administration errors or delays due to time zone difference in relation to settlement oftrades on Bursa Malaysia.

P4

• Resident insurance companies may extend policy loans in ringgit to their non-resident policy holdersfor amount up to the attained cash surrender value of their policies and not exceeding the durationof the policies.

• Residents, bank or non-bank, may extend up to a maximum of three immovable property loans inringgit to a non-resident to finance/refinance the purchase or construction of any immovableproperty in Malaysia, excluding for the purchase of land only, subject to their own internal creditassessment guideline. All purchases of immovable properties are subject to the guidelines issuedby the Foreign Investment Committee. Details of the guidelines can be found athttp://www.epu.jpm.my/.

• In addition, banking institutions may extend credit facilities in ringgit up to an aggregate limit ofRM10 million to a non-resident (excluding a non-resident stockbroking company, custodian bank orcorrespondent bank) for any use in Malaysia, other than to finance the purchase or construction ofimmovable property.

• Prior permission of the Controller is required for the extension of credit facilities exceeding anypermissible aggregate limits.

(e) Forward Foreign Exchange ContractsForward Foreign Exchange Contracts with Residents

• Licensed onshore banks and approved merchant banks may enter into forward foreign exchangecontracts with residents to purchase or sell any foreign currency against ringgit or another foreigncurrency as follows:

(i) Any payments or receipts for import or export of goods and services as well as income, based onfirm commitment or anticipatory basis;

(ii) Hedging the foreign currency exposures of permitted overseas investment, including extension ofcredit facilities to non-residents;

(iii) Any committed capital inflows or outflows, including drawdown of permitted foreign currencycredit facilities, and repayment of foreign currency credit facilities up to the amount repayablewithin 24 months as well as payments for permitted overseas investment.

• The maturity date of the forward foreign exchange contract should be the expected date of receiptor payment of the underlying transaction.

• For forward purchase of export proceeds, the maturity date of the forward foreign exchangecontract should not be later than six months after the intended date of export.

• For forward foreign exchange contract involving two foreign currencies, the use or retention of theforeign currency being purchased by the residents must comply with the current foreign exchangeadministration rules.

• Licensed onshore banks, approved merchant banks and licensed offshore banks in Labuan areallowed to enter into interest rate swaps with residents, provided the transaction is supported byfirm underlying commitment.

• Resident companies that have sold forward foreign currency receivables for ringgit, may temporarilyretain up to the amount of foreign currency receipts received earlier than the maturity date of theforward foreign exchange contract in their FCA with licensed onshore banks, pending maturity ofthe forward foreign exchange contract.

Forward Foreign Exchange Contracts with Non-residents

• Licensed onshore banks are allowed to enter into short-term currency swap arrangements with non-resident stockbrokers and non-resident custodian banks to cover payment for shares purchased onBursa Malaysia. The permission is subject to the condition that such contracts are based on firmcommitment and not on anticipated purchases, and for maturity period of up to three working dayswith no rollover option.

Annex

P5

• In addition, licensed onshore banks are allowed to enter into forward purchase or sales contractagainst ringgit with non-residents that have purchased or sold ringgit assets to facilitate settlement inringgit. The permission is subject to the condition that such contracts are based on firm commitmentand not on anticipated purchases or sales, and the maturity date is the expected or due date ofpayment or receipt of the underlying transaction.

• Multilateral Development Banks (MDBs)/Multilateral Financial Institutions (MFIs) and foreignmultinational corporations (MNCs) that are allowed to issue ringgit-denominated bonds inMalaysia may also enter into forward foreign exchange contracts with licensed onshore banks tohedge their foreign exchange and interest rate risks arising from the issuance of ringgit-denominated bonds.

• Licensed onshore banks may also enter into forward foreign exchange contracts with non-residents who invest in ringgit-denominated bonds issued by MDBs/MFIs and MNCs to hedge theirforeign exchange and interest rate risk arising from the investment in the ringgit-denominatedbonds.

III Ringgit Credit Facilities to Non-resident Controlled Companies (NRCCs)

• There is no restriction on residents to extend any amount of ringgit credit facilities to NRCCs.

IV Issuance of Ringgit Private Debt Securities

• There is no restriction for resident companies to raise domestic credit facility through the issuanceof ringgit Private Debt Securities regardless of amount, provided the proceeds are not used forrefinancing of offshore borrowing and/or for financing of investment abroad exceeding RM10million in aggregate in a calendar year. The issuance of Private Debt Securities must also be inaccordance with the Exchange Control Guideline on Private Debt Securities.

• Applications for issuance of ringgit bonds in Malaysia by MDBs/MFIs and MNCs would be consideredbased on the merits of each case. The information notes relating to such applications may be foundat http://www.bnm.gov.my/fxadmin.

V Foreign Currency Accounts of Residents

• Residents, with or without any domestic credit facilities, are free to open foreign currencyaccounts (FCA) with any licensed onshore banks, licensed offshore banks in Labuan or overseasbanks to retain any amount of their foreign currency receipts, other than receipts arising fromexport of goods from Malaysia.

• Resident exporters may open FCA with licensed onshore banks to retain any amount of foreigncurrency export receipts. They are also free to merge their export and non-export FCA maintainedwith licensed onshore banks without any restriction on the amount of foreign currency receiptsretained in such accounts.

• In addition, residents may convert ringgit into foreign currency for credit into their FCAmaintained with licensed onshore banks, licensed offshore banks in Labuan and overseas bankssubject to the permitted limits for investment abroad by residents.

• Resident companies may also temporarily retain in their onshore FCA, proceeds that have beensold forward for ringgit and received earlier than maturity date of the forward contract.

• Resident individuals with domestic credit facilities may also convert ringgit into foreign currencyfor credit into FCA opened solely to facilitate education and employment overseas up to anaggregate limit of:

(i) US$150,000 with licensed onshore banks;(ii) US$150,000 with licensed offshore banks in Labuan; and(iii) US$ 50,000 with overseas banks.

• Resident companies maintaining FCA with licensed offshore banks in Labuan or overseas banks arerequired to submit monthly statement, Statement OA, on the accounts to the Controller.

P6

VI Foreign Currency Accounts of Non-residents

• Licensed onshore banks and licensed merchant banks may open FCA for non-residents.

• There are no limits on the FCA of non-residents and no restrictions on the inflow and outflow offunds through the FCA of non-residents.

VII External Accounts of Non-residents

• Resident financial institutions may open accounts in ringgit known as External Accounts fornon-residents. There is no overnight limit on External Accounts. Non-residents may make ringgitcash withdrawal of any amount from the External Accounts.

• There is also no restriction on the amount that can be converted from ringgit into foreigncurrency and vice versa by the non-resident account holders with licensed onshore banks.

• Non-residents may use ringgit funds in the External Account for the following purposes:

- Purchase of foreign currency, excluding Restricted Currency;

- Purchase of ringgit assets in Malaysia;

- Payment for goods and services for own use in Malaysia;

- Payment of administrative and statutory expenses incurred in Malaysia;

- Payment under a non-financial guarantee to a resident (where the External Account holder ismaking payment arising from the guarantee being called upon);

- Extension of ringgit credit facilities to staff in Malaysia in accordance with the terms andconditions of employment;

- Repayment of ringgit credit facilities permitted by the Controller or in accordance with termsand conditions of employment; and

- Payments to resident beneficiary for any purpose other than the following:

∗ Payment for the import of goods and services;

∗ Extension of ringgit credit facilities to residents other than as permitted by the Controller;

∗ Settlement under financial guarantees; and

∗ Payment on behalf of a third party.

• The sources of funds for credit into External Accounts may be from:

- Sale of foreign currency for ringgit with licensed onshore banks, excluding Restricted Currency;

- Sale of ringgit assets;

- All income derived in Malaysia including salaries, wages, royalties, commissions, fees, rental,interest, profits or dividends;

- Proceeds from ringgit credit facilities permitted by the Controller or in accordance with theterms and conditions of employment;

- Proceeds from repayment of ringgit credit facilities permitted by the Controller or inaccordance with the terms and conditions of employment;

Annex

P7

- Transfers from:

∗ Another External Account of the same account holder;

∗ Another External Account and/or Resident Account of different account holders by way of:

o Automated Teller Machine transfer up to RM5,000 per person/company, per day, per bank forany purpose;

o Internet-bank transfers up to RM5,000 per person/company, per day, per bank for any purpose.

- Deposit of ringgit notes not exceeding RM10,000 per day; and

- Deposit of cheques up to RM5,000 per cheque for any purpose.

• Ringgit funds in the External Accounts may be converted into foreign currency and repatriated abroad orused in Malaysia for permitted purposes.

• There is no restriction on the operation of the External Accounts of non-residents working or studying inMalaysia (including their spouse, children and/or parents who are currently residing in Malaysia), centralbanks, embassies, consulates, high commissions, supranational or international organisations recognisedby the Government of Malaysia. Such persons or organisations can use funds in the External Accountsfor all purposes, including the permissible purposes referred above.

VIII Special Status Granted to Selected Companies

(a) Offshore Entities in the Labuan International Offshore Financial Centre

• Entities incorporated or registered under the Offshore Companies Act 1990 in the Labuan InternationalOffshore Financial Centre are declared as non-residents for foreign exchange administration purposes.

• Offshore entities in Labuan may buy or sell foreign currency (other than Restricted Currency) againstanother foreign currency spot or forward with licensed onshore banks, licensed offshore banks(excluding licensed offshore investment banks) in Labuan as well as non-residents outside Malaysia.They may also buy or sell foreign currency (other than Restricted Currency) against ringgit with licensedonshore banks for permitted purposes.

• All offshore entities may maintain External Accounts with resident banks to facilitate the defrayment ofstatutory and administrative expenses in Malaysia.

• Offshore insurance entities in Labuan may also use their External Accounts to facilitate the receipt ofreinsurance premiums and for payment of claims arising from reinsurance of domestic insurance business.

• Licensed offshore banks in Labuan may receive payments in ringgit from residents arising from fees,commissions, dividends or interest from deposit of funds with onshore financial institutions.

• Licensed offshore banks in Labuan may invest in assets/instruments in Malaysia for their own accountprovided investments are transacted directly with resident banking institutions or resident brokers. Theinvestments must not be financed by ringgit borrowings.

(b) Multimedia Super Corridor Companies

• Companies operating in Multimedia Super Corridor (MSC) that are incorporated as separate legalentities, are given exemption from foreign exchange administration rules upon the companies beingawarded the MSC status by the Multimedia Development Corporation. The exemption granted to theMSC companies is solely for transactions undertaken on their own account.

• However, prior permission should be obtained to deal with Specified Persons and in Restricted Currency.

• The MSC companies are required to submit the necessary statistical forms/reports/statements formonitoring purposes. These reports can be obtained from Bank Negara Malaysia’s website,http://www.bnm.gov.my/fxadmin.

P8

(c) Approved Operational Headquarters

• Approved Operational Headquarters (OHQs) are allowed to:

(i) Open FCA with licensed onshore banks to retain any amount of export proceeds in foreigncurrency.

(ii) Open FCA with licensed onshore banks, licensed offshore banks in Labuan or overseas banks forcrediting foreign currency receivables, other than export proceeds, with no limit imposed on theovernight balances.

(iii) Obtain any amount of domestic credit facilities in ringgit.

(iv) Obtain any amount of foreign currency credit facilities from licensed onshore banks and licensedmerchant banks in Malaysia, and from any non-resident, provided the OHQ does not on-lend to, orraise the funds on behalf of, any resident.

(v) Invest abroad any amount, including extension of credit facilities to their related overseascompanies, to be funded with foreign currency funds or foreign currency borrowing. They mayalso convert any amount of ringgit if they have no domestic credit facilities or up to RM10 millioninto foreign currency per calendar year if they have domestic credit facilities for investment abroad.

Annex

P9

Fun

ds

Term

inat

ed F

un

ds

Ship

Fin

anci

ng F

acili

ty

Fund

for

Foo

d Bu

mip

uter

a En

trep

rene

urs

Proj

ect

Fund

Fu

nd F

or S

mal

l and

Med

ium

Indu

strie

s 2

New

Ent

repr

eneu

rs F

und

2 Re

habi

litat

ion

Fund

for

Sm

all B

usin

esse

s

30-O

ct-9

260

0

1,30

03

3003

4,50

01,3

2,00

02,3

800

04-J

an-9

310

-Feb

-00

15-A

pr-0

015

-Jul

-01

01-N

ov-0

3

06-F

eb-8

818

-Jun

-90

29-O

ct-9

310

-Mar

-90

05-F

eb-9

1

01-M

ay-9

804

-Jan

-93

02-J

an-9

812

-Dec

-89

23-N

ov-9

8

03-J

ul-0

1

01-J

an-9

129

-Feb

-92

31-O

ct-9

531

-Dec

-97

04-A

ug-9

9

04-A

ug-9

903

-Apr

-00

03-A

pr-0

015

-Jul

-01

01-N

ov-0

3

01-N

ov-0

3

388,

176

893

3,52

71,

952 0

Ente

rpris

e Re

habi

litat

ion

Fund

A

band

oned

Hou

sing

Pro

ject

s Fu

nd

Fund

to

Acc

eler

ate

the

Con

stru

ctio

n of

L

ow-C

ost

Hou

ses

Spec

ial F

und

for

Tour

ism

Indu

stria

l Adj

ustm

ent

Fund

Spec

ial S

chem

e fo

r Lo

w a

nd M

ediu

m

Cos

t H

ouse

s Bu

mip

uter

a In

dust

rial F

und

Fund

for

Sm

all a

nd M

ediu

m In

dust

ries

New

Ent

repr

eneu

rs F

und

Reha

bilit

atio

n Fu

nd f

or S

mal

l and

Med

ium

In

dust

ries

Entr

epre

neur

s Re

habi

litat

ion

and

D

evel

opm

ent

Fund

Spec

ial R

elie

f G

uara

ntee

Fac

ility

8

500

3

200

3

1,8

503

1,2

503

330

3,4

104

600

500

100

100

1,0

00

1Th

e al

loca

tion

was

incr

ease

d fr

om R

M2,

000

mill

ion

to R

M4,

500

mill

ion

in 2

004

3 R

evol

ving

fun

ds

4 U

nutil

ised

allo

catio

ns w

ere

tran

sfer

red

to R

ehab

ilita

tion

Fund

for

Sm

all B

usin

esse

s 5

6

row

ers’

out

stan

ding

loan

bal

ance

s w

ith t

he le

ndin

g in

stitu

tions

8

Fun

ds

Ad

min

iste

red

/Fu

nd

ed b

y B

ank

Neg

ara

Mal

aysi

a: F

un

d U

tilis

atio

n

Dat

e es

tabl

ishe

d

Fund

al

loca

tion

(RM

m)

Fund

allo

catio

n (R

M m

)

Num

ber

of a

pplic

atio

ns a

ppro

ved

Num

ber

of a

pplic

atio

ns a

ppro

ved

Am

ount

app

rove

d (R

M m

)To

tal d

isbu

rse-

m

ents

as

at

end-

2004

(R

M m

)

Out

stan

ding

as

at

end-

20

047

(RM

m)

Tota

l dis

burs

e-

men

ts a

s at

en

d-20

04

(RM

m)

Out

stan

ding

as a

t en

d-

2004

7

(RM

m)

Ann

ual

chan

ge

Ann

ual

chan

ge

Tota

l as

at e

nd-

Ann

ual

chan

ge

Dat

e es

tabl

ishe

dD

ate

term

inat

ed

2003

2004

2003

2004

2003

2004

Am

ount

app

rove

d (R

M m

)

Tota

l as

at e

nd-

Ann

ual

chan

ge20

0320

04

Tota

l as

at e

nd-

Tota

l as

at e

nd-

764 74 54 194 25 96 99

5,42

03,

126

322 33

21-M

ay-0

310

-Jul

-04

1,0

0073

388,

829

1,07

96,

239

2,94

8 23

065

318

62,

712

996 23

577

1,41

143

82,

285

1,07

7 0

577

1,52

849

94,

172

1,88

6 11

011

7 611,

887

809 11

543

1,41

841

23,

312

1,54

2 5

282

702 68

2,86

01,

422 5

896

331

297

203 95 604 95

3,77

6

764 74 54 194 25 96 99

5,42

03,

126

317 33

0 0 0 0 0 0 0 0 -55

00

1,42

1

352 3

896

331

297

203 95 609 95

3,77

41,

420

344 3

00 0 0 0 55,6

0 -25

-15

-85 0

850

346

297

203 95 583 91

3,72

61,

398

328 2

100 12 0 35 10 12 35

1,74

635

0

227

0.9

8512

4049

90

0

P10

Licensed Banking Institutions (as at 31 December 2004)

Commercial Banks

1. ABN AMRO Bank Berhad2. Affin Bank Berhad3. Alliance Bank Malaysia Berhad1

4. AmBank Berhad5. Bangkok Bank Berhad6. Bank of America Malaysia Berhad

7. Bank of China (Malaysia) Berhad8. Bank of Tokyo-Mitsubishi (Malaysia) Berhad9.

10.Bumiputra-Commerce Bank Berhad

11.Citibank Berhad

12.Deutsche Bank (Malaysia) Berhad

13.EON Bank Berhad2

14.Hong Leong Bank Berhad3

15.HSBC Bank Malaysia Berhad

16.J.P. Morgan Chase Bank Berhad

17.Malayan Banking Berhad4

18.OCBC Bank (Malaysia) Berhad

19.Public Bank Berhad5

20.RHB Bank Berhad

21.Southern Bank Berhad

22.Standard Chartered Bank Malaysia Berhad

23.The Bank of Nova Scotia BerhadUnited Overseas Bank (Malaysia) Berhad

Islamic Banks

1. Bank Islam Malaysia Berhad

2. Bank Muamalat Malaysia Berhad

1 Merged with Alliance Finance Berhad with effect from 1 August 20042 Merged with EON Finance Berhad with effect from 1 November 20043 Merged with Hong Leong Finance Berhad with effect from 1 August 20044 Merged with Mayban Finance Berhad with effect from 1 October 20045 Merged with Public Finance Berhad with effect from 4 September 2004

Annex

P11

Finance Companies

1. AFFIN-ACF Finance Berhad

3. Bumiputra-Commerce Finance Berhad4. Kewangan Bersatu Berhad5. RHB Delta Finance Berhad

6. Southern Finance Berhad

Merchant Banks

1. Affin Merchant Bank Berhad

2. Alliance Merchant Bank Berhad3. AmMerchant Bank Berhad4. Aseambankers Malaysia Berhad

5. Commerce International Merchant Bankers Berhad6. Malaysian International Merchant Bankers Berhad7. Public Merchant Bank Berhad

8. RHB Sakura Merchant Bankers Berhad9. Southern Investment Bank Berhad

10. Utama Merchant Bank Berhad

P12

Financial Institutions Offering Islamic Banking Services

Islamic Banks

1. Bank Islam Malaysia Berhad2.3.

Bank Muamalat Malaysia BerhadRHB Islamic Bank Berhad

Participating Banks in the Islamic Banking Scheme

Commercial Banks

1. Affin Bank Berhad

2. Alliance Bank Malaysia Berhad3. AmBank Berhad4. Citibank Berhad5. EON Bank Berhad6. Hong Leong Bank Berhad

7. HSBC Bank Malaysia Berhad8. Malayan Banking Berhad9. OCBC Bank (Malaysia) Berhad

10. Public Bank Berhad

11. Southern Bank Berhad

12. Standard Chartered Bank Malaysia Berhad

Finance Companies

1. Affin-ACF Finance Berhad2. AmFinance Berhad

3. Southern Finance Berhad

Merchant Banks

1. Affin Merchant Bank Berhad2. Alliance Merchant Bank Berhad

4. Commerce International Merchant Bankers Berhad3. AmMerchant Bank Berhad

Launched on 1 March 20051

1

Annex

P13

Discount Houses

1. Abrar Discounts Berhad2. Affin Discount Berhad3. Amanah Short Deposits Berhad

4. CIMB Discount House Berhad5. KAF Discounts Berhad6. Malaysia Discount Berhad

7. Mayban Discount Berhad

Development Financial Institutions Offering Islamic BankingFacilities

1. Bank Kerjasama Rakyat Malaysia Berhad2. Bank Simpanan Nasional3. Bank Pembangunan dan Infrastruktur Malaysia Berhad

4. Bank Industri & Teknologi Malaysia BerhadBank Pertanian Malaysia5.

P14

Shariah Advisory Council Membersfor Islamic Banking and TakafulSession 2004-2006

Y.A.A. Datuk Sheikh Ghazali Abdul Rahman

Chairman:

Dr. Mohd Daud Bakar

1.

2.

3.

4.

5.

6.

7.

8.

Datuk Haji Md. Hashim Haji Yahaya

Deputy Chairman:

S.S. Dato’ Haji Hassan Haji Ahmad

Members:

Datuk Dr. Abdul Monir Yaacob

Dato’ Dr. Abdul Halim Haji Ismail

Y.A. Dato' Abdul Hamid Haji Mohamad

Assoc. Prof. Dr. Abdul Halim Muhammad

Dr. Mohd Ali Haji Baharum

Dr. Mohd Parid Sheikh Ahmad

Annex

Key Economic andFinancial Statistics

Annex

P17

2000 2001 2002

RM million

Agriculture 18,662 18,551 19,036Mining and quarrying 15,385 15,160 15,774Manufacturing 67,250 63,299 65,872Construction 6,964 7,108 7,275Services 113,408 120,194 127,872

Less: Imputed bank service charges 15,832 17,678 21,225Plus: Import duties 4,721 4,594 5,384

GDP at purchasers' prices1 210,557 211,227 219,988

Annual change (%)

Agriculture 6.1 -0.6 2.6Mining and quarrying 0.3 -1.5 4.0Manufacturing 18.3 -5.9 4.1Construction 0.6 2.1 2.3Services 6.7 6.0 6.4

Less: Imputed bank service charges 6.3 11.7 20.1Plus: Import duties -11.2 -2.7 17.2

GDP at purchasers' prices 8.9 0.3 4.1

2003 2004p 2005f

20,12316,69971,3127,417

133,531

22,5935,184

231,674

5.75.98.31.94.4

6.4-3.7

5.3

1 Numbers may not necessarily add up due to rounding p Preliminaryf Forecast


Table A.1Gross Domestic Product by Kind of Economic Activity in Constant 1987 Prices

21,13517,38478,323

7,276142,433

23,3314,820

248,040

21,83618,25081,8827,205

150,593

24,4024,958

260,323

5.04.19.8

-1.96.7

3.3-7.0

7.1

3.35.04.5

-1.05.7

4.62.9

5.0 ~ 6.0

P18

Table A.2Growth in Manufacturing Production (1993=100)

2001 2002 2003 2004 20042002 2003

Index Annual change (%)

Export-oriented industries 200.1 210.2 235.3 5.0 11.9Electrical machinery, apparatus

appliances and supplies 229.2 247.8 271.7 8.1 9.6Electronics 269.1 305.2 351.3 13.4 15.1Electrical products 166.6 158.2 147.1 -5.1 -7.0

Radio and television sets 170.6 157.4 134.4 -7.8 -14.6

Cables and wires 180.6 145.8 128.8 -19.2 -11.7Manuf. of office, computing

and accounting machinery 227.1 176.1 156.6

Manuf. of refrigerating, exhaust,ventilating and air-conditioningmachinery 132.3 161.8 180.6 22.2 11.6

Textiles and wearing apparel 118.8 111.4 109.0 -6.2 -2.2

Wood and wood products 104.9 98.6 99.5 -6.0 0.9Chemicals and chemical products 228.7 235.0 283.8 2.7 20.8

Rubber products 180.0 183.5 217.9 2.0 18.7

Off-estate processing 200.9 215.1 240.5 7.1 11.8

Others 106.2 115.1 120.9 8.3 5.1

Domestic-oriented industries 184.1 190.4 202.0 3.4 6.1Construction-related products 176.1 182.9 201.6 3.8 10.2

Non-metallic mineral products 171.3 180.0 197.5 5.1 9.7Basic iron and steel and

non-ferrous metal 182.3 186.6 206.7 2.4 10.8

Transport equipment 237.1 251.9 238.0 6.2 -5.5Food products 154.7 168.2 183.0 8.7 8.8

Beverages 138.5 121.9 147.3 -11.9 20.8Tobacco products 164.4 148.0 153.8 -10.0 3.9

Petroleum products 198.3 190.2 194.7 -4.1 2.3

Fabricated metal products 200.0 201.7 216.5 0.8 7.4

Paper products 165.0 186.2 201.2 12.8 8.0

Total 195.8 204.7 226.1

268.7

319.8439.0133.3114.5

117.1

144.5

177.3

96.2

112.2323.8

250.1

250.2

142.8

216.4200.3187.8

215.9

258.5188.5

144.5157.7

197.3

279.8

205.8

254.7

14.2

17.725.0-9.4

-14.8

-9.1

-7.7

-1.8

-11.7

12.714.1

14.8

4.0

18.1

7.1-0.6-4.9

4.4

8.63.0

-1.92.6

1.3

29.2

2.3

12.74.5 10.5


-22.5 -11.1

Annex

P19

Table A.3Production of Primary Commodities

2000 2001 2002 2003 2004p 2001 2002 2003 2004p

Volume Annual change (%)

Crude palm oil(‘000 tonnes) 10,842 11,804 11,909 13,355 8.9 0.9 12.1

1

(‘000 tonnes) 928 882 890 986 1,186

(‘000 cu. metres) 23,074 18,923 20,649 21,532 -18.0 9.1 4.3Cocoa

(‘000 tonnes) 70 58 48 36Crude oil (including

condensates)(‘000 bpd) 681 666 698 738 -2.4 4.9 5.6

Natural gas

(mmscfd) 4,367 4,542 4,676 5,013 3.7 3.0 7.2Tin-in-concentrates

(‘000 tonnes) 6.3 5.0 4.2 3.4 2.8

13,976

21,576

33

762

5,196

4.7

0.2

-7.8

3.6

4.0

Source: Malaysian Palm Oil BoardDepartment of Statistics, MalaysiaForestry Departments (Peninsular Malaysia, Sabah & Sarawak)Malaysian Cocoa BoardPETRONASMinerals and Geoscience Department, Malaysia

-4.9 0.9 10.8 20.4

-17.9 -17.4 -24.0

-21.2 -15.2 -20.3 -16.6

p

1 Revised from 2000 onwards based on new compilation methodology

P20

Table A.4GNP by Demand Aggregates

2000 2001 2002 2003 2004p 2005f

at Current Prices

(RM million)

Consumption 181,031Private consumption 145,355Public consumption 35,676

Investment 87,729Private investment 44,102Public investment 43,627

Change in stocks1 5,982

Exports of goods and services 427,004

Imports of goods and services 358,530

GDP at purchasers' value 343,215

Net factor payments abroad -28,909

GNP at purchasers' value 314,306

at Constant 1987 Prices(RM million)

Consumption 119,238Private consumption 95,370Public consumption 23,868

Investment 64,840Private investment 32,596Public investment 32,244

Change in stocks1 3,384

Exports of goods and services 246,158

Imports of goods and services 223,062

GDP at purchasers' value 210,557

Net factor payments abroad -19,271

GNP at purchasers' value 191,287


1 Includes statistical discrepancy


192,909150,64442,265

83,34534,52848,817

-3,339

389,255

327,767

334,404

-25,623

308,781

209,521159,50650,015

83,76429,37654,388

2,217

415,040

348,919

361,624

-25,061

336,563

227,279172,36654,913

87,08929,85657,233

-2,842

450,593

367,918

394,200

-22,527

371,673

251,373191,97059,403

91,81835,35456,464

8,664

544,956

449,262

447,548

-24,480

423,068

275,869213,49562,374

89,16238,96950,193

-1,580

583,654

476,850

470,255

-26,387

443,868

125,63797,63028,007

63,05026,12036,930

-1,279

227,685

203,866

211,227

-17,642

193,585

133,282101,94631,336

63,24922,18141,068

2,356

237,904

216,802

219,988

-17,251

202,737

143,198108,72234,476

64,96022,27042,690

-1,913

253,006

227,578

231,674

-15,196

216,477

156,427119,68136,746

66,99625,79041,206

4,863

292,475

272,720

248,040

-15,888

232,152

168,246129,85438,392

64,67528,26536,411

-874

316,216

287,941

260,323

-17,524

242,799

Annex

P21

f Forecast

Table A.5Savings-Investment Gap

2000 2001 2002 2003 2004p 2005f

RM million

Public gross domestic capital formation 43,627 48,817 54,388 57,233 56,464

Public savings 55,391 53,534 63,347 74,564 64,429

Deficit/surplus 11,764 4,717 8,959 17,331 7,964

Private gross domestic capital formation 50,084 31,189 31,593 27,014 44,018

Private savings 70,573 54,159 53,129 60,530 92,633

Deficit/surplus 20,489 22,970 21,538 33,516 48,616

Gross domestic capital formation 93,711 80,006 85,981 84,247 100,482(as % of GNP) 29.8 25.9 25.5 22.7 23.8

Gross national savings 125,964 107,693 116,476 135,094 157,062(as % of GNP) 40.1 34.9 34.6 36.3 37.1

Balance on current account 32,253 27,687 30,495 50,847 56,580(as % of GNP) 10.3 9.0 9.1 13.7 13.4

50,193

66,191

15,998

37,389

87,683

50,294

87,58219.7

153,87434.7

66,29214.9

I ncludes the change in stocks. Previously, the change in stocks was distributed between the public and private sector gross domestic capital formation

p Preliminary


1

1

P22

Table A.6Balance of Payments

2001

Item

RM million

Goods1 334,326 264,472 69,854Trade account 334,284 280,229 54,055

Services 54,929 63,295 -8,366Transportation 10,443 21,795 -11,352Travel 26,081 9,933 16,148Other services 17,932 31,119 -13,187Government services n.i.e.3 473 448 25

Balance on goods and services 389,255 327,767 61,488

Income 7,018 32,641 -25,623Compensation of employees 1,395 2,409 -1,014Investment income2 5,623 30,232 -24,609

Current transfers 2,040 10,218 -8,178

Balance on current account 398,313 370,626 27,687% of GNP 9.0

Capital account – –

Financial account -14,791Direct investment 1,091

Abroad -1,014In Malaysia 2,105

Portfolio investment -2,466Other investment -13,416

Official sector 7,114Private sector -20,530

Balance on capital andfinancial account -14,791

Errors and omissions -9,234of which:Exchange revaluation

gain (+) / loss (-) -4,060

Overall balance(surplus + / deficit -) 3,662

Bank Negara Malaysiainternational reserves, net4

RM million 117,203US$ million 30,843Reserves as months of

retained imports 5.11 Adjusted for valuation and coverage to the balance of payments basis. Imports include military goods which are not

included in trade data2

reinvested earnings under “Direct Investment” in the Financial Account3

4 ruling on the balancesheet date and the gain/loss has been reflected accordingly in the Bank’s account

e f recastNote: Numbers may not necessarily add up due to rounding


2002

358,504 286,387 72,117357,430 303,090 54,340

56,536 62,532 -5,99610,847 22,419 -11,57227,049 9,947 17,10218,166 29,408 -11,242

474 758 -284

415,040 348,919 66,121

8,129 33,190 -25,061 1,653 2,832 -1,1796,476 30,358 -23,882

2,513 13,079 -10,566

425,682 395,188 30,4949.1

-11,9414,935

-7,23812,173-6,506

-10,3704,720

-15,090

-11,941

-4,362

6,627

14,191

131,39434,577

5.4

+ - Net + - Net

Annex

P23

2003 2004e 2005f

RM million

481,240 376,766 104,474398,998 301,297 97,701480,722 399,648 81,073397,884 316,538 81,347

63,716 72,497 -8,78051,595 66,621 -15,02612,018 29,801 -17,78310,514 23,787 -13,274 31,152 11,754 19,398 22,423 10,816 11,607 20,120 29,794 -9,67418,206 31,225 -13,019

426 1,147 -721452 793 -341

544,957 449,263 95,694450,594 367,918 82,675

15,307 39,787 -24,48013,103 35,630 -22,527 2,618 3,760 -1,1422,170 3,120 -950

12,689 36,027 -23,33910,933 32,510 -21,577

1,700 16,333 -14,633 1,929 11,229 -9,300

561,964 505,384 56,580465,626 414,777 50,84813.413.7

––

15,386-12,146 10,823-7,11117,93433,112

-28,550-1,140

-27,410

11,095

7,997

83,061

253,51366,714

8.0

4,194-5,2049,3984,168

-20,508-11,201-9,307

358

514,880 400,060 114,820514,366 424,872 89,494

68,774 76,790 -8,01612,639 31,953 -19,314

35,120 13,645 21,47520,613 29,975 -9,362

402 1,217 -815

583,654 476,850 106,804

18,099 44,486 -26,3873,179 4,588 -1,409

14,920 39,898 -24,978

1,607 15,732 -14,125

603,360 537,068 66,29214.9

11,927

39,059

170,45244,856

6.6

+ - Net + - Net + - Net

-12,146 15,386

P24

Table A.7Principal Markets for Manufactured Exports

2000 2001 2002 2003 2004p

Country

ASEANSingaporeThailandIndonesiaPhilippinesBrunei Darussalam

EU1

United KingdomGermany

Netherlands

Others

United States

Japan

Hong Kong China

Chinese Taipei

Korea

The People’s Republic of China

Australia

Canada

Middle East2

Latin American Countries

Rest of the World

Total

RMmillion share

% RMmillion share

% RMmillion share

% RMmillion share

% RMmillion share

%


85,210

46,057

675

12,465

11,067

5,5375,064

10,16663,768

8,682

14,315

4,169

5,717

2,900

7,054

7,979

7,363

11,421

15,795

35,763

74,165

317,908

26.8

3.220.1

1.61.70.2

14.5

3.52.73.9

23.3

5.0

3.6

2.3

2.5

2.2

0.9

1.8

1.3

11.2

4.6

100.0

72,140

40,894

52,4839,8164,9834,113

745

7,17611,754

8,355

65,830

32,413

14,327

9,767

6,692

11,266

5,862

1,977

6,885

3,436

13,827

285,316

25.3

18.43.41.81.40.3

14.3

2.92.5

23.1

4.1

11.4

5.0

3.4

2.3

3.9

2.1

0.7

2.4

1.2

4.9

100.0

26.2

18.54.11.91.40.3

12.7

2.62.34.1

23.9

9.4

6.3

3.7

2.6

4.6

2.0

0.7

2.0

1.0

4.9

100.0

82,481

57,36713,5536,2914,346

925

41,077

8,1318,053

14,580

74,918

28,683

24,717

11,610

7,123

17,376

7,116

2,132

7,485

2,939

18,665

326,322

25.3

17.64.21.91.30.3

12.6

2.52.54.4

23.0

8.8

7.6

3.6

2.2

5.3

2.2

0.7

2.3

0.9

5.5

100.0

78,981

869

38,505

302,021

12,31955,917

7,8367,071

13,843 4.4 13,609 4.8 3.7 10,313 3.2

99,180

65,80017,500

8,9445,994

942

51,523

9,6789,248

20,138

85,484

33,341

27,482

11,766

9,178

22,134

9,531

2,754

10,461

4,154

23,461

390,449

12,459

25.4

16.94.52.31.50.2

13.2

2.52.45.1

21.9

8.5

7.0

3.0

2.4

5.7

2.4

0.7

2.7

1.1

6.0

100.0

3.211,085

12,513

14,041

5,951

1,992

72,116

28,271

19,147

11,216

7,797

5,992

3,031

14,981

5,6274,249

1 Includes the 10 new member states in 20042 Beginning 2004, Cyprus has been excluded from Middle East as it has been included under the EU countriesp Preliminary

Annex

P25

Table A.8Principal Export Markets for Electronics

20032000 2001 2002 2004p

Country

United StatesSingapore

Chinese Taipei

Japan

Hong Kong China

Others

Total

The People's Republic of China

RM million

% share

RM million

% share

RM million

% share

RM million

% share

RM million

% share

41,969 26.742,378 25.4 34,793 24.9 45,285 27.133,000 21.0 41,048 24.6 30,335 21.7 32,042 19.1

7,670 4.97,289 4.4 6,520 4.7 8,056 4.8

11,226 7.115,970 9.6 13,502 9.7 10,465 6.3

12,641 8.08,017 4.8 7,470 5.3 18,005 10.8

21,271 13.521,429 12.7 19,736 14.2 22,395 13.3

157,401 100.0166,791 100.0 139,632 100.0 167,381 100.0

7,838 5.03,494 2.1 6,012 4.3 9,002 5.4

51,912 27.533,466 17.7

6,873 3.6

11,213 5.9

Thailand 6,921 4.45,641 3.4 4,802 3.4 7,147 4.3 8,297 4.4

19,606 10.4

28,704 15.4

188,605 100.0

10,802 5.7


p Preliminary

Netherlands 7,746 4.910,490 6.3 9,199 6.6 7,056 4.2 8,079 4.3

Germany 3,804 2.44,767 2.9 3,453 2.5 4,535 2.7 5,176 2.7

United Kingdom 3,315 2.16,268 3.8 3,810 2.7 3,393 2.0 4,477 2.4

Table A.9Principal Export Markets for Electrical Products

20032000 2001 2002 2004p

16,354 29.517,358 27.3 17,324 28.6 17,430 31.78,340 15.0 8,665 13.6 8,120 13.4 7,443 13.6

1,242 2.21,032 1.6 1,113 1.8 1,201 2.2

6,758 12.29,337 14.7 9,207 15.2 7,584 13.8

2,398 4.32,992 4.7 2,534 4.2 2,483 4.5

15,211 27.419,552 30.8 17,176 28.2 14,208 25.9

Total 55,470 100.063,638 100.0 60,675 100.0 54,897 100.0

1,430 2.61,794 2.8 1,865 3.1 1,410 2.61,643 3.01,480 2.3 1,566 2.6 1,558 2.8

2,094 3.8

18,134 26.510,552 15.4

1,634 2.4

7,602 11.1

2,534 3.7

20,956 30.6

68,446 100.0

1,820 2.72,271 3.3

2,943 4.31,428 2.2 1,770 2.9 1,580 2.9


Indonesia

Japan

Hong Kong China

Others

Germany

The People's

Republic of China

Thailand

Country RM million

% share

RM million

% share

RM million

% share

RM million

% share

RM million

% share


p Preliminary

P26

Table A.10Principal Export Markets for Chemicals and Chemical Products

2000 2001 2002 2003 2004p

Singapore 1,900 12.7 1,646 11.1 1,736 10.1

Hong Kong China 1,373 9.1 1,176 7.9 1,239 7.2

Japan 1,586 10.6 1,566 10.5 1,750 10.2

Korea 469 3.1 511 3.4 546 3.2

Chinese Taipei 671 4.5 620 4.2 882 5.1

Thailand 976 6.5 1,164 7.8 1,387 8.0Indonesia 1,153 7.7 999 6.7 1,302 7.6

The People’sRepublic of China 1,054 7.0 1,533 10.3 2,294 13.3 2,930 13.8

2,158 10.2

2,105 9.9

1,771 8.4

1,549 7.3

1,531 7.2

766 3.6960 4.5

5,533 26.1

21,220 100.0

4,019 14.5

2,581 9.3

2,983 10.7

2,339 8.4

1,847 6.7

2,232 8.0

1,174 4.21,337 4.8

7,184 26.0

27,767 100.0

Others 4,181 27.8 4,070 27.4 4,552 26.3

Total 15,011 100.0 14,879 100.0 17,228 100.0

Country RMmillion share

% RMmillion share

% RMmillion share

% RMmillion share

%RMmillion share

%


p Preliminary

India 222 1.5 376 2.5 498 2.9 858 4.0 1,089 3.9United States 1,426 9.5 1,218 8.2 1,042 6.1 1,059 5.0 982 3.5

Table A.11Principal Export Markets for Manufactures of Metal

2000 2001 2002 2003 2004pCountry RM %

million shareRM %

million shareRM %

million shareRM %

million shareRM %

million share

Singapore

United States

Japan

The People’sRepublic of China

Thailand

IndonesiaKorea

Australia

Others

Total


p Preliminary

2,270 24.3

687

755

445 5.2

495

476

23.2 2,134 20.12,255

9.01,015

7.4833

4.95506.3706

3.9442

7.4 486

8.5 594

5.5 665

5.8 504

4.1 398

3.4 249

39.3 3,549

8.0 644

8.8 736

26.3 2,0205.7 501

4.3 360

2.8 295

35.6 3,420

374

242

3,062

5.5

6.8

7.6

5.7

4.53.8430

3.3366

41.34,645

100.011,242

18.93,057

5.7918

6.61,070

8.31,3407.91,269

3.75903.6581

5.8929

39.56,386

100.016,140

2.8 2173.3 240288 2.5

2.8

40.3

8,618 8,692 8,796100.0 100.0 100.0

Annex

P27

2000 2001 2002 2003 2004pCountry RM

million%

shareRM

million%

shareRM

million%

shareRM

million%

shareRM

million%

share

Table A.12Principal Export Markets for Optical and Scientific Equipment


p Preliminary

United StatesSingaporeJapanNetherlandsThe People's

Hong Kong ChinaGermanyOthers

Total

Republic of China

1,999859

1,004

291

173

342584

1,573

6,825

29.312.6

14.7

4.3

2.5

5.08.6

23.0

100.0

2,1321,110

1,163

415

232

408437

1,905

7,802

27.314.2

14.9

5.3

3.0

5.25.6

24.5

100.0

1,8741,573

1,186

511

199

430408

1,971

8,152

23.019.3

14.5

6.3

2.4

5.35.0

24.2

100.0

1,9831,752

1,380

642

451

438404

2,106

9,156

21.719.1

15.1

7.0

4.9

4.84.4

23.0

100.0

2,4282,203

2,106

877

567

452397

2,538

11,568

21.019.0

18.2

7.6

4.9

3.93.4

22.0

100.0

Table A.13Principal Export Markets for Petroleum Products

2000 2001 2002 2003 2004pCountry RM %

million shareRM %

million shareRM %

million shareRM %

million shareRM %

million share

Singapore 2,457 39.9

United States

239

1,371

746 9.2

119

921

34.6 3,043 38.23,605

5.6525

19.51,836

2.9275

4.3407

2.9274

270

3.3 188

11.8 1,001

11.0 412

2.4 188

1.3 257

257

31.2 2,274

2.9 276

16.9 99130.2 2,906

1.5 201

2.8 110

36.0 2,637

231

2,927

2.5

Japan 13.1The People’s

Republic of China

5.4

Australia

2.5

3.4

2.9

23.72,243

100.09,435

40.25,392

4.8642

14.21,905

7.3977

3.4459

4.1551

663 4.9

21.12,832

100.013,421

4.40.5 36641

Korea

3.4Hong Kong China

29.8Others

Total 8,131 8,408 7,620100.0 100.0 100.0


p Preliminary

P28

Table A.15Principal Export Markets for Palm Oil

20032000 2001 2002 2004p 20032000 2001 2002 2004p

('000 tonnes) % share

The People'sRepublic of China

India

European Union1

NetherlandsGermany

SwedenOthers

Middle East

Pakistan

Australia

United States

JapanBangladesh

KoreaChinese Taipei

Others

Total


p Preliminary

Country

1,023 1,364 1,940 11.5 13.0 17.9

2,029 2,066 1,670 22.9 19.7 15.4

984 1,610 1,478 11.1 15.4 13.6528 1,028 847 6.0 9.8 7.887 116 225 1.0 1.1 2.1

76 100 102 0.9 1.0 0.9174 211 177 1.9 2.0 1.6

1,168 1,236 1,449 13.2 11.8 13.3

1,075 1,143 1,059 12.1 10.9 9.8

105 101 120 1.2 1.0 1.1

178 208 270 2.0 2.0 2.5

353 379 434 4.0 3.6 4.098 178 230 1.1 1.7 2.1

198 241 218 2.2 2.3 2.076 82 80 0.9 0.8 0.7

1,576 1,858 1,909 17.8 17.8 17.68,863 10,466 10,857

2,502

1,650

1,648975185

106284

1,749

1,105

97

231

430272

211103

2,48912,487

2,827

925

1,8551,130

149

114343

1,716

838

96

299

458353

228120

2,07311,788

20.0

13.2

13.27.81.5

0.82.3

14.0

8.9

0.8

1.9

3.42.2

1.70.8

19.9100.0

24.0

7.8

15.79.61.3

Italy 119 155 127 1.3 1.5 1.298 119 0.8 1.01.02.8

14.6

7.1

0.8

2.5

3.93.0

1.91.0

17.7100.0100.0 100.0 100.0

1 Includes 10 new member states in 2004

Table A.14Export Prices of Major Commodities

2000 2001 2002 2003 2004p 2001 2002 2003 2004p

Annual change (%)

Palm oil (RM/tonne)

Rubber (sen/kg)

Saw logs (RM/cu. metre)

Crude oil (US$/barrel)

Sawn timber(RM/cu. metre)


p Preliminary

Liquefied natural gas(RM/tonne)

1,122 944 1,367 -15.9 44.8

263 230 269 -12.7 17.0

384 315 359 -17.9 13.9

1,050 943 1,102 -10.2 16.9

29.58 25.53 24.81

1,617

379

366

1,134

30.27 -13.7 -2.9

18.3

41.0

1.8

2.9

22.0

740 721 659 772

1,706

470

398

1,015

40.81

824 -2.6 -8.6 17.1

5.5

24.3

8.9

-10.4

34.8

6.8

Annex

P29


Table A.17Principal Export Markets for Saw Logs

20032000 2001 2002 2004p 20032000 2001 2002 2004p

('000 cubic metres) % share

Japan


India

Chinese Taipei

Hong Kong China

KoreaThailand

Others

Total

p Preliminary

Country

2,184 1,375 1,641 24.533.7 28.4 32.2

1,405 1,071 1,106 24.221.7 22.2 21.7

873 985 998 24.713.5 20.4 19.5

898 669 651 12.513.8 13.8 12.7

541 417 188 1.98.3 8.6 3.7

301 175 159 2.54.6 3.6 3.1102 29 39 1.11.6 0.6 0.8

180 113 322 8.62.8 2.4 6.3

6,484 4,834 5,104

1,356

1,336

1,369

694

103

14060

474

5,532

1,268

1,185

1,230

754

43

13184

512

5,207 100.0

24.4

22.8

23.6

14.5

0.8

2.51.6

9.8

100.0100.0 100.0 100.0

Table A.16Principal Export Markets for Rubber

('000 tonnes) % share

European Union1

GermanyFranceItalyUnited Kingdom

NetherlandsOthers


United StatesKoreaBrazil

SingaporeCanada

Others

Total


p Preliminary

Country20012001 20002000 20032003 2004p 20022002 2004p

306350 318 309 32.335.8 38.7 33.3129107 119 119 13.610.9 14.4 12.8

4040 31 41 4.24.1 3.8 4.42933 30 28 3.03.3 3.7 3.12235 25 24 2.43.5 3.0 2.5

1217 12 15 1.31.7 1.4 1.757101 87 65 6.010.6 10.7 6.9

20794 85 129 21.99.6 10.4 13.9

76101 66 81 8.010.3 8.0 8.76973 58 59 7.37.5 7.0 6.4

914 5 9 0.91.4 0.6 1.01427 16 28 1.52.8 1.9 3.0

152197 154 191 16.120.1 18.9 20.6

946978 822 928 100.0100.0 100.0 100.0

29

354147

532924

2057

289

7464

2219

156

1,105

37

32.013.3

4.82.6

Middle EastIranTurkeyOthers

8488 95 81 8.99.0 11.5 8.74843 60 45 5.14.4 7.3 4.82530 24 24 2.63.1 2.9 2.61115 11 12 1.21.5 1.3 1.3

90552411

8.14.92.21.0

2.2Spain 1717 14 17 1.7 1.7 1.9 1.824 2.2

1.85.1

26.1

6.75.8

2.01.7

14.3

100.0

3.334 25 41 3.13.5 3.0 4.4

1 Includes 10 new member states in 2004

P30


Table A.18Principal Export Markets for Sawn Timber

20032000 2001 2002 2004p 20032000 2001 2002 2004p

(‘ % share

ThailandChinese TaipeiNetherlandsThe People’s

Republic of ChinaJapan

Hong Kong China

Singapore

KoreaRepublic of Yemen

BelgiumUnited Arab Emirates

United Kingdom

Australia

Others

Total

p Preliminary

Country

565 534 589 23.722.2 21.4226 170 187 7.57.9 7.0 6.8

137 151 159 6.94.8 6.3 5.8

132 135 149 3.84.6 5.6 5.4

129 120 98 3.14.5 5.0 3.6114 83 68 2.83.9 3.4 2.5

82 66 64 2.02.9 2.7 2.3

56 52 53 1.81.9 2.2 1.9

33 20 40 1.41.1 0.8 1.5

581 434 710 23.020.2 17.9 25.7

2,876 2,411 2,753

660 19.7209

193

107

8578

55

51

40

641

2,789 100.0100.0 100.0 100.0

270 197 186 7.3 9.4 8.2 6.8204

239 187 194 6.08.3 7.8 7.1167220 185 155 5.97.6 7.7 5.6165

69 52 64 2.6

19.27.2

6.7

2.6

2.73.3

2.3

1.5

2.0

30.1

100.0

6.9

5.85.7

2.22.4 2.2 2.372

608227

213

81

86105

74

47

63Italy 23 25 37 2.20.8 1.0 1.362 1.856

954

3,166

220

184179

69

Annex

P31

Table A.19Principal Export Markets for Crude Oil

20032000 2001 2002 2004p 20032000 2001 2002


2004p

(‘000 tonnes) % share

IndiaThailand


Japan

Korea

Australia

Indonesia

New Zealand

PhilippinesSri Lanka


Others

Total

p Preliminary

Country

2,162 1,690 2,462 13.0 11.2 15.22,890 2,797 2,358 17.3 18.6 14.6

1,298 1,457 2,131 7.8 9.7 13.2

2,295 2,190 1,838 13.8 14.5 11.41,061 753 956 6.4 5.0 5.9

565 487 604 3.4 3.2 3.7

527 362 511 3.2 2.4 3.2

415 400 485 2.5 2.7 3.0

1,311 1,332 822 7.7 8.7 5.0

16,672 15,077 16,192

3,3963,097

1,440

1,2711,290

412

610

425

306

17,913 100.0 100.0 100.0

19.017.3

8.0

7.1

705 838 1,723 4.2 5.6 10.62,013 11.2

1,761 1,852 1,687 10.6 12.3 10.42,248 12.5

7.2

2.3

3.4

2.4

1,056 704 412 6.3 4.7 2.5937 5.2626 215 203 3.8 1.4 1.3468

2,5812,863

1,016

1,3161,548

205

676

420

479

18,090

1,284

4,145

682875 2.6

1.8

100.0

14.315.8

5.6

7.3

7.1

22.9

8.6

1.1

3.7

2.3

3.84.8

2.7

100.0


Table A.20Principal Export Markets for LNG

20032000 2001 2002 2004p 20032000 2001 2002 2004p

(‘000 tonnes) % share

Japan

Korea

Chinese Taipei

Others

Total

p Preliminary

Country

11,076 11,308 10,782 71.8 73.3 71.8

2,497 2,256 2,303 16.2 14.6 15.4

1,803 1,860 1,857 11.7 12.1 12.4

0.3 – 0.4

15,430 15,423 15,007 100.0 100.0 100.0

72.1

15.4

12.2

–

100.0

61.4

22.4

12.7

2.1

100.0

54 – 65

12,491

2,658

2,108

17,311

_

12,724

4,643

2,623

20,729

440

United States – – – – – – 0.3 1.454 299

P32

Table A.21External Debt and Debt Servicing1

20032000 2001 2002 2004p

RM million

Medium- and long-term debt:Gross borrowing

Federal GovernmentNFPEsPrivate sector

Repayment and prepaymentFederal GovernmentNFPEsPrivate sector

Net borrowingFederal GovernmentNFPEsPrivate sector

Outstanding debtFederal GovernmentNFPEsPrivate sector

Currency composition (% share)US dollarJapanese yenOthers

Short-term debt:Outstanding debt

Banking sector2

Non-bank private sector

Total external debt:Total external debt (US$ million)% GNPAnnual change (%)

Interest paymentFederal GovernmentNFPEsPrivate sector

Debt service ratio (% of exports of goods and services)

Total debtMedium- and long-term debt

Federal GovernmentNFPEsPrivate sector

Total servicing (including short-term interest payment)

of which:Medium- and long-term debt

Repayment (excludingprepayment)Federal GovernmentNFPEsPrivate sector

1 Data on MAS was included under private sector up to 2000 and under NFPEs from 2001 2 Excludes currency and deposits held by non-residents with resident banking institutionsp PreliminaryNote: Numbers may not necessarily add up due to rounding

Source: Ministry of Finance and Bank Negara Malaysia

23,390 31,550 23,8534,767 7,030 10,4657,719 11,311 3,655

10,903 13,209 9,732

17,941 22,323 23,1043,903 735 2,4453,836 10,447 6,942

10,203 11,141 13,717

5,448 9,227 749864 6,295 8,020

3,883 865 -3,287701 2,068 -3,985

143,465 149,346 153,22518,821 24,328 36,28359,566 67,415 64,33065,077 57,604 52,612

100.0 100.0 100.0

17.6 14.5 14.38.4

17,600 24,072 32,4359,271 11,926 21,8948,329 12,147 10,541

161,065 173,419 185,66042,385 45,636 48,858

51.2 56.2 55.2-0.7 7.7 7.1

25,043 26,954 27,832

16,370 19,612 20,7803,903 735 2,4452,506 7,886 6,9429,962 10,991 11,393

7,117 6,346 6,2971,187 1,150 1,6923,408 3,574 3,4302,522 1,621 1,174

5.8 6.8 6.65.4 6.6 6.41.2 0.5 1.01.4 2.9 2.52.9 3.2 3.0

7.57.3

75.1 78.0 77.3

22,1803,1445,140

13,896

29,3096,854

12,43710,019

-7,129-3,710-7,2973,877

152,95037,28459,54056,125

100.0

13.010.4

33,69023,32110,369

186,64049,116

50.20.5

28,627

21,8543,861

10,0177,976

6,1501,8833,287

979

6.26.01.22.91.9

76.6

25,1011,136

11,38812,578

24,7011,015

12,67311,013

400120

-1,2861,565

154,29834,65462,05457,590

100.0

12.510.5

43,02334,972

8,051

197,32151,927

46.65.7

24,368

18,2271,015

10,7426,469

5,4131,7582,664

991

4.34.20.52.41.3

77.0

Annex

P33

1,099

Table A.22Gross Overseas Investment by Country1

2000 2001 2002 2003 2004Country

RM million

2,972 1,130 1,600 933

5,7084,0073,924

532 270 822

994

172

901536

73

493

1677643

… 28

181

1,683

304

125… 600 24915

138

30

356

3

21557

…28

… 0 0 64,958 3,317 4,656 5,254

… 0 4621

2

54

137

100

120

Total 13,805 13,102 16,872 10,642

34

90 25

83

16

…29…

0

9 6

30

12

… 4

142

0

22

28

58

0 0 … 175

19,10559 82 420 386 22079 53 4 10 102

349 37 906 1,664 87

772

145

410 158 520100 1,126

87

1,074 8452,0822,920 2,529

956

89

45134292 226 686313 310153 243 407

389

687385

59

3019,929

46

2 531 87934 249

39

3738

44

50 88 78 86 170

28,302

41

Labuan2

Mauritius British Virgin IslandsCayman Islands Isle of Man

SingaporeHong Kong China

United StatesThailandThe People's Republic of ChinaIndonesiaNetherlandsSudanVietnamUnited KingdomCanadaAustraliaIndiaEgyptSouth AfricaBelgiumGermanyBahrainJapanBangladeshFinlandQatarOthers of which:

Chad

1 Refers to direct equity investment, purchase of real estate and extension of loans to non-residents abroad. Includes capital invested or loans extended by the foreign-owned companies in/to their parent companies abroad. For the purpose of compiling balance of payments statistics, capital invested in or loans extended to parent companies abroad must be offset against the capital invested in or loans extended to Malaysia by the parent companies abroad. At present, the Cash BOP Reporting System is not able to segregate this type of transaction2 Labuan IOFC is treated as a non-resident for foreign exchange administration purposes

Source: Cash BOP Reporting System, Bank Negara Malaysia

… NegligibleNote: Numbers may not necessarily add up due to rounding

P34

Table A.23Consumer Price Index (2000=100) Sub-groups of Food

Weights (%)

2002 2003 2004

Annual change (%)

Food 33.8 0.7 1.3

of which:Food at Home 24.1

Rice, bread and other cereals 5.5Meat 3.4Fish 4.9Milk and eggs 2.1Oils and fats 0.8Fruits and vegetables 5.0Sugar 0.5Coffee and tea 0.8Other foods 1.1

Food away from home 9.7

0.20.1

-1.31.01.01.80.2

-1.90.40.32.0

2.2

2.30.74.33.32.62.31.50.22.11.32.1

1.60.42.41.32.24.42.50.21.60.50.7


Table A.24Producer Price Index (1989=100)

Weights(%)

2000 2001 2002 2003 2004

Annual change (%)

Domestic Economy 100.0 3.1 -5.0 4.4

of which:Food and live animals chiefly for food 14.9 0.4 0.4 0.4Beverages and tobacco 2.1 0.4 1.8 3.9Crude materials, inedible except fuels 18.0 1.3 -5.9 7.0Mineral fuels, lubricants and

related materials 18.8 33.9 -10.6 0.0Animal and vegetable oils and fats 8.5 -31.9 -17.6 46.5Chemicals and related products N.E.C 4.4 1.0 -1.1 -0.7Manufactured goods 10.8 0.9 -0.5 -0.2Machinery and transport equipment 18.4 -0.1 -0.1 -0.3Miscellaneous manufactured articles 3.6 0.9 -0.6 -0.3Other commodities and transactions 0.6 0.4 10.3 2.6

Local Production 79.3 3.6 -6.1 5.7

Imports 20.7 1.1 -0.3 -0.7

6.8

0.8

8.9

3.61.66.6

22.313.24.32.50.10.60.2

-0.2

5.7

0.97.5

11.415.7

1.41.80.10.90.5

10.3

2.0


Annex

P35

Table A.25New Supply of Purpose-Built Office Space and Retail Space in Malaysia

Office Space Retail SpaceYear

Square metres

Square metres

Occupancyrate1 (%)

Occupancyrate1 (%)

19951996

460,618 94.7 395,006 74.6

1997378,186 93.9 331,747 69.2

19981,378,989 92.7 1,658,174 77.7

19991,606,986 82.0 499,085 67.4

2000768,633 82.1 97,960 75.7

20012,921,324 78.3 737,828 73.9

2002

2004p (Jan-Sept)

547,864 77.8 257,743 75.6

2003374,750 77.9 210,657 77.7

80.0 77.9

81.9

169,548

221,532 79.6

507,637

265,3241 Refers to end periodp Preliminary


Year

Table A.26Average Monthly Rentals for Prime Office and Retail Space in the Klang Valley1

Prime Office Space Prime Retail Space

RM/sq.m Annual change (%) RM/sq.m Annual change (%)

19992000

42 -8.7 175 8.0

200148 14.3 194 10.9

200248 0.9 215 11.0

20032004

45 -6.7 226 5.045 0.0 226 0.046 2.2 242 7.1

1 Refers to Kuala Lumpur and Selangor

Source: CH Williams Talhar & Wong Sdn. Bhd.

P36

Table A.27Broad Money (M3)

Annual change As at end- 20042000 2001 2002 2003 2004

RM million

Broad money (M3)1 21,906 13,022 31,607

Currency2 -1,949 -92 1,751Demand deposits 7,623 2,882 6,718Broad quasi-money 16,232 10,232 23,138

Fixed deposits 8,207 -358 12,648Savings deposits 6,380 4,454 5,590NIDs -932 600 3,575Repos -314 4,186 2,507Foreign currency deposits 2,890 1,350 -1,182

Factors Affecting M3

Net claims on Government 4,388 -1,542 11,538Claims on Government 3,326 4,165 -867Less: Government deposits -1,062 5,707 -12,405

Claims on private sector 25,968 20,335 27,737Loans 21,566 17,081 19,288Securities 4,402 3,255 8,449

Net external operations 7,336 6,741 1,237Bank Negara Malaysia3 1,633 7,722 7,564Banking system 5,703 -980 -6,327

Other influences -15,786 -12,513 -8,905

48,524

2,23311,21035,08217,065

5,6021,9658,0162,434

68,004

2,60810,08655,31124,668

6,1298,179

13,3372,998

12,9493,960

-8,989

31,28721,468

9,819

20,74827,131-6,383

-16,460

617,654

28,55287,466

501,636351,97668,58719,15646,51315,403

-3,24241,55644,798

596,606515,165

81,441

219,786213,169

6,617

-195,4961 Excludes interplacements among banking institutions2 Excludes holdings by banking system3 Includes exchange rate revaluation loss/gain

-11,8078,649

20,457

30,26139,815-9,554

82,23375,072

7,161

-32,683

Annex

P37

Table A.28Money Supply: Annual Change and Growth Rates

M35

M23

M11

Deposits with other

banking institutions4

Demanddeposits

Narrow quasi-money2Total Total Total Currency

RM m RM mRM mRM mRM mRM mRM m% %%%%%%

20002001

21,906 5.0 17,564 5.2 4,769 6.5 -2,517 -10.2 7,287 15.0 12,795 4.9 4,342 4.5

200213,022 2.9 7,810 2.2 2,512 3.2 -115 -0.5 2,627 4.7 5,298 1.9 5,213 5.1

20032004

31,607 6.7 21,030 5.8 8,344 10.3 1,749 7.9 6,595 11.3 12,686 4.5 10,576 9.948,524 9.7 42,519 11.1 13,032 14.6 2,205 9.2 10,827 16.6 29,487 10.0 6,005 5.168,004 12.4 108,116 25.4 12,179 11.9 2,530 9.7 9,649 12.7 95,937 29.6 -40,112 -32.5

1 Currency in circulation and demand deposits of the private sector2 Comprising savings and fixed deposits, negotiable instruments of deposits (NIDs), repos and foreign currency deposits of the private sector placed with commercial banks and Islamic banks3 M1 plus narrow quasi-money4 Comprising fixed deposits and repos of the private sector placed with finance companies, merchant banks and discount houses. Also includes saving deposits with finance companies, negotiable instruments of deposits (NIDs) with finance companies and merchant banks, foreign currency deposits placed with merchant banks and call deposits with discount houses. Excludes interplacement among the banking institutions5 M2 plus deposits placed with other banking institutions

P38

Tab

le A

.29

Inte

rest

Rat

es (

%)

Ave

rage

rat

es a

t en

d-ye

arA

vera

ge r

ates

at

end-

mon

th in

200

4

2003

2000

2001

2002

Jan.

Feb.

Mar

.A

pr.

May

Jun.

Jul.

Aug

.Se

p.O

ct.

Nov

.D

ec.

3-m

onth

inte

rban

k

Com

mer

cial

ban

ksFi

xed

depo

sit:

3-m

onth

12-m

onth

Savi

ngs

depo

sit

Base

lend

ing

rate

(BLR

)

Fina

nce

com

pani

esFi

xed

depo

sit:

3-m

onth

12-m

onth

Savi

ngs

depo

sit

Base

lend

ing

rate

(BLR

)

Trea

sury

bill

s(9

1 da

ys)

Gov

ernm

ent

secu

ritie

s(1

yea

r)G

over

nmen

t se

curit

ies

(5 y

ears

)

3.25

3.48

4.24

2.72

6.78

3.52

4.27

3.44

7.95

2.98

3.36

4.80

3.27

3.21

4.00

2.28

6.39

3.22

4.01

2.94

7.45

2.73

2.93

3.18

3.13

2.89

2.85

3.20

3.00

3.00

4.00

3.70

3.70

2.12

1.83

1.83

6.39

6.00

6.00

3.20

3.00

3.00

4.00

3.66

3.70

2.65

2.20

2.19

7.45

6.90

6.90

2.82

2.68

2.38

2.94

2.76

2.67

3.15

2.87

3.00

3.70

1.86

6.00

3.00

3.68

2.18

6.90

2.77

2.93

4.28

3.92

4.30

2.85

3.00

3.70

1.77

6.00

3.00

3.70

2.14

6.90

2.54

2.73

4.08

2.85

3.00

3.70

1.77

6.00

3.00

3.70

2.14

6.90

2.49

2.74

4.16

2.91

3.00

3.70

1.74

5.98

3.00

3.70

2.11

6.90

2.58

2.78

4.35

2.83

2.80

3.00

3.00

3.70

3.70

1.73

1.69

5.98

5.98

3.00

3.00

3.70

3.70

1.99

1.79

6.90

6.90

2.57

2.51

2.75

2.76

4.41

2.83

3.00

3.70

1.72

5.98

3.00

3.70

1.93

6.90

2.34

2.74

4.28

4.27

2.83

3.00

3.70

1.65

5.98

3.00

3.70

1.93

6.90

2.52

2.74

4.09

2.82

3.00

3.70

1.64

5.98

3.00

3.70

1.99

6.90

2.35

2.53

3.95

2.80

3.00

3.70

1.59

5.98

3.00

3.70

2.04

6.90

1.84

1.77

3.60

2.80

3.00

3.70

1.58

5.98

3.00

3.70

1.98

6.90

1.96

2.24

3.64

Annex

P39

Table A.30

20032000 2001 2002 2004e

RM million

Revenue1

% growth

Operating expenditure% growth

Current surplus of NFPEs2

Current balance% of GDP

Net development expenditure3

% growth

Overall balance% of GDP

General government4

NFPEs

Source: Ministry of Finance, state governments and non-financial public enterprises (NFPEs)

Consolidated Public Sector Finance

2 Refers to 34 NFPEs in 2003 and 2004; 36 NFPEs in 2002

4 Comprises Federal Government, state governments, statutory bodies and local governments

3 Adjusted for transfers and net lending within public sector

1 Excludes transfers within general government

e Estimate

116,66376,002 91,633 96,7639.07.2 20.6 5.6

102,72764,445 72,299 75,45022.118.7 12.2 4.4

52,29541,204 39,484 45,324

66,23152,761 58,818 66,63714.815.4 17.6 18.5

67,77250,439 59,724 69,125

-18.78.7 18.4 15.7

33,63827,079 35,692 36,82834,13523,360 24,032 32,297

-1,5412,322 -906 -2,488-0.30.7 -0.3 -0.7

107,055 10.6

84,16311.5

55,651

78,54319.9

83,315

20.5

43,15540,160

-4,772-1.2

Note: Numbers may not add up due to rounding

P40

Table A.31Major Industrial Countries: Key Economic Indicators

2000 2001 2002 2003 2004e 2005f

Annual change (%)

REAL GDPMajor Industrial Countries 3.8 1.2 1.6 2.0

United States 3.7 0.8 1.9 3.0Japan 2.4 0.2 -0.3 1.4Euro area 3.5 1.6 0.9 0.5

Germany 2.9 0.8 0.1 -0.1United Kingdom 3.9 2.3

2.63.51.31.51.02.1

2.13.0

-0.11.91.31.9

1.8 2.2

INFLATIONMajor Industrial Countries 2.2 2.1 1.5 1.8

United States 3.4 2.8 1.6 2.3Japan -0.7 -0.7 -0.9 -0.3Euro area 2.1 2.4 2.3 2.1

Germany 1.4 1.9 1.3 1.0United Kingdom1 0.8 1.2 1.3 1.4

% of labour force

UNEMPLOYMENTMajor Industrial Countries

United States 4.0 4.8 5.8 5.5Japan 4.7 5.0 5.4 4.7Euro area 8.5 8.0 8.5 8.9

Germany 7.8 7.9 8.7 9.8United Kingdom 5.5 5.1 5.2 4.8

6.05.38.99.65.0

% of GDP

CURRENT ACCOUNT BALANCEMajor Industrial Countries

United States -4.2 -3.8 -4.5 -4.8 -5.5Japan 2.5 2.1 2.8 3.2 3.7Euro area -0.5 0.2 0.8 0.3 0.5

Germany -1.4 0.1 2.2 2.2 3.7United Kingdom -2.5 -2.3 -1.7 -1.7 -2.4

FISCAL BALANCEMajor Industrial Countries

United States 2.0 0.5 -2.4 -3.3 -3.3Japan -6.9 -6.3 -6.9 -6.6 -6.8Germany 1.4 -1.4 -1.7 -1.9 -1.7United Kingdom 3.9 0.8 -1.7 -3.6 -3.2

3.44.42.62.01.63.1

2.02.70.02.21.81.3

5.44.58.79.54.8

-5.13.20.94.8

-1.9

-3.3-6.3-1.7-3.0

1 Refers to Retail Price Index excluding mortgage intereste Estimatef Forecast

Source: IMF World Economic Outlook, September 2004 OECD Economic Outlook, December 2004

Annex

P41

Table A.32East Asia: Key Economic Indicators

2000 2001 2002 2003 2004e 2005f

REAL GDP Annual change (%)

Regional Countries 7.7 4.3 6.4 6.4 7.5The People’s Republic of China 8.0 7.5 8.3 9.3 9.5Korea 8.5 3.8 7.0 3.1 4.7Chinese Taipei 5.8 -2.2 3.9 3.3 5.7Singapore 9.7 -1.9 2.2 1.4 8.4Hong Kong China 10.2 0.5 1.9 3.2 7.5Malaysia 8.9 0.3 4.1 5.3 7.1Thailand 4.8 2.2 5.3 6.9 6.1Indonesia 4.9 3.8 4.3 4.9 5.1Philippines 6.0 1.8 4.3 4.7 6.1

CONSUMER PRICES Annual change (%)

Regional Countries 1.3 1.8-0.8 1.22.7 3.6

-0.2 -0.3-0.4 0.5 -3.0 -2.6

1.8 1.20.7 1.8

11.9 6.63.1 3.1 5.0 ~ 6.0

CURRENT ACCOUNT BALANCE % of GDP

Regional CountriesThe People’s Republic of China 1.9 1.5 2.8 3.2 2.4

Hong Kong China 4.3 6.1 7.9 10.7 10.0

FISCAL BALANCE2 % of GDP

Regional Countries

Korea 1.1 1.6 3.9 1.8 n.a.Chinese Taipei -3.2 -6.6 -3.0 -2.5 n.a.

Philippines -4.0 -4.0 -5.3 -4.6 -3.8

6.3 ~ 6.5 8.54.04.2

3.0 ~5.04.5

5.0 ~6.05.3 ~ 6.35.0 ~ 6.05.3 ~ 6.3

2.9 ~ 3.2 3.03.01.9

1.0 ~ 2.01.52.5

2.5 ~ 3.55.0 ~ 7.0

2.8Korea 2.4 1.7 1.0 2.0 3.1 3.3Chinese Taipei 2.9 6.5 9.1 10.2 6.9 6.0Singapore 14.3 18.7 21.4 30.9 25.7 23.9

9.6Malaysia 9.4 8.3 8.4 12.9 12.6 14.1Thailand 7.6 5.4 5.5 5.6 3.8 2.0Indonesia 5.3 4.8 4.5 3.5 2.9 1.9Philippines 8.4 1.9 5.8 4.9 2.8 1.8

The People’s Republic of China -3.6 -3.1 -3.3 -2.8 -2.2 -2.0n.a.n.a.

Singapore 2.5 -1.8 0.1 -1.2 -0.8 n.a.Hong Kong China -0.6 -5.0 -4.9 -3.3 n.a. n.a.Malaysia -5.7 -5.5 -5.6 -5.3 -4.3 n.a.Thailand -2.2 -2.4 -1.4 0.4 n.a. n.a.Indonesia -5.1 -2.3 -1.7 -1.9 -1.2 n.a.

-3.4

1 Refers to composite prices

e Estimate

2 Refers to central government balance

f Forecastn.a. Not available

Source: National Sources IMF World Economic Outlook, September 2004

The People’s Republic of ChinaKoreaChinese TaipeiSingaporeHong Kong China1

MalaysiaThailandIndonesiaPhilippines

1.20.42.21.31.3

-3.81.61.63.84.4

2.40.74.10.01.0

-1.61.41.6

11.56.1

3.4 3.93.6 1.61.7

-0.41.42.86.1

5.9

P42

Table A.33Sources and Uses of Funds of the Financial System

2000 2001 2002 2003

RM millionSources of Funds:

Capital, reserves and profit 120,990.7 123,863.2 134,871.7

Currency 26,708.9 25,385.4 27,137.4

Demand deposits 83,205.3 92,129.0 87,539.5

503,079.1 508,836.0 547,135.345,385.0 44,971.3 44,767.7

110,791.5 102,161.7 122,405.2339,770.3 354,996.6 372,884.1

Other deposits1 (of which):Public sectorOther financial institutionsPrivate sectorForeign 7,132.3 6,706.4 7,078.4

Borrowings 34,820.5 37,380.8 44,948.0

67,603.3 68,552.4 70,836.851,355.6 53,448.2 46,973.0

Funds from other financial institutionsDomestic2

Foreign 16,247.7 15,104.2 23,863.8

Insurance, provident and pension funds 236,640.1 251,409.8 274,384.5

Other liabilities 190,138.3 193,163.0 208,266.6

Total Liabilities 1,263,186.3 1,300,719.6 1,395,119.8

Uses of Funds:

Currency 8,834.4 5,336.7 7,369.8

183,470.2 177,102.0 187,883.0162,274.1 156,662.9 166,670.3

Deposits with other financial institutionsDomesticForeign 21,196.1 20,439.1 21,212.7

512,428.5 528,348.3 560,459.45,529.4 5,188.8 10,191.0

26,450.3 25,984.9 23,746.4477,954.0 494,977.2 524,393.4

Loans and advancesPublic sectorOther financial institutionsPrivate sectorForeign 2,494.8 2,197.4 2,128.5

298,033.1 336,379.3 361,113.3

88,197.3 103,714.8 104,354.9

1,233.9 2,720.3 3,189.7

186,728.5 207,130.1 226,671.9

Securities

Malaysian Government Securities(MGS)

Foreign

Corporate3

Others 5,301.1 6,528.0 7,894.9

Gold and forex reserves 109,835.5 113,542.3 127,515.1

Other assets 150,584.5 140,011.1 150,779.3

Total Assets 1,263,186.3 1,300,719.6 1,395,119.8

148,997.5

29,445.4

92,117.8

617,286.640,563.0

161,311.5406,049.3

9,362.8

48,715.3

87,571.561,837.825,733.6

305,657.0

233,289.0

1,563,080.0

5,573.8

226,303.7211,075.615,228.0

599,285.54,670.1

24,295.3567,980.1

2,340.0

409,488.6

125,165.0

3,429.0

254,197.9

9,688.7

166,139.3

156,289.1

1,563,080.0

2004p

164,006.2

32,353.9

124,333.4

711,241.939,175.5

197,022.6461,718.413,325.4

51,231.4

72,028.734,434.937,593.7

339,216.1

268,177.1

1,762,588.8

6,066.8

247,594.0214,010.033,584.0

655,557.85,007.7

24,385.1623,497.6

2,667.4

429,771.6

139,757.6

4,260.4 4,063.5 5,680.0Treasury bills 3,539.4 440.412,312.0 12,222.5 13,321.8Commercial bills 13,468.4 8,403.7

268,163.7Private Debt Securities (PDS) 122,237.8 129,210.1Equities 131,960.1

n.a.n.a.

n.a.n.a.

n.a.n.a. 138,953.6

4,584.38,421.9

249,704.1

173,894.4

1,762,588.81 Equals savings, fixed and other (NIF, LPHT, etc.) deposits + NIDs + repos2 Includes statutory reserves of banking institutions3 Breakdown of Corporate Securities between Private Debt Securities (PDS) and Equities available from 2003p Preliminaryn.a. Not available

Annex

P43

Tab

le A

.34

Co

mm

erci

al B

anks

1 : C

om

mit

men

ts a

nd

Co

nti

ng

enci

es

As

at e

nd-

2000

RM

mill

ion

%sh

are

2001

RM

mill

ion

%sh

are

2002

RM

mill

ion

%sh

are

2003

RM

mill

ion

%sh

are

2004

RM

mill

ion

%sh

are

Ass

ets

sold

with

rec

ours

e an

d co

mm

itmen

ts w

ith d

raw

dow

n

Cre

dit

exte

nsio

n co

mm

itmen

ts

Dire

ct c

redi

t su

bstit

utes

Fore

ign

exch

ange

rel

ated

con

trac

ts

Inte

rest

rat

e re

late

d co

ntra

cts

Trad

e-re

late

d co

ntin

genc

ies

Tran

sact

ion-

rela

ted

cont

inge

ncie

s

Und

erw

ritin

g ob

ligat

ions

Oth

ers

Tota

l

4.0

44.4 4.8

27.3 5.2

4.8

6.0

0.5

3.1

100.

0

11,2

82.3

159,

824.

0

13,8

94.6

81,4

45.1

32,6

67.8

13,4

65.3

19,0

25.6

1,76

8.1

11,2

93.9

344,

666.

6

3.3

46.4 4.0

23.6 9.5

3.9

5.5

0.5

3.3

100.

0

2.7

39.9 3.0

20.4

21.6 4.2

4.9

0.5

2.8

100.

0

2.9

35.8 3.0

21.4

25.7

4.1

4.3

0.4

2.4

100.

0

13,8

17.4

169,

490.

0

14,1

56.4

101,

288.

1

121,

567.

6

19,4

04.3

20,4

48.1

1,80

8.4

11,6

00.3

473,

580.

6

2.8

31.7 2.3

28.2

25.6

3.6

3.2

0.2

2.3

100.

0

17,3

52.4

198,

002.

5

14,2

32.5

176,

020.

7

159,

931.

1

22,4

09.2

20,2

50.6

1,46

6.9

14,5

93.0

624,

259.

0

11,4

40.7

167,

530.

0

12,7

05.8

85,3

61.0

90,5

28.5

17,4

38.5

20,6

39.0

1,95

2.0

11,8

38.6

419,

434.

0

12,2

49.3

137,

597.

3

14,9

99.8

84,5

06.6

15,9

87.1

14,7

85.5

18,4

85.7

1,66

4.4

9,51

8.3

309,

794.

0

1Ex

clud

es Is

lam

ic b

anks

Not

e: N

umbe

rs m

ay n

ot n

eces

saril

y ad

d up

due

to

roun

ding

P44

Tab

le A

.35

Fin

ance

Co

mp

anie

s: C

om

mit

men

ts a

nd

Co

nti

ng

enci

es

As

at e

nd-

2000

RM

mill

ion

%sh

are

2001

RM

mill

ion

%sh

are

2002

RM

mill

ion

%sh

are

2003

RM

mill

ion

%sh

are

2004

RM

mill

ion

%sh

are

Ass

ets

sold

with

rec

ours

e an

d co

mm

itmen

ts w

ith d

raw

dow

n

Cre

dit

exte

nsio

n co

mm

itmen

ts

Dire

ct c

redi

t su

bstit

utes

Fore

ign

exch

ange

rel

ated

con

trac

ts

Inte

rest

rat

e re

late

d co

ntra

cts

Trad

e-re

late

d co

ntin

genc

ies

Tran

sact

ion-

rela

ted

cont

inge

ncie

s

Und

erw

ritin

g ob

ligat

ions

Oth

ers

Tota

l

41.8

49.2 3.1

0.0

5.1

0.0

0.2

0.0

0.5

100.

0

9,99

0.7

8,77

9.9

198.

3

0.0

1,38

9.0

0.0

40.7 0.0

32.6

20,4

31.3

48.9

43.0 1.0

0.0

6.8

0.0

0.2

0.0

0.2

100.

0

53.0

34.6 0.5

0.0

11.8 0.0

0.1

0.0

0.0

0.0

100.

0

51.4

36.5 0.5

0.0

11.6 0.0

0.1

0.0

0.0

100.

0

13,0

10.2

9,24

1.1

136.

3

0.0

2,92

9.0

0.0

15.9 0.0

25,3

32.6

0.0

50.1

29.7 0.3

0.0

19.9 0.0

0.1

0.0

0.0

100.

0

7,96

3.5

4,71

8.1

52.0 0.0

3,16

0.0

0.0

12.9 0.0

15,9

06.5

13,9

83.8

9,13

6.1

141.

6

0.0

3,10

9.0

0.0

29.1 0.0

0.0

26,3

99.5

8,18

6.1

9,64

0.4

611.

0

0.0

1,00

7.0

0.0

41.6 0.0

105.

4

19,5

91.7

Not

e: N

umbe

rs m

ay n

ot n

eces

saril

y ad

d up

due

to

roun

ding

Annex

P45

Tab

le A

.36

Mer

chan

t B

anks

: Co

mm

itm

ents

an

d C

on

tin

gen

cies

As

at e

nd-

2000

RM

mill

ion

%sh

are

2001

RM

mill

ion

%sh

are

2002

RM

mill

ion

%sh

are

2003

RM

mill

ion

%sh

are

2004

RM

mill

ion

%sh

are

Ass

ets

sold

with

rec

ours

e an

d co

mm

itmen

ts w

ith d

raw

dow

n

Cre

dit

exte

nsio

n co

mm

itmen

ts

Dire

ct c

redi

t su

bstit

utes

Fore

ign

exch

ange

rel

ated

con

trac

ts

Inte

rest

rat

e re

late

d co

ntra

cts

Trad

e-re

late

d co

ntin

genc

ies

Tran

sact

ion-

rela

ted

cont

inge

ncie

s

Und

erw

ritin

g ob

ligat

ions

Oth

ers

Tota

l

0.6

16.0 8.2

3.8

61.0

0.0

3.4

6.4

0.5

100.

0

1,42

5.5

2,63

9.7

1,32

5.1

1,32

0.1

39,6

58.8

0.1

790.

4

1,61

7.5

80.0

48,8

57.2

2.9

5.4

2.7

2.7

81.2 0.0

1.6

3.3

0.2

100.

0

2.2

2.7

1.3

1.9

89.7

0.0

1.0

1.2

0.1

55.4

100.

0

1.3

2.1

1.0

1.2

92.9

0.0

0.7

0.9

0.0

100.

0

1,59

5.2

2,54

5.9

1,22

6.8

1,45

9.9

115,

332.

1

0.0

818.

2

1,13

9.0

124,

172.

6

44.6

1.4

1.3

0.6

1.6

94.1 0.0

0.4

0.6

0.0

100.

0

2,49

3.7

2,33

7.6

1,12

6.2

2,87

7.6

169,

300.

3

0.0

676.

6

1,02

9.6

179,

886.

2

1,73

6.0

2,08

9.1

1,03

9.3

1,50

6.6

70,7

01.1

0.0

749.

0

937.

5

44.1

78,8

02.7

161.

0

4,11

4.8

2,11

1.4

964.

7

15,6

86.3 1.2

886.

0

1,65

3.5

118.

3

25,6

97.1

Not

e: N

umbe

rs m

ay n

ot n

eces

saril

y ad

d up

due

to

roun

ding

P46

Table A.37Commercial Banks : Income and Expenditure1

For the financial year For the calendar year

2001 2002 2003 2002 2003 2004p

RM millionInterest income net of

interest-in-suspense 24,969.7 25,055.5 26,383.7(Interest-in-suspense) 3,488.2 3,759.7 3,149.6Less: Interest expense 12,961.4 12,808.6 13,400.2

Net interest income 12,008.4 12,247.0 12,983.5Add: Fee-based income

Add: Other income

2,429.6 2,871.8 3,267.3

Gross operating profit

7,171.9 7,255.3 8,043.4

Gross operating profit after provision 1,168.7 3,447.9 5,174.1

3,475.6 2,909.4 1,553.8

Less: Loan loss and other provisions 6,003.2 3,807.4 2,869.3

Less: Staff cost 3,624.3 3,688.1 3,879.3Overheads 3,641.8 4,175.3 4,328.2

Pre-tax profit 4,644.3

25,157.73,959.0

12,876.2

12,281.52,827.1

7,357.1

3,372.8

2,986.8

3,984.2

3,635.14,116.4

6,359.7 6,357.3

25,832.43,296.1

13,105.7

12,726.73,083.7

7,719.4

5,072.8

1,699.5

2,646.6

3,776.14,314.9

6,772.3 6,727.9

30,120.22,562.2

15,346.6

14,773.63,889.2

9,108.3

5,202.5

2,891.8

3,905.7

4,512.15,042.4

8,094.31 Excludes Islamic banksp PreliminaryNote: Numbers may not necessarily add up due to rounding

Table A.38Finance Companies: Income and Expenditure


2001 2002 2003 2002 2003 2004p


interest-in-suspense(Interest-in-suspense)Less: Interest expense

Net interest incomeAdd: Fee-based income

Add: Other income


Gross operating profit after provision

Less: Loan loss and other provisions

Less: Staff costOverheads

Pre-tax profitp PreliminaryNote: Numbers may not necessarily add up due to rounding

8,956.87,637.4 8,824.11,339.41,161.5 1,521.63,955.13,375.8 3,884.2

5,001.84,261.6 4,939.888.1224.8 104.2

3,370.63,036.6

1,664.9

176.8369.2

1,371.6

785.2663.0 687.3783.0934.0786.8

2,034.1

9,299.71,452.44,094.5

5,205.1103.0

3,412.2

1,887.8

524.2

1,524.4

802.11,093.9

2,412.0

9,202.41,327.7

5,196.8100.9

3,525.6

2,502.9

140.8

1,022.7

812.7959.4

2,643.7

7,892.9968.5

3,455.1

4,437.888.1

2,943.43,242.6

2,398.7 2,574.91,871.7

164.5507.7

971.8 368.61,370.9

895.11,018.5

2,575.5 2,739.42,379.4

4,005.6

Annex

P47

Table A.39Merchant Banks: Income and Expenditure


2001 2002 2003 2002 2003 2004p


interest-in-suspense(Interest-in-suspense)Less: Interest expense

Net interest incomeAdd: Fee-based income

Add: Other income


Gross operating profit after provision

Less: Loan loss and other provisions

Less: Staff costOverheads

Pre-tax profitp PreliminaryNote: Numbers may not necessarily add up due to rounding

1,624.31,783.7 1,601.0258.1313.8 296.8

1,081.71,176.9 1,070.1

542.6606.8 530.9332.6296.3 338.2

481.4580.1 521.2

-314.6

624.6

894.7

263.1204.9 226.5130.8118.1 121.3

310.0

1,714.3328.1

1,138.7

575.5306.2

549.9

178.3

488.3

371.6

214.8117.0

666.6 591.3

1,636.5220.9

1,145.7

490.8327.6

424.3

287.0

398.2

137.4

260.6133.4

685.2

1,645.8173.0

1,173.4

472.5350.4

371.1

175.3 314.9203.1

550.7388.3

306.0 56.3318.2

297.2154.6

695.0 865.5

519.6

Table A.40Commercial Banks1 and Finance Companies: Lending Guidelines to the Priority Sectors

Housing Loan CommitmentsTotal number of houses (units)Non-compliance (no. of institutions)

Non-compliance (no. of institutions)

Compliance Date of 31 December 2004

AchievedTarget

Loans to Small and Medium EnterprisesTotal loans approved (RM billion)

2003/2004 Lending Guidelines

– 8

– 6

100,000 160,272

1 Including performance of Islamic banks

28.1 44.7

P48

Tab

le A

.41

Co

mm

erci

al B

anks

1 : D

irec

tio

n o

f Le

nd

ing

Loan

s by

Sec

tors

(RM

mill

ion)

% s

hare

2004

2000

As

at e

nd-

2001

2003

2002

Bu

sin

ess

ente

rpri

ses

Ho

use

ho

lds

Oth

ers

183,

337.

0

1,15

1.5

9,27

7.9

56,4

89.0

6,83

8.2

17,7

71.9

117,

502.

725

,342

.759

,094

.7

11,8

93.2

21,1

39.8

256.

7

19,6

79.6

94,4

59.7

31,2

18.9

9,16

9.1

4,27

7.8

21,1

72.1

8,71

2.1

28,3

31.1

6,93

4.6

12,0

35.0

5,98

7.6

180,

310.

0

996.

69,

935.

6

55,9

49.5

4,38

3.2

18,1

83.7

129,

269.

924

,286

.371

,052

.3

12,6

46.3

21,5

45.4

533.

5

21,0

78.9

107,

402.

9

31,5

65.9

9,42

4.6

3,95

7.7

21,2

85.0

7,54

6.6

29,6

28.1

7,54

9.2

12,2

77.2

7,29

0.2

179,

580.

1

805.

710

,010

.8

55,0

90.8

5,59

5.1

19,0

47.5

139,

615.

322

,871

.883

,747

.2

11,3

05.0

19,7

15.1

587.

9

22,9

42.4

122,

806.

1

32,5

00.5

9,78

8.0

3,66

4.9

21,6

91.3

7,50

8.1

27,2

56.4

6,95

3.4

13,1

31.9

8,96

2.4

177,

547.

5

927.

19,

090.

2

55,1

22.2

4,58

7.6

20,1

83.3

154,

985.

521

,113

.898

,762

.4

11,7

33.1

19,8

24.2

191.

6

24,8

68.0

140,

998.

2

34,4

65.4

10,3

43.6

3,93

8.4

23,3

76.2

8,08

0.3

26,9

82.4

6,96

6.6

13,6

26.3

10,4

87.3

194,

323.

8

868.

29,

708.

6

58,1

33.3

4,74

4.8

24,5

53.2

187,

382.

624

,629

.912

2,18

9.1

12,2

12.8

20,5

14.6

124.

3

66,6

86.8

213,

386.

9

40,7

10.2

12,1

70.6

3,98

6.4

28,3

50.7

8,16

7.9

29,4

60.7

8,82

1.8

15,5

55.2

12,7

11.2

691.

596

5.5

433.

41,

078.

132

3.8

524.

331

1.2

443.

227

1.1

38,1

49.3

15,2

35.8

131.

714

,166

.512

1.9

15,4

60.0

58.9

14,2

48.9

54.4

16,9

39.7

890.

14,

689.

69,

098.

44,

584.

28,

173.

74,

511.

17,

679.

33,

744.

18,

874.

04,

427.

28,

785.

0

30,5

59.8

Tota

l230

8,35

6.6

29,6

87.8

317,

400.

7

26,6

48.1

329,

034.

3

27,4

84.4

346,

030.

0

29,1

94.4

436,

905.

1

2000

59.5 0.4

3.0

18.3 2.2

5.8

38.1 8.2

19.2 3.9

6.9

0.1

6.4

30.6

10.1 3.0

1.4

6.9

2.8

9.2

2.2

3.9

1.9

0.2

0.3

4.9

0.0

1.5

3.0

9.9

2001

56.8 0.3

3.1

17.6 1.4

5.7

40.7 7.7

22.4 4.0

6.8

0.2

6.6

33.8 9.9

3.0

1.2

6.7

2.4

9.3

2.4

3.9

2.3

0.1

0.3

4.5

0.0

1.4

2.6

9.4

2002

54.6 0.2

3.0

16.7 1.7

5.8

42.4 7.0

25.5 3.4

6.0

0.2

7.0

37.3 9.9

3.0

1.1

6.6

2.3

8.3

2.1

4.0

2.7

0.1

0.2

4.7

0.0

1.4

2.3

8.1

2003

51.3 0.3

2.6

15.9 1.3

5.8

44.8 6.1

28.5 3.4

5.7

0.1

7.2

40.7

10.0 3.0

1.1

6.8

2.3

7.8

2.0

3.9

3.0

0.1

0.1

4.1

0.0

1.1

2.6

7.9

2004

44.5 0.2

2.2

13.3 1.1

5.6

42.9 5.6

28.0 2.8

4.7

0.0

15.3

48.8 9.3

2.8

0.9

6.5

1.9

6.7

2.0

3.6

2.9

0.1

8.7

3.9

0.2

1.0

2.0

6.7

Agr

icul

ture

, hun

ting,

for

estr

y an

d fis

hing

Min

ing

and

quar

ryin

gM

anuf

actu

ring

Elec

tric

ity, g

as a

nd w

ater

sup

ply

Who

lesa

le a

nd r

etai

l tra

de, r

esta

uran

ts a

nd h

otel

sW

hole

sale

tra

deRe

tail

trad

eRe

stau

rant

s an

d ho

tels

Broa

d pr

oper

ty s

ecto

rC

onst

ruct

ion

Purc

hase

of

resi

dent

ial p

rope

rty

Purc

hase

of

non-

resi

dent

ial p

rope

rty

Real

est

ate

Tran

spor

t, s

tora

ge a

nd c

omm

unic

atio

nFi

nanc

ial,

insu

ranc

e an

d bu

sine

ss s

ervi

ces

Fina

ncia

l ser

vice

s

Insu

ranc

eBu

sine

ss s

ervi

ces

Con

sum

ptio

n cr

edit

Pers

onal

use

sC

redi

t ca

rds

Purc

hase

of

cons

umer

dur

able

goo

dsPu

rcha

se o

f pa

ssen

ger

cars

Purc

hase

of

secu

ritie

sPu

rcha

se o

f tr

ansp

ort

vehi

cles

Com

mun

ity, s

ocia

l and

per

sona

l ser

vice

sO

ther

s1

Ex

clud

es ls

lam

ic b

anks

2 In

clud

es lo

ans

sold

to

Cag

amas

Not

e: N

umbe

rs m

ay n

ot n

eces

saril

y ad

d up

due

to

roun

ding

Annex

P49

Loan

s by

Sec

tors

(RM

mill

ion)

% s

hare

200

420

0020

0120

0320

0220

0020

0120

0220

03

25,1

06.7

187.

073

2.5

2,89

1.0

59.1

1,12

2.5

25,4

00.2

6,13

7.6

12,4

17.2

1,52

6.8

616.

420

.0

38,7

43.4

2004

57,9

81.4

3,28

3.4

1,61

8.9

542.

0

5,31

8.6

2,07

7.4

1,96

8.1

1,33

1.7

802.

11,

372.

0

469.

7

1,04

8.2

Tota

l184

,136

.3

24,1

85.4

175.

964

1.0

3,00

4.3

46.9

1,34

0.8

26,0

21.8

6,01

5.7

13,0

35.6

1,54

3.0

373.

916

.3

46,7

94.0

67,7

77.0

3,35

0.7

1,50

4.6

505.

3

5,42

7.5

1,86

3.8

1,45

8.2

1,06

8.0

904.

61,

521.

9

391.

2

716.

2

92,6

78.6

21,9

51.0

113.

056

2.9

2,51

3.9

50.1

1,36

1.7

25,8

80.9

5,50

4.1

14,0

42.2

1,43

8.7

271.

516

.5

56,8

80.5

77,9

08.9

3,46

6.0

1,57

6.1

528.

1

4,89

5.8

1,78

5.2

1,41

9.2

1,13

1.2

789.

51,

601.

2

317.

6

611.

9

100,

471.

7

21,5

68.3

106.

356

9.4

2,76

3.2

50.8

1,42

8.4

25,5

19.5

5,33

2.2

14,6

45.5

1,13

3.8

237.

214

.4

63,5

92.9

84,7

04.9

3,63

5.2

1,62

3.5

583.

3

4,40

8.0

1,64

9.5

1,38

0.3

1,12

8.6

953.

31,

658.

8

366.

0

621.

2

106,

894.

4

11,6

44.9

59.3

483.

2

1,90

4.5

28.6

561.

1

12,2

26.5

2,70

8.1

7,00

9.2

683.

3

153.

32.

9

34,9

60.4

44,1

38.4

1,59

3.9

684.

934

8.0

1,82

5.9

1,29

5.9

688.

6

532.

4

804.

71,

396.

8

79.7

307.

0

56,0

90.3

29.8 0.2

0.9

3.4

0.1

1.3

30.2 7.3

14.8 1.8

0.7

0.0

46.0

68.9 3.9

1.9

0.6

6.3

2.5

2.3

1.6

1.0

1.6

0.6

1.2

26.1 0.2

0.7

3.2

0.1

1.4

28.1 6.5

14.1 1.7

0.4

0.0

50.5

73.1 3.6

1.6

0.5

5.9

2.0

1.6

1.2

1.0

1.6

0.4

0.8

21.8 0.1

0.6

2.5

0.0

1.4

25.8 5.5

14.0 1.4

0.3

0.0

56.6

77.5 3.4

1.6

0.5

4.9

1.8

1.4

1.1

0.8

1.6

0.3

0.6

20.2 0.1

0.5

2.6

0.0

1.3

23.9 5.0

13.7 1.1

0.2

0.0

59.5

79.2 3.4

1.5

0.5

4.1

1.5

1.3

1.1

0.9

1.6

0.3

0.6

20.8 0.1

0.9

3.4

0.1

1.0

21.8 4.8

12.5 1.2

0.3

0.0

62.3

78.7 2.8

1.2

0.6

3.3

2.3

1.2

0.9

1.4

2.5

104.

739

.538

.921

.310

.70.

10.

00.

00.

00.

0

0.1

919.

795

2.0

962.

01,

062.

451

5.4

1.1

1.0

1.0

1.0

0.9

1,50

9.1

3,19

0.7

2,57

0.1

2,57

7.4

1,53

0.7

1.8

3.4

2.6

2.4

2.7

5,89

5.7

4,78

8.1

3,95

0.5

3,62

1.6

723.

57.

05.

23.

93.

41.

336

,464

.644

,328

.054

,450

.960

,959

.532

,748

.343

.347

.854

.257

.058

.40.5

Tab

le A

.42

Fin

ance

Co

mp

anie

s: D

irec

tio

n o

f Le

nd

ing

1 Incl

udes

loan

s so

ld t

o C

agam

asN

ote:

Num

bers

may

not

nec

essa

rily

add

up d

ue t

o ro

undi

ng

Bu

sin

ess

ente

rpri

ses

Ho

use

ho

lds

Oth

ers

Agr

icul

ture

, hun

ting,

for

estr

y an

d fis

hing

Min

ing

and

quar

ryin

gM

anuf

actu

ring

Elec

tric

ity, g

as a

nd w

ater

sup

ply

Who

lesa

le a

nd r

etai

l tra

de, r

esta

uran

ts a

nd h

otel

sW

hole

sale

tra

deRe

tail

trad

eRe

stau

rant

s an

d ho

tels

Broa

d pr

oper

ty s

ecto

rC

onst

ruct

ion

Purc

hase

of

resi

dent

ial p

rope

rty

Purc

hase

of

non-

resi

dent

ial p

rope

rty

Real

est

ate

Tran

spor

t, s

tora

ge a

nd c

omm

unic

atio

nFi

nanc

ial,

insu

ranc

e an

d bu

sine

ss s

ervi

ces

Fina

ncia

l ser

vice

sIn

sura

nce

Busi

ness

ser

vice

sC

onsu

mpt

ion

cred

itPe

rson

al u

ses

Cre

dit

card

sPu

rcha

se o

f co

nsum

er d

urab

le g

oods

Purc

hase

of

pass

enge

r ca

rsPu

rcha

se o

f se

curit

ies

Purc

hase

of

tran

spor

t ve

hicl

esC

omm

unity

, soc

ial a

nd p

erso

nal s

ervi

ces

Oth

ers

As

at e

nd-

P50

Tab

le A

.43

Mer

chan

t B

anks

: Dir

ecti

on

of

Len

din

g

Loan

s by

Sec

tors

(RM

mill

ion)

% s

hare

2004

2000

2001

2003

2002

2000

2001

2002

2003

15,7

33.0

1,01

9.7

88.4

2,22

2.6

278.

1

453.

84,

798.

23,

084.

5

225.

8

971.

61,

230.

7

13,3

04.0

12,2

82.6

864.

480

7.4

87.5

69.2

2,20

5.0

2,01

2.1

172.

815

6.5

443.

340

0.4

4,38

3.3

3,85

9.9

2,80

0.4

2,49

5.3

247.

320

9.0

594.

736

3.0

1,02

6.7

938.

3

9,89

7.8

8,35

5.7

652.

344

5.5

47.7

47.4

1,66

7.9

1,33

0.1

97.4

129.

3

465.

147

5.6

2,85

8.8

2,87

4.5

1,70

8.0

1,94

9.5

150.

011

1.9

845.

332

0.5

633.

156

4.5

2004

90.6 5.9

0.5

12.8 1.6

2.6

27.6

17.8 1.3

5.6

7.1

91.1 5.9

0.6

15.1 1.2

3.0

30.0

19.2 1.7

4.1

7.0

91.1

89.6

6.0

5.9

0.5

0.4

14.9

15.1

1.2

0.9

3.0

4.2

28.6

25.9

18.5

15.5

1.6

1.4

2.7

7.7

7.0

5.7

87.7

464.

733

7.3

317.

138

3.1

560.

12.

72.

32.

43.

55.

9

4.7

0.5

14.0

704.

745

5.3

779.

838

4.7

413.

74.

13.

15.

83.

54.

3

1.4

5.0

30.2

945.

4

213.

5

806.

870

5.2

190.

714

8.3

655.

373

5.3

92.8

130.

4

5.4

1.2

5.5

1.3

5.2

5.9

1.1

0.8

7.7

1.4

20.5 1.2

75.0

73.5

77.1

78.2

80.3

0.4

0.5

0.6

0.7

0.8

3.4

1,41

2.9

1,26

2.1

1,07

8.4

922.

673

2.7

8.1

8.6

8.0

8.4

7.7

5.9

1,16

5.4

965.

588

1.4

Tota

l117

,363

.114

,606

.813

,481

.0

762.

161

0.6

6.7

11,0

42.9

9,52

6.4

6.6

6.5

6.9

6.4

860.

521

.3

45.3

348.

8

36.5 0.0

1,67

6.8

710.

85.

5

44.7

310.

4

32.5 0.0

1,57

0.8

768.

20.

0

40.3

170.

2

21.1 0.0

1,72

0.0

535.

20.

0

57.0

97.9

35.5 0.0

1,43

2.6

520.

70.

0

139.

143

.8

118.

10.

0

1,11

7.9

5.0

0.1

0.3

2.0

0.2

0.0

9.7

4.9

0.0

0.3

2.1

0.2

0.0

10.8

5.7

0.0

0.3

1.3

0.2

0.0

12.8

4.8

0.0

0.5

0.9

0.3

0.0

13.0

5.5

0.0

1.5

0.5

1.2

0.0

0.1

0.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

11.7

381.

336

7.4

203.

998

.469

.12.

22.

51.

50.

90.

70.

20.

80.

30.

50.

50.

00.

00.

00.

00.

03,

278.

22,

199.

61,

981.

61,

709.

41,

468.

418

.915

.114

.715

.515

.48.

812

.119

.121

.520

.90.

10.

10.

10.

20.

2

1 In

clud

es lo

ans

sold

to

Cag

amas

Not

e: N

umbe

rs m

ay n

ot n

eces

saril

y ad

d up

due

to

roun

ding

Agr

icul

ture

, hun

ting,

for

estr

y an

d fis

hing

Min

ing

and

quar

ryin

gM

anuf

actu

ring

Elec

tric

ity, g

as a

nd w

ater

sup

ply

Who

lesa

le a

nd r

etai

l tra

de, r

esta

uran

ts a

nd h

otel

sW

hole

sale

tra

deRe

tail

trad

eRe

stau

rant

s an

d ho

tels

Broa

d pr

oper

ty s

ecto

rC

onst

ruct

ion

Purc

hase

of

resi

dent

ial p

rope

rty

Purc

hase

of

non-

resi

dent

ial p

rope

rty

Real

est

ate

Tran

spor

t, s

tora

ge a

nd c

omm

unic

atio

nFi

nanc

ial,

insu

ranc

e an

d bu

sine

ss s

ervi

ces

Fina

ncia

l ser

vice

sIn

sura

nce

Busi

ness

ser

vice

sC

onsu

mpt

ion

cred

itPe

rson

al u

ses

Cre

dit

card

sPu

rcha

se o

f co

nsum

er d

urab

le g

oods

Purc

hase

of

pass

enge

r ca

rsPu

rcha

se o

f se

curit

ies

Purc

hase

of

tran

spor

t ve

hicl

esC

omm

unity

, soc

ial a

nd p

erso

nal s

ervi

ces

Oth

ers

Bu

sin

ess

ente

rpri

ses

Ho

use

ho

lds

Oth

ers

As

at e

nd-

Annex

P51

NPL

by

sect

or (R

M m

illio

n)A

s pe

rcen

tage

of

tota

l loa

nsto

the

sec

tor

(%)

2004

2000

As

at e

nd-

2001

2003

2002

Bu

sin

ess

ente

rpri

ses

Ho

use

ho

lds

Oth

ers

Tota

l

2000

2001

2002

2003

2004

1 Ex

clud

es ls

lam

ic b

anks

2 In

clud

es p

urch

ase

of p

asse

nger

car

sN

ote:

Num

bers

may

not

nec

essa

rily

add

up d

ue t

o ro

undi

ng

Tab

le A

.44

Co

mm

erci

al B

anks

1 : N

on

-per

form

ing

Lo

ans

by

Sect

or

37,0

22.8

150.

455

6.3

7,71

4.6

179.

5

1,86

9.6

13,8

18.5

5,39

5.4

3,34

2.8

2,53

9.9

2,01

6.7

1,66

1.6

64.5

8,61

6.2

4,02

1.8

1,05

7.6

1,09

4.6

2,54

0.4

1,09

0.8

2,38

7.7

290.

6

409.

82,

192.

1

491.

7

32,9

00.4

173.

873

7.6

10,6

62.9

208.

7

1,92

4.1

18,9

51.2

7,36

6.9

4,93

9.3

3,80

6.0

1,98

6.3

1,62

1.2

52.5

9,88

2.3

4,21

9.0

1,12

7.9

1,16

6.9

2,83

9.0

796.

13,

856.

6

312.

6

226.

72,

927.

7

892.

3

28,9

21.0

109.

282

5.7

10,8

57.5

196.

3

1,63

0.5

18,6

35.3

6,50

8.3

6,42

5.2

2,91

6.7

2,08

2.7

1,67

5.4

43.1

10,9

82.2

3,52

4.6

1,00

7.9

886.

2

2,78

5.1

751.

52,

361.

8

364.

1

179.

72,

389.

6

868.

8

27,3

74.9

101.

367

2.1

8,62

0.1

1,31

6.8

1,56

5.9

17,7

01.7

5,05

4.4

7,52

3.5

2,53

8.9

2,19

8.4

1,68

1.5

39.2

14,0

26.6

3,81

6.5

1,24

5.4

1,00

5.2

2,58

4.9

776.

71,

805.

91,

276.

62,

439.

71,

239.

181

1.5

164.

541

.131

.817

.094

6.6

1,37

5.8

1,09

0.9

977.

4

477.

7

135.

12,

250.

4

508.

4

56.6

580.

8

7,49

1.4

1,21

0.4

1,49

7.8

20,0

29.8

5,07

2.3

9,61

3.6

2,29

9.9

2,21

4.9

1,63

1.2

31.3

3,77

0.8

1,11

5.3

1,15

7.7

3,04

4.0

519.

71,

605.

262

5.1

3.3

976.

8

552.

4

1,13

3.0

2,13

0.1

658.

9

13.2 7.9

17.6

13.16.0

13.7 2.6

10.5

11.8

21.3 5.7

21.4

10.8

13.8 9.3

8.7

12.9

11.5

25.6

12.0

12.5 8.4

4.9

37.4

14.4

10.5

15.9

17.47.4

19.1 4.8

10.6

14.7

30.3 7.0

30.1 9.9

13.2

12.1

8.6

13.4

12.0

29.5

13.3

10.5

13.0 4.3

18.9

20.7

19.5

14.0

13.68.2

19.7 3.5

8.6

13.3

28.5 7.7

25.8 9.3

12.8

13.3

8.4

10.8

10.3

24.2

12.8

10.0 8.7

4.1

30.8

15.5

19.3

11.9

10.97.4

15.6

28.7 7.8

11.4

23.9 7.6

21.6 9.0

12.3

12.6

7.1

11.1

12.0

25.5

11.1 9.6

6.7

6.0

11.3

6.3

4.1

64.1

7.7

5.4

8.9

13.7

18.2

15.7

14.0 4.6

27.1

15.8

13.6

6.5

6.0

12.9

25.5 6.1

10.7

20.6 7.9

18.8 7.8

10.5

11.69.3

9.2

29.0

10.7 6.4

5.4

3.0

2.7

11.1 4.3

2.9

12.6

14.9

1,27

3.1

46,9

12.1

28,1

64.7

6,86

5.3

630.

6

35,6

60.6

1,15

0.0

43,9

32.7

866.

9

40,7

70.1

891.

8

42,2

93.3

6.9

15.6

15.0

9.8

10.2

Agr

icul

ture

, hun

ting,

for

estr

y an

d fis

hing

Min

ing

and

quar

ryin

gM

anuf

actu

ring

Elec

tric

ity, g

as a

nd w

ater

sup

ply

Who

lesa

le a

nd r

etai

l tra

de, r

esta

uran

ts a

nd h

otel

s

Who

lesa

le t

rade

Reta

il tr

ade

Rest

aura

nts

and

hote

lsBr

oad

prop

erty

sec

tor

Con

stru

ctio

n Pu

rcha

se o

f re

side

ntia

l pro

pert

yPu

rcha

se o

f no

n-re

side

ntia

l pro

pert

y Re

al e

stat

eTr

ansp

ort,

sto

rage

and

com

mun

icat

ion

Fina

nce,

insu

ranc

e an

d bu

sine

ss s

ervi

ces

Con

sum

ptio

n cr

edit

Pe

rson

al u

ses

Fi

nanc

ial s

ervi

ces

In

sura

nce

Bu

sine

ss s

ervi

ces

Cre

dit

card

s Pu

rcha

se o

f co

nsum

er d

urab

le g

oods

Pu

rcha

se o

f se

curit

ies

Com

mun

ity, s

ocia

l and

per

sona

l ser

vice

sPu

rcha

se o

f tr

ansp

ort

vehi

cles

2

P52

NPL

by

sect

or (R

M m

illio

n)A

s pe

rcen

tage

of

tota

l loa

nsto

the

sec

tor

(%)

2004

2000

As

at e

nd-

2001

2003

2002

Bu

sin

ess

ente

rpri

ses

Ho

use

ho

lds

Oth

ers

Tota

l

2000

2001

2002

2003

2004

1 In

clud

es p

urch

ase

of p

asse

nger

s ca

rsN

ote:

Num

bers

may

not

nec

essa

rily

add-

up d

ue t

o ro

undi

ng

Agr

icul

ture

, hun

ting,

for

estr

y an

d fis

hing

Min

ing

and

quar

ryin

gM

anuf

actu

ring

Elec

tric

ity, g

as a

nd w

ater

sup

ply

Who

lesa

le a

nd r

etai

l tra

de, r

esta

uran

ts a

nd h

otel

s

Who

lesa

le t

rade

Reta

il tr

ade

Rest

aura

nts

and

hote

lsBr

oad

prop

erty

sec

tor

Con

stru

ctio

n Pu

rcha

se o

f re

side

ntia

l pro

pert

yPu

rcha

se o

f no

n-re

side

ntia

l pro

pert

y Re

al e

stat

eTr

ansp

ort,

sto

rage

and

com

mun

icat

ion

Fina

nce,

insu

ranc

e an

d bu

sine

ss s

ervi

ces

Con

sum

ptio

n cr

edit

Pe

rson

al u

ses

Fi

nanc

ial s

ervi

ces

In

sura

nce

Bu

sine

ss s

ervi

ces

Cre

dit

card

s Pu

rcha

se o

f co

nsum

er d

urab

le g

oods

Pu

rcha

se o

f se

curit

ies

Com

mun

ity, s

ocia

l and

per

sona

l ser

vice

sPu

rcha

se o

f tr

ansp

ort

vehi

cles

1

Tab

le A

.45

Fin

ance

Co

mp

anie

s: N

on

-per

form

ing

Lo

ans

by

Sect

or

7,90

4.3

37.5

55.2

641.

05.

6

148.

1

7,06

9.4

2,23

3.0

2,28

1.2

590.

0

281.

418

0.4

5.0

6,20

5.9

533.

2

149.

823

5.3

1,96

5.2

337.

143

3.2

96.1

2,53

7.2

187.

4

145.

2

14,2

55.4

9,02

6.6

59.4

120.

3

768.

115

.9

153.

9

5,91

0.6

2,06

0.3

1,71

2.2

587.

0

313.

721

0.8

15.8

6,04

6.7

511.

8

210.

014

7.9

1,55

1.1

750.

255

4.7

87.2

3,50

7.6

253.

2

220.

7

15,2

94.0

8,47

4.9

70.3

100.

0

870.

816

.7

158.

0

6,91

9.0

2,32

8.8

1,80

1.9

789.

8

354.

723

9.4

18.5

5,74

7.9

568.

2

203.

420

6.7

1,99

8.5

735.

363

7.0

96.8

3,20

3.0

224.

2

135.

6

14,3

58.4

7,46

6.2

45.6

59.9

859.

117

.8

191.

5

6,90

0.2

2,13

9.7

2,05

8.7

756.

6

264.

618

0.0

14.5

5,54

7.8

610.

7

189.

123

0.1

1,94

5.2

616.

760

4.0

70.1

2,84

3.7

238.

8

93.2

13,1

07.2

4,14

7.3

23.3

35.0

358.

31.

6

63.0

4,04

6.7

1,24

2.0

1,30

4.5

456.

1

188.

781

.1 3.0

3,24

6.6

297.

3

99.4

134.

9

1,04

4.1

166.

124

5.3

104.

6

1,55

4.9

79.7

29.9

7,42

3.8

28.2

39.37.2

18.8 5.7

11.2

33.1

45.9

18.6

66.7 8.5

10.1

28.1

11.2

18.7

14.5

38.8

57.2

12.8

35.6 7.5

4.5

15.5

30.9

33.6

31.8

16.4

26.6

26.9

13.7

23.3

33.6

13.8

38.4

13.8

26.3

15.1

9.2

15.6

13.0

27.3

29.2

36.1

28.2 6.4

9.2

27.5

56.4

34.3

40.0

15.6

29.0

35.5

11.8

26.6

38.7

13.8

51.2

14.4

26.5

46.8

7.6

17.0

13.5

40.9

36.8

39.5

43.7 6.4

6.7

23.5

42.7

31.2

40.4

10.6

34.2

35.6

14.1

26.7

38.9

14.7

52.6

10.9

22.8

37.2

6.7

17.6

12.0

43.6

39.7

34.5

42.6 4.4

5.0

24.8

25.5

34.1

35.39.7

23.2

11.0

10.4

27.7

41.9

15.6

52.0

10.7

18.9

23.3

7.4

14.7 9.2

40.3

44.6

20.4

31.4 5.8

4.0

895.

81,

344.

71,

374.

21,

161.

739

6.8

54.9

22.8

28.7

29.4

24.7

17.6

37.7

146.

50.

398

.5

210.

71.

022

1.4

257.

44.

229

3.1

344.

31.

229

1.6

243.

21.

035

9.9

95.5

12.0

18.5

41.7

21.0

22.0

92.1 7.3

27.3

89.6 5.9

31.8

88.8 6.8

19.6

Annex

P53

NPL

by

sect

or (R

M m

illio

n)A

s pe

rcen

tage

of

tota

l loa

nsto

the

sec

tor

(%)

2004

2000

As

at e

nd-

2001

2003

2002

Bu

sin

ess

ente

rpri

ses

Ho

use

ho

lds

Oth

ers

Tota

l

2000

2001

2002

2003

2004

1 In

clud

es p

urch

ase

of p

asse

nger

car

s

Agr

icul

ture

, hun

ting,

for

estr

y an

d fis

hing

Min

ing

and

quar

ryin

gM

anuf

actu

ring

Elec

tric

ity, g

as a

nd w

ater

sup

ply

Who

lesa

le a

nd r

etai

l tra

de, r

esta

uran

ts a

nd h

otel

s

Who

lesa

le t

rade

Reta

il tr

ade

Rest

aura

nts

and

hote

lsBr

oad

prop

erty

sec

tor

Con

stru

ctio

n Pu

rcha

se o

f re

side

ntia

l pro

pert

yPu

rcha

se o

f no

n-re

side

ntia

l pro

pert

y Re

al e

stat

eTr

ansp

ort,

sto

rage

and

com

mun

icat

ion

Fina

nce,

insu

ranc

e an

d bu

sine

ss s

ervi

ces

Con

sum

ptio

n cr

edit

Pe

rson

al u

ses

Fi

nanc

ial s

ervi

ces

In

sura

nce

Bu

sine

ss s

ervi

ces

Cre

dit

card

s Pu

rcha

se o

f co

nsum

er d

urab

le g

oods

Pu

rcha

se o

f se

curit

ies

Com

mun

ity, s

ocia

l and

per

sona

l ser

vice

sPu

rcha

se o

f tr

ansp

ort

vehi

cles

1

Not

e: N

umbe

rs m

ay n

ot n

eces

saril

y ad

d-up

due

to

roun

ding

Tab

le A

.46

Mer

chan

t B

anks

: No

n-p

erfo

rmin

g L

oan

s b

y Se

cto

r

2,46

4.6

24.4 4.5

570.

6

179.

4

165.

096

0.9

525.

2

49.3 0.0

8.3

11.8

3,59

7.7

3,22

2.7

25.9

86.5

0.4

0.5

383.

189

1.5

195.

919

7.4

127.

911

8.8

1,14

4.9

1,47

7.3

565.

580

7.5

68.2

91.3

79.6

63.6

87.9

187.

2

12.9

13.2

2,31

4.5

2,01

4.9

47.3

22.0

4.1

4.4

792.

553

8.1

181.

421

7.6

146.

120

1.3

1,28

2.0

1,00

4.6

756.

653

1.2

70.9

65.9

38.4

22.9

139.

485

.6

12.2

11.5

17.7

5.5

9.4

42.9

24.4

34.7

33.4

26.9

44.0 0.0

1.5

10.0

30.4

2.5

0.5

17.2

20.7

28.2

23.9

18.3

30.2 8.2

7.1

35.3

30.3

26.8

10.0

5.9

0.5

5.9

40.4

39.4

24.5

25.7

26.8

36.5

33.7

33.2

28.8

30.3

36.9

33.9

10.7

10.6

18.2

14.9

40.5

57.5

27.0

464.

145

3.4

423.

228

3.9

163.

226

.437

.238

.228

.717

.1

3.4

9.1

32.3

85.4

57.5

133.

420

8.4

118.

020

.68.

229

.326

.730

.733

.2

43.3

35.1

7.8

6.6

35.2

45.4

32.8

33.1

29.8

9.8

5.6

6.5

6.0

5.1

12.6

15.4

26.3

19.0

17.4

3.7

10.0 7.0

31.1

43.9

0.4

0.4

0.7

0.2

0.1

0.6

0.5

0.9

0.3

0.2

2.7

386.

051

0.8

577.

845

4.3

407.

352

.736

.145

.842

.144

.1

11.8

12.9

13.2

12.2

11.5

10.0

35.2

40.4

57.4

32.4

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.3

1.2

0.6

0.4

301.

990

1.8

878.

982

1.5

544.

420

.627

.540

.041

.531

.8

30.9

38.9

121.

611

8.7

29.2

44.6

10.2

33.1

58.2

29.7

13.5

32.5

155.

533

3.3

343.

0

3,08

4.2

4,38

4.4

3,98

9.0

220.

216

1.9

9.3

2,81

8.6

2,34

0.0

21.2

19.9

15.4

14.5

71.8 0.0

13.7

101.

30.

038

.1

2.9

0.0

5.5

45.7 0.0

42.2

134.

60.

052

.6

13.4 0.0

14.0

0.6

0.0

12.5

5.3

0.0

12.1

18.9 0.0

16.9

13.2 0.0

22.4

P54


2004 20042000 2001 2002 2003 2000 2001 2002 2003

1.2

14.4

112.0

44.3

64.7

62.5

82.4

222.9

270.5

111.8

1.4

18.2

94.5

39.0

54.7

49.8

87.7

175.4

200.1

98.4

0.9

10.5

65.5

41.7

63.1

54.8

103.0

89.6

190.7

213.0

113.2

1.2

13.9

95.4

43.6

64.2

55.4

88.4

201.7

228.1

111.6

1.2

13.5

101.7

46.1

63.2

58.6

83.3

205.4

246.5

130.2

2.6

34.7

196.9

33.7

35.7

49.4

124.3

177.5

142.8

123.5

1.7

42.4

91.6

31.2

35.7

36.7

100.4

90.2

89.8

131.7

1.8

27.4

102.9

32.1

36.4

37.5

108.0

106.0

98.2

130.1

1.9

26.9

119.2

32.4

36.5

39.2

111.1

133.1

119.8

118.0

1.9

26.0

138.9

32.6

34.1

42.7

115.8

146.6

126.6

Table A.47Banking System1,2: Selected Indicators

Pre-tax profit / Average assets (%)

Pre-tax profit / Average shareholders' funds (%)

Pre-tax profit / Average employee (RM'000)

Cost3 incurred per ringgit of revenue earned4 (sen)

Cost3 incurred per ringgit of net interest income4 (sen)

Overheads to staff cost ratio (%)

Staff cost per employee (RM'000)

Loan to deposit ratio5 (%)

Loans per branch (RM million)

Deposits per branch5

(RM million)

1 Includes Islamic banks

2 Based on Malaysian operations only

3 Cost = Staff cost and overheads (excluding loan loss provisions)

4 Revenue = Net interest income + fee-based income + other income

5 Including NIDs and repos

Annex

P55

As at calendar year end-

Merchant banks Islamic banks

2004 2004 20042000 2001 2002 2003 2000 2001 2002 2003

52.0

2.0

16.4

338.2

32.9

95.6

116.1

33.1

560.4

1,691.1

70.0

1.5

17.3

248.6

19.6

43.6

70.0

70.1

789.1

1,125.5

58.1

0.8

7.1

124.8

20.7

55.5

86.4

57.6

768.8

1,334.6

53.6

1.4

12.9

244.5

27.7

65.5

93.6

51.3

729.9

1,547.1

51.2

1.6

13.7

280.8

32.4

80.3

106.8

37.6

649.6

1,725.4

120.1

0.5

6.8

30.3

59.9

75.5

50.6

55.2

84.3

152.6

84.9

0.5

5.0

22.6

58.2

64.8

38.7

57.0

52.8

92.6

96.7

0.4

5.3

23.9

62.5

67.9

46.1

53.4

62.9

117.8

108.3

0.7

9.3

41.6

54.7

61.5

45.2

56.1

71.9

128.1

142.7

0.6

8.4

37.4

58.5

68.0

44.3

55.8

74.3

133.2

Banking system1

2000 2001 2002 2003

111.1

1.4

16.6

127.8

42.4

59.3

61.5

82.3

211.6

257.2

101.6

1.4

19.5

92.7

38.4

50.7

46.9

89.0

151.1

169.7

104.0

1.0

12.2

72.4

40.2

55.3

51.6

91.2

166.1

182.1

112.9

1.3

15.3

100.2

42.5

56.6

51.8

90.6

184.3

203.4

110.4

1.3

15.3

112.0

42.8

55.9

56.1

85.4

184.9

216.4

P56

Table A.48Banking System: Key Data

As at end-

20042000 2001 2002 2003

64 49 47 4631 25 24 23

619 12 111012 10 10

13.812.5 13.0 13.213.912.2 12.8 13.210.211.5 12.1 12.021.917.1 19.6 19.0

2,4292,835 2,675 2,5311,9601,758 1,660 1,631

316933 874 7551722 19 17

4,6513,694

3 8

4,169 4,2134,0983,004 3,386 3,477

273560 605 551

131212

13,05113,256 13,959 15,04080,94924,920 26,474 32,490

93,94896,159 93,329 90,86478,03270,226 67,398 65,866

9,19020,725 20,488 19,4302,6902,339 2,402 2,451

4123

1110

22 2 2 2

136122 122 128 132

280130 178 185 212

188,088– – 191,641 189,773

4,0362,869 3,041 3,117 3,323

12.517.1 14.4 12.6 11.7

13.814.111.619.2

2,5631,685

72917

4,3963,707

477

1212

14,86634,362

90,84466,45818,634

2,429

133 8

Number of institutions- Commercial banks- Finance companies

- Merchant banks - Islamic banks

Risk-weighted capital ratio (%)- Commercial banks

- Finance companies - Merchant banks

Office network- Commercial banks


ATM network- Commercial banks

- Finance companies

Number of banks with internet services- Commercial banks

Persons served per office- Commercial banks

- Finance companies

Number of employees- Commercial banks


- Islamic banks

- Islamic banks

- Islamic banks

- Islamic banks

- Islamic banks

Annex

P57

Table A.49Housing Credit Institutions

Lendingrate for new

housing loans (%)

2003 2004 2003 2004

Commercial banks 4.01 1,700

Finance companies 4.11 672

Treasury Housing 1970 To provide housing loans to Government employees

4.0Loans Division

Malaysia Building 1950 To be the nation’s single largestprovider of property finance andto contribute to the continuousgrowth of the nation

2.0 ~ 8.5 22

–

Society Berhad

Borneo Housing Mortgage 1958 To provide housing loans mainlyto Sabah and Sarawak StateGovernment employees

3.0 ~ 8.5 2Finance Berhad

Sabah Credit Corporation 1955 To improve the social economicdevelopment of Sabah throughloans mainly to the property,agriculture and business sectors

3.0 ~ 10.5 11

Bank Kerjasama Rakyat 1954 A co-operative society whichcollects deposits and providesbanking facilities according toSyariah principles

7.41 7.31 100Malaysia Berhad

Bank Simpanan Nasional 1974 To promote and mobilise savings particularly from small saversand to inculcate the habit ofthrift and savings

6.51

3.11

3.11

4.0

2.0 ~ 8.5

3.0 ~ 8.5

3.0 ~ 10.5

4.81 398

1,960

316

22

–

2

11

103

393

1 Average

Source: Bank Negara Malaysia and various housing credit institutions

Year of establishment

ObjectiveNo. of

branches

–

–

P58

Table A.50Outstanding Housing Loans

2003 2004p 2004p2003 2003 2004p


Commercial banks 101,829 18.1 70

Treasury Housing Loans Division 24,754 11.6 17

Finance companies 14,645 4.3 10

Bank Kerjasama Rakyat Malaysia Berhad 1,371 23.7

Bank Simpanan Nasional

Malaysia Building Society Berhad 1,206 1,753 -2.4 45.4 1 1

1,058 -6.6

Borneo Housing Mortgage Finance Berhad 680 4.7

Sabah Credit Corporation 252 -14.2

Total 145,795

125,825

25,930

7,009

2,508

1,059

705

238

165,027 14.9

23.6

4.8

-52.1

83.0

…

3.7

-5.5

13.2 100

p Preliminary… Negligible


1

1

...

...

76

16

4

100

2

1

...

...

Table A.51Approved Housing Loans

2004p 2004p 2004p2003


Commercial banks 27,942 4.3 78

Treasury Housing Loans Division 4,738 -6.2 13

Finance companies 2,090 -12.3

Bank Kerjasama Rakyat Malaysia Berhad 591 46.8

Malaysia Building Society Berhad

Borneo Housing Mortgage Finance Berhad 87 3.4

Bank Simpanan Nasional 118 51.1 …

Sabah Credit Corporation 20 -34.5 …

Total 35,931

34,140

4,086

1,553

1,040

89

249

6

42,983 2.8

22.2

-13.8

-25.7

75.9

1.8

111.1

-70.3

19.6 100

p Preliminary… Negligible


...

6

2

79

10

1

…

100

…

4

2

345 205.81,820 426.8 1 4

20032003

Annex

P59

Number of financial institutions1 Islamic banks

1 Excluding new licences/approvals to foreign banks and Islamic subsidiaries2 Full-fledged Islamic branches3 Branches that offer both Islamic and conventional banking products

Commercial banks

Table A.52Islamic Financial Institutions: Branches/Counters

As at end-

2003 2004

Finance companiesMerchant banksDiscount houses

332

13747

292

13347

Number of branches2 143132101

153136161

Number of counters3 2,0241,410

6059

1,8861,661

2169

Islamic banksCommercial banksFinance companies

Commercial banksFinance companiesMerchant banks

Table A.53Islamic Banking System: Sources and Uses of Funds

SourcesCapital and reservesDepositsFunds from other

financial institutionsOther liabilities

Total

Uses

Total

As at end-

1,795 5,714 7,50920,756 52,103 72,859

436 3,591 4,0271,882 8,303 10,185

24,869 69,711 94,580

260 11 271

542 816 1,358

6,119 12,533 18,65211,463 46,419 57,883

5,216 13,828 19,0441,269 -3,8961 -2,6281

24,869 69,711 94,580

2003 2004p

Islamic Banks Total

RM million

IBS Banks

Islamic Banks Total

IBS Banks

1,523 5,261 6,78417,584 42,628 60,212

113 6,872 6,9851,779 6,481 8,260

20,999 61,242 82,241

231 24 255

587 930 1,517

3,239 5,743 8,9829,809 38,851 48,6605,764 16,790 22,5541,369 -1,0961 273

20,999 61,242 82,241

RM million

CashReserves with

Bank Negara MalaysiaDeposits with other

financial institutionsFinancingSecuritiesOther assets

1 Denotes the interbranch balances pending settlementp Preliminary

P60

Table A.54Islamic Banking System: Commitments and Contingencies

Assets sold with recourseand commitments withdrawdown

Credit extensioncommitments

Direct credit substitutesForeign exchange related

contractsTrade-related contingenciesTransaction-related

contingenciesUnderwriting obligationsOthers

Total

p Preliminary

As at end-

2004p2003

IslamicBanks

IBS Banks

RM million

Islamic BanksTotal %

share

IBS Banks Total %

shareRM million

140 3,887 14.7

1,573 9,144 10,717 40.6429 478 907 3.4

374 – 374 1.41,442 7,303 27.7

1,422 864 2,286 8.756 621 677 2.644 187 231 0.9

5,480 20,902 26,382 100.0

3,747

5,861

45 1,995 8.6

1,418 8,287 9,705 42.0503 357 860 3.7

189 – 189 0.81,103 7,532 32.6

1,157 634 1,791 7.860 510 570 2.564 392 456 2.0

4,539 18,559 23,098 100.0

1,950

6,429

Annex

P61

Tab

le A

.55

Isla

mic

Ban

kin

g S

yste

m: I

nco

me

and

Exp

end

itu

re

Inco

me1

net

ofin

com

e-in

-sus

pens

e(In

com

e-in

-sus

pens

e)

Less

: E

xpen

se1

Net

inco

me

Add

: O

ther

inco

me

Less

:Fi

nanc

ing

loss

and

oth

er

prov

isio

nsSt

aff

cost

Ove

rhea

ds

Pre-

tax

pro

fit

1Fr

om f

inan

cing

act

iviti

es a

nd s

ecur

ities

pPr

elim

inar

y

For

the

finan

cial

yea

rFo

r th

e ca

lend

ar y

ear

RM m

illio

n

Isla

mic

Bank

sTo

tal

Isla

mic

Bank

sIB

SBa

nks

Tota

lIs

lam

icBa

nks

IBS

Bank

sTo

tal

Isla

mic

Bank

sIB

SBa

nks

Tota

l

2004

p20

0320

04p

2003

IBS

Bank

s

596.

92,

266.

514

1.9

966.

5

1,30

0.0

1,63

1.5

1,23

1.9

193.

52,

863.

495

3.5

108.

2

410.

2

543.

3

246.

858

9.2

836.

0

2,48

2.0

1,93

8.7

1,40

3.7

1,81

3.9

201.

330

9.5

4,29

5.9

3,34

2.4

51.6

265.

4

331.

5

356.

9

759.

273

.517

8.2

144.

027

5.3

884.

826

8.7

186.

322

3.7

421.

519

7.8

80.6

266.

91,

374.

61,

643.

3

439.

482

.5

125.

610

4.7

131.

3

52.4

680.

273

2.6

638.

32,

604.

716

9.5

1,10

0.2

1,50

4.5

1,85

3.8

1,38

9.2

225.

63,

243.

056

.1

289.

0

349.

3

450.

6

993.

269

.520

1.1

136.

628

9.5

1,13

4.8

582.

313

1.7

141.

613

1.6

152.

9

54.9

755.

881

0.7

111.

487

4.9

986.

3

924.

595

.0

403.

4

521.

1

124.

062

4.5

748.

5

2,17

4.8

1,65

3.7

1,28

5.5

1,68

8.9

211.

630

6.6

3,86

3.7

2,93

9.2

179.

214

8.8

197.

438

4.3

186.

982

.923

1.7

1,16

7.7

1,34

6.9

119.

784

0.7

960.

4

P62

Table A.56Islamic Banking System: Financing Activities

Financing approvals

Financing disbursements

Financing repayments

p Preliminary

For the year

2004p2003

IslamicBanks

IBSBanks

Total IslamicBanks

IBSBanks

Total

RM million

2004p2003

IslamicBanks

IBSBanks

Total IslamicBanks

IBSBanks

Total

RM million

As at end-

Outstanding financing

2,291.9 13,968.5 16,260.41,428.1 14,740.0 16,168.1

8,771.6 32,317.0 41,088.68,001.9 28,046.6 36,048.5

7,679.2 25,960.2 33,639.47,596.5 18,560.6 26,157.1

11,463.3 46,419.2 57,882.59,809.2 38,850.8 48,660.0

Financing approvals

Financing disbursements

Total non-performing financing

404.8

p Preliminary

2004p2003

IslamicBanks

IBSBanks

Total IslamicBanks

IBSBanks

Total

RM million

2,064.0 2,468.8 363.1 2,319.2 2,682.3

933.0 2,436.8 3,369.8 1,856.5 4,702.8 6,559.3

Table A.57Islamic Banking System: Financing to Small and Medium Enterprises

For the year

As at end-

Outstanding financing

1,759.0

2004p2003

IslamicBanks

IBSBanks

Total IslamicBanks

IBSBanks

Total

RM million

4,407.2 6,166.2 1,860.9 6,133.1 7,994.0

323.0 289.1 612.1 375.9 211.6 587.5

Annex

P63

Table A.58Islamic Banking System: Direction of Financing

As at end-

2004p2003

Islamic Banks

IBS Banks Total

RM million

Agriculture, hunting,forestry and fishing

Mining and quarryingManufacturingElectricity, gas and

Community, social andpersonal services

Broad property sectorReal estateConstructionPurchase of residential

propertyPurchase of non-

residential propertyWholesale and retail trade,

restaurants and hotelsTransport, storage and

communicationFinance, insurance and

business servicesPurchase of securitiesConsumption credit

Credit cardsPersonal usePurchase of consumer

durable goodsPurchase of transport

vehiclesOthers

Total

p Preliminary

% share

Islamic Banks

IBS Banks Total

RM million

% share

241.6 2,328.6 4.015.1 61.5 76.6 0.1

1,687.7 4,424.9 6,112.6 10.6

11.8 707.4 719.2 1.3

94.2 324.3 418.5 0.76,024.8 16,426.2 22,451.0 38.8

86.3 820.1 906.4 1.61,452.3 2,078.6 3,530.9 6.1

3,635.9 11,797.4 15,433.3 26.7

850.3 1,730.1 2,580.4 4.4

447.2 2,623.7 3,070.9 5.3

181.3 995.2 1,176.5 2.0

33.0 10.6 43.6 0.1

2,087.0202.2 1,861.6 3.915.0 48.5 63.5 0.1

1,529.7 2,857.1 4,386.8 9.0

43.0 205.9 248.9 0.5

63.7 239.6 303.3 0.65,349.9 15,177.5 20,527.4 42.1

90.6 721.3 811.9 1.71,328.5 1,605.0 2,933.5 6.0

3,066.9 11,322.0 14,388.9 29.5

863.9 1,529.2 2,393.1 4.9

405.9 1,391.1 1,797.0 3.7

152.8 871.5 1,024.3 2.1

225.6 1,864.5 2,090.1 3.6256.2 621.9 878.1 1.5

2,207.8 15,595.6 17,803.4 30.8127.1 184.9 312.0 0.6811.4 1,637.9 2,449.3 4.2

261.6 1,671.7 1,933.3 4.0226.6 694.2 920.8 1.9

1,431.5 13,440.7 14,872.2 30.690.3 65.9 156.2 0.3

562.0 1,075.1 1,637.1 3.4

40.3 13.8 54.1 0.1

1,236.3 13,762.2 14,998.5 25.970.0 687.0 757.0 1.3

11,463.3 46,419.2 57,882.5 100.0

738.9 12,285.9 13,024.8 26.8127.3 593.6 720.9 1.5

9,809.2 38,850.8 48,660.0 100.0

1,659.4

water supply

P64

Tab

le A

.59

Isla

mic

Ban

kin

g S

yste

m: N

on

-per

form

ing

Fin

anci

ng

by

Sect

or1

As

at e

nd-

NPF

by

sect

or

2004

p20

0320

03 %

2004

p

Isla

mic

Ba

nks

IBS

Bank

sTo

tal RM

mill

ionIsla

mic

Ba

nks

IBS

Bank

sTo

tal

Agr

icul

ture

, hun

ting,

for

estr

y an

d fis

hing

Min

ing

and

quar

ryin

gM

anuf

actu

ring

Elec

tric

ity, g

as a

nd w

ater

sup

ply

Com

mun

ity, s

ocia

l and

per

sona

l ser

vice

sBr

oad

prop

erty

sec

tor

Real

est

ate

Con

stru

ctio

nPu

rcha

se o

f re

side

ntia

l pro

pert

yPu

rcha

se o

f no

n-re

side

ntia

l pro

pert

yW

hole

sale

and

ret

ail t

rade

, res

taur

ants

and

hot

els

Tran

spor

t, s

tora

ge a

nd c

omm

unic

atio

nFi

nanc

e, in

sura

nce

and

busi

ness

ser

vice

sPu

rcha

se o

f se

curit

ies

Con

sum

ptio

n cr

edit

Cre

dit

card

sPe

rson

al u

sePu

rcha

se o

f co

nsum

er d

urab

le g

oods

Purc

hase

of

tran

spor

t ve

hicl

esO

ther

s

Tota

l

1 B

ased

on

actu

al c

lass

ifica

tion

p P

relim

inar

y

Cha

nge

As

perc

enta

ge o

f to

tal

finan

cing

to

the

sect

or

38.4

7.4

45.8

-40.

1 2

.05.

11.

16.

224

.08.

119

5.4

68.3

263.

7-2

8.0

4.3

2.1

0.1

2.2

-46.

30.

321

.630

.852

.416

.412

.599

2.0

2,32

0.0

3,31

2.0

17.6

14.8

0.9

302.

2 3

03.1

6.2

33.4

407.

236

4.1

771

.329

.821

.837

3.9

1,41

5.9

1,78

9.8

24.0

11.

621

0.0

237.

8 4

47.8

-9.1

17.4

92.9

138.

8 2

31.7

12.3

7.5

36.4

92.9

129

.3-4

0.9

11.0

17.6

8.6

26.2

-36.

1 1

.365

.494

.115

9.5

13.2

18.2

198.

544

8.5

647.

025

.03.

66.

910

.417

.311

9.0

5.5

124.

875

.220

0.0

2.8

8.2

2.4

0.4

2.8

-37.

86.

464

.436

2.5

426.

937

.42.

83.

387

.490

.74.

012

.0

4.1 7.9

8.4

1.6

14.8

13.7

35.2

20.3

10.

020

.611

.521

.4 2

.115

.3 3.5

5.1

11.9 8.3

2.4

12.1

1,66

8.7

3,29

8.0

4,96

6.7

32.0

44.4

76.4

4.8

0.2

5.0

202.

216

3.9

366.

14.

1...

4.1

27.8

17.2

45.0

865.

31,

951.

42,

816.

70.

128

5.4

285.

535

9.8

234.

6 5

94.4

317.

61,

126.

31,

443.

918

7.8

305.

149

2.9

66.3

140.

0 2

06.3

51.3

167.

4 2

18.7

31.6

9.4

41.0

59.5

81.4

140.

922

6.8

291.

051

7.8

4.8

3.1

7.9

140.

953

.719

4.6

4.3

0.2

4.5

76.8

234.

031

0.8

3.9

83.3

87.2

1,57

5.6

2,94

9.6

4,52

5.2

9.8

Annex

P65

Demand deposits 1,796693

1,103

Table A.60Islamic Banking System: Deposits by Type and Institution

As at end2004p

Annual change

2003 2004p

17.610.522.0

12,9174,5788,339

Savings deposits 1,442190

1,145107

22.817.938.2

-51.41

8,4322,3025,771

359

Investment deposits -74193

-2,351614213690

19.215.587.2

-57.21

121.013.2

41,99612,91919,150

3,8601,3044,763

Other deposits 4,410187

3,1481,150

-46-29

19.620.119.2

26.610.837.816.9

-2.10.8

-18.77.3

56.519.6

161.6157.1147.6

2,017.5-15.0-25.7

1,937435

1,502

1,566350

1,596-3801

6,7691,7368,923

-5,1591

714555

2,375651

1,234526-38

2

33.3212.7

23.443.6

-14.62.4

9,514957

6,5151,733

22386

Total deposits 6,906Islamic banks 1,163 Commercial banks 3,043Finance companies 1,871Merchant banks 168Discount houses

Islamic banksCommercial banksFinance companiesMerchant banksDiscount houses

Islamic banksCommercial banksFinance companies

Islamic banksCommercial banks

Islamic banksCommercial banks

Finance companies

Merchant banksDiscount houses

661

13.07.1

13.020.624.618.2

12,6473,172

13,255-5,0131

676557

21.018.050.0

-45.71

79.313.0

72,85920,75639,775

5,9521,5274,849

RM million % RM million RM million%

1 Due to merger of finance companies with commercial banksp Preliminary

P66

Table A.61Development Financial Institutions : Sources and Uses of Funds

As at end-

20042000 2001 2002 2003

RM million

10,809.86,314.3 6,906.77,862.35,258.5 5,416.91,963.81,216.6 1,196.2

983.7-160.8 293.6

49,878.034,752.2 39,305.7

17,569.311,825.5 13,024.912,990.56,238.3 6,625.8

1,731.73,034.8 3,321.72,847.12,552.4 3,077.4

12,052.78,470.2 8,828.5

90,309.861,362.2 68,065.8

18,906.211,493.2 12,265.2

24,038.417,506.6 21,968.0

2,629.32,497.1 3,715.06,833.94,759.8 5,099.45,513.34,203.5 4,478.51,320.6556.3 620.9

37,709.221,998.0 24,486.3

3,863.62,090.2 3,011.6

5,792.48,274.2 6,334.7

90,309.861,362.2 68,065.8

3,949.04,211.5 3,341.5

308.6205.0 148.0

4,257.64,416.5 3,489.5

7,905.46,012.41,517.0

376.0

39,797.6

13,977.08,875.4

3,434.31,667.3

10,766.4

72,446.4

12,446.2

19,268.1

1,952.36,427.45,325.61,101.8

29,442.4

3,606.7

7,683.0

72,446.4

3,160.1

151.4

3,311.5

9,424.17,192.31,599.6

632.2

42,403.3

16,576.811,730.2

3,158.51,688.1

10,686.2

79,090.4

16,244.7

21,229.5

2,950.86,778.15,200.91,577.2

32,354.8

3,707.5

5,553.9

79,090.4

3,661.6

123.3

3,784.9

1

Sources:

Shareholders’ fundsPaid-up capitalReservesRetained earnings

Deposits accepted

BorrowingsGovernmentMultilateral/International agenciesOthers

Others

Total

Uses:

Deposits placed

Investmentsof which:

Government securitiesShares

QuotedUnquoted

Loans and advances

Fixed assets

Others

Total

Contingencies:

Guarantee

Export credit insurance

Total

1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri & Teknologi Malaysia Berhad, Bank KerjasamaRakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Malaysia Export Credit InsuranceBerhad, Bank Pertanian Malaysia, Malaysian Industrial Development Finance Berhad, Sabah Development Bank Berhad,Borneo Development Corporation (Sabah) Sendirian Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad,Credit Guarantee Corporation Malaysia Berhad, Sabah Credit Corporation and Lembaga Tabung Haji

Annex

P67

Table A.62Development Financial Institutions under DFIA : Sources and Uses of Funds

As at end-

20042000 2001 2002 2003

RM million

6,541.82,963.4 3,495.0 4,087.64,811.12,594.5 2,718.0 3,288.51,288.4360.9 389.1 877.7

442.38.0 387.9 -78.6

37,278.525,140.9 28,663.3 29,373.9

13,397.79,086.6 9,668.2 9,851.74,416.7 4,659.0 6,248.0

1,533.72,721.2 3,037.8 3,135.11,535.41,948.7 1,971.4 468.6

9,449.35,361.7 6,088.6 8,358.2

66,667.342,552.6 47,915.1 51,671.4

12,949.58,139.7 8,771.4 8,212.5

15,866.78,931.4 12,579.6 11,637.0

2,549.81,935.1 3,355.0 1,952.31,730.41,592.9 2,364.4 6,427.41,618.91,435.6 2,205.4 5,325.6

111.5157.3 159.0 1,101.8

33,431.918,929.5 21,135.9 25,191.1

1,623.1974.7 947.2 1,496.0

2,796.15,577.3 4,481.0 5,134.8

66,667.342,552.6 47,915.1 51,671.4

533.3806.5 672.5 575.4

308.6205.0 148.0 151.5

841.91,011.5 820.5 726.9

5,359.44,167.5

964.1227.8

30,762.7

12,347.79,039.8

2,933.9374.0

8,403.7

56,873.5

11,383.5

12,970.7

2,736.51,778.51,664.7

113.8

28,072.3

1,550.3

2,896.7

56,873.5

549.1

123.3

672.4

10,328.6

Sources:

Shareholders’ fundsPaid-up capitalReservesRetained earnings

Deposits accepted

BorrowingsGovernmentMultilateral/International agenciesOthers

Others

Total

Uses:

Deposits placed

Investmentsof which:

Government securitiesShares

QuotedUnquoted

Loans and advances

Fixed assets

Others

Total

Contingencies:

Guarantee

Export credit insurance

Total

1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri & Teknologi Malaysia Berhad, BankKerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Malaysia ExportCredit Insurance Berhad and Bank Pertanian Malaysia

2 Development Financial Institutions Act 2002

1 2

P68

Table A.63Development Financial Institutions : Direction of Lending

As at end-

2004 2000 2001 2002 2003

RM million

3,261.32,584.9 2,750.2 2,964.366.847.4 46.1 90.0

4,186.33,086.1 3,147.5 3,356.61,228.9265.0 334.9 453.8

429.6522.1 618.1 240.410,022.54,687.0 5,700.4 7,840.64,136.11,613.7 2,346.9 3,790.64,066.42,090.6 2,593.8 2,785.2

463.9163.1 268.8 393.41,356.1819.6 490.9 871.45,315.42,028.9 2,860.5 4,362.1

474.4801.5 733.1 530.41,306.71,213.0 1,300.7 1,780.59,238.55,084.5 5,404.2 6,716.1

446.8997.6 819.2 816.524.342.9 47.8 48.0

103.4330.0 356.2 173.22,075.41,347.6 1,234.4 934.4

37,709.221,998.0 24,486.3 29,442.4

2,874.075.2

3,952.0617.1

250.48,376.64,009.42,927.9

441.1998.2

4,712.7473.1

1,694.77,787.5

521.223.7

136.21,405.3

32,354.8

1

Agriculture, forestry and fisheryMining and quarryingManufacturingElectricity, gas and water supplyImport and export, wholesale and retail

trade, restaurants and hotelsBroad property sector

ConstructionPurchase of residential propertyPurchase of non-residential propertyReal estate

Transport, storage and communicationMaritimeFinance, insurance and business servicesConsumption creditof which:

Purchase of motor vehiclesCredit card

Purchase of securitiesOthers

Total1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri & Teknologi Malaysia Berhad, Bank

Kerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad, Bank Pertanian Malaysia, Malaysian Industrial Development Finance Berhad, Sabah Development Bank Berhad, Borneo Development Corporation (Sabah) Sendirian Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad, Credit Guarantee Corporation Malaysia Berhad, Sabah Credit Corporation and Lembaga Tabung Haji

Annex

P69

Table A.64Development Financial Institutions under DFIA : Direction of Lending

As at end-

20042000 2001 2002 2003

RM million

2,460.2 2,628.3 2,823.1 2,749.133.5 34.5 80.5 58.8

2,154.2 2,204.2 2,130.2 2,675.31,228.9265.0 334.9 453.8

151.5 260.7135.2 129.07,371.4 8,921.44,054.6 5,078.23,842.0 3,973.71,427.6 2,192.12,629.3 3,785.31,779.8 2,288.0

438.8 461.2160.9 267.3461.3 701.2686.3 330.8

4,668.9 5,265.11,871.1 2,746.5473.1 474.4801.5 733.1896.0 827.41,096.8 1,198.0

7,533.8 8,913.15,037.5 5,339.6

521.2 446.8950.6 754.623.7 24.342.9 47.8

136.2 103.4330.0 356.2741.1 1,359.7689.9 353.4

Total 28,072.3 33,431.918,929.5 21,135.9

3,148.349.1

2,880.4617.1

125.96,846.93,641.32,480.3

391.3334.0

4,321.6530.4877.6

6,567.8

741.248.0

173.2260.1

25,191.1

1 2

Agriculture, forestry and fisheryMining and quarryingManufacturingElectricity, gas and water supplyImport and export, wholesale and retail

trade, restaurants and hotelsBroad property sector


Transport, storage and communicationMaritimeFinance, insurance and business servicesConsumption creditof which:

Purchase of motor vehiclesCredit card

Purchase of securitiesOthers

1 Refers to Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Industri & Teknologi Malaysia Berhad, BankKerjasama Rakyat Malaysia Berhad, Bank Simpanan Nasional, Export-Import Bank of Malaysia Berhad and Bank PertanianMalaysia

2 Development Financial Institutions Act 2002

Table A.65Bank Industri & Teknologi Malaysia Berhad

Year of establishment 1979

Objectives The principal activity of Bank Industri & Teknologi Malaysia Berhad is to finance capital intensive and high technology industries in priority sectors such as shipping industry and manufacturing.

Loans Approved (RM million) Loans Disbursed (RM million)Sector

20042003 20042003

Maritime

Others

76.3 83.7Shipping industry 57.4 54.7Shipyard industry 1.2 16.6Marine-related industries 17.7 12.4

Manufacturing 177.1 59.5of which:

High technology 16.8 7.8

Total 253.4

378.1217.5

9.2151.4329.8

70.0

745.5 143.2

171.5144.610.916.0

147.6

1.9– –37.6 39.0

358.1

Source: Bank Industri & Teknologi Malaysia Berhad

P70

Objectives

Table A.66Export-Import Bank of Malaysia Berhad


Establishing an institutional support mechanism to facilitate theexports of goods and services by providing medium and long-term credit to Malaysian exporters and investors, as well as foreignbuyers of Malaysian goods. Effective January 1998, the ExportCredit Refinancing facility was transferred from Bank NegaraMalaysia to Export-Import Bank of Malaysia Berhad.

Loans Approved (RM million) Loans Disbursed (RM million)Facility

2004 20042003 2003

Buyer credit facility 22.8 10.7Overseas investment credit facility 239.4 40.7Supplier credit facility 209.1 109.4Export of services financing facility –Export credit refinancing 6,611.2 6,611.2Others – –

–

Total 7,082.5

252.7196.4306.8

–6,770.8

–

7,526.7

24.3212.6363.8

–6,770.8

0.4

7,371.96,772.0

Source: Export-Import Bank of Malaysia Berhad

Annex

P71

Table A.67Malaysia Export Credit Insurance Berhad


Objectives Support and strengthen Malaysian exports through the provision ofexport credit insurance facilities to exporters to cover against commercial and non-commercial risks and issuing guarantees forbanks and financial institutions to facilitate access to export finance, and encouraging reverse investment by Malaysian investors through the provision of political risk insurance for investment.

Contingent Liabilities Business Coverage(RM million) (RM million)

As at end-2003 As at end-2004 2003 2004

Short-term Policies

Comprehensive policies

Others

Others

Bank letter of credit policySpecific policiesBond indemnity support

Sub-total

Medium and Long-term Policies

Specific policiesBuyer credit guaranteeBond indemnity support

Sub-total

Total

Overseas investment insurance

307.1 1,479.3

– –

351.4 1,543.8

0.8 0.8290.7 240.3

24.7 24.77.5 8.4

323.8 274.2

675.2 1,818.0

121.4 1,077.0

–

41.0 61.20.8 0.8

9.0 24.2– –

–

0.1 –0.1 –

2.5 2.5– –

130.4 1,101.2

1.9 2.0331.4 276.5

23.1 23.17.5 8.4

364.0 310.0

494.4 1,411.2

Source: Malaysia Export Credit Insurance Berhad

1 Excluding Banker's export finance insurance policy

1

P72

Table A.68Bank Simpanan Nasional


Objectives Bank Simpanan Nasional is a savings bank, incorporated under the National Savings Bank Act 1974 and focuses on retail banking andpersonal finance especially for small savers.

Deposits Accepted(RM million)

Interest Rate /Rate of Return (%)Deposits facility

As at end-2003 As at end-2004 2003 2004

Savings depositsFixed depositsGIRO depositsIslamic depositsPremium savings certificates

Total

RM millionInvestments

Quoted sharesMalaysian Government SecuritiesPrivate debt securitiesSubsidiary companiesAssociate companies

Total

Number of branchesNumber of account holders (‘000)Number of automatic teller machines (ATM)

Source: Bank Simpanan Nasional

1.00 ~ 2.00252.0 1.90 ~ 5.52

1.50

10,986.8

1.00 ~ 2.00

As at end-2004

437.8231.8

393 11,446

599

2,267.1819.7

1,277.7

5,034.1

As at end-2003

437.8231.8

398 10,252

591

1,923.71,084.7

1,389.0

5,067.0

1,103.74,654.24,054.1

922.8281.9

9,435.2

1,230.73,422.03,595.9

904.7

3.00 ~ 3.701.30 ~ 2.301.96 ~ 3.40

1.50

1.30 ~ 4.513.00 ~ 3.70

Table A.69Bank Kerjasama Rakyat Malaysia Berhad


Objectives Bank Kerjasama Rakyat Malaysia Berhad mobilises savings andprovides financing services to its members as well asnon-members.

Financing Outstanding (RM million)

As at end-2003 As at end-2004Sector

Members Non-membersMembers Non-members

Agriculture 45.2 11.7Purchase of property 1,201.9 696.5General commerce 46.4 424.7Purchase of securities 15.8 101.5Purchase of motor vehicles 278.3 0.7Consumption credit 6,120.0 735.3Manufacturing – 100.3Others – 178.4

Total 7,707.6

Source: Bank Kerjasama Rakyat Malaysia Berhad

2,249.1

48.3 10.22,246.8 822.7

45.7 399.510.8 78.9

649.6 0.66,656.8 1,032.1

– 100.8– 251.1

9,658.0 2,695.9

Annex

P73

Table A.70Bank Pembangunan dan Infrastruktur Malaysia Berhad


Objectives To increase the participation and involvement of the Bumiputeracommunity in business and industry through financing and equityparticipation and to provide financing for infrastructure projects,in particular Government-identified projects.

Loans Approved (RM million) Loans Disbursed (RM million)Sector

2003 2004 2003 2004

InfrastructureGovernment programmesPrivate programmes

SME of which:

Bumiputera

Total

Source: Bank Pembangunan dan Infrastruktur Malaysia Berhad

7,428.8 1,905.53,412.2 863.04,016.6 1,042.51,583.6 648.3

1,506.5 601.2

9,012.4

4,753.82,883.01,870.81,086.8

1,059.6

5,840.6 2,553.8

1,589.8853.9735.9649.7

526.4

2,239.5

Table A.71Bank Pertanian Malaysia


Objectives

Loans Approved Loans Disbursed(RM million) (RM million)

Sub-sector

2004 2004

Oil palm

Total

Source: Bank Pertanian Malaysia

196.8 121.285.3 81.4

1,095.5 923.9

Food crops

Agriculture, Forestry & Fishery

60.4 69.2LivestockFishery 122.7 46.8

21.0 1.4ForestryTobacco 0.7 19.7

8.4 9.3Rubber600.3 574.9Others

Bank Pertanian Malaysia was established to promote sound agricultural development in the country, through the provision of loans and advances. The main function of the bank is to co-ordinate and supervise the granting of credit facilities for agricultural purposes and mobilise savings, particularly from the agriculture sector and community.

P74

Table A.72Other Development Financial Institutions1: Core Activities

As at end-

RM million

2004

Lending Activity

AgricultureManufacturingBroad property sector


Total

Other Activities

Deposits acceptedof which:

SavingsGuarantee issued

1 Refers to Malaysian Industrial Development Finance Berhad, Sabah Development Bank Berhad, Borneo Development Corporation (Sabah) Sendirian Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad, Credit Guarantee Corporation Malaysia Berhad, Sabah Credit Corporation and Lembaga Tabung Haji

1,305.91,101.2

162.4281.2

2.7654.9

4,277.3

12,599.5

12,085.43,415.7

2003

1,276.71,005.2

167.4298.6

2.3536.9

4,282.3

11,640.6

11,286.63,112.5

2002

1,226.4993.7149.2304.9

2.1537.5

4,251.4

10,423.7

10,270.42,584.7

2001

943.3622.2154.8305.7

1.5160.2

3,350.4

10,642.4

10,565.82,669.0

2000

931.8113.1124.9141.2122.0124.7

632.3186.1310.7

2.2133.3

Consumption credit 325.4253.6148.464.647.0Others 1,431.71,621.91,741.71,598.31,332.6

3,068.4

9,611.3

9,534.03,405.0

Annex

P75

Table A.73Development Financial Institutions : Selected Data

As at end-

2003 2004

DFIs under DFIA1: Branch ATM Staff Branch ATM Staff

Bank Pembangunan dan InfrastrukturMalaysia Berhad

Bank Kerjasama Rakyat Malaysia BerhadBank Simpanan NasionalBank Industri & Teknologi Malaysia BerhadExport-Import Bank of Malaysia BerhadMalaysia Export Credit Insurance Berhad

Sub-total

Other DFIs:

Malaysian Industrial DevelopmentFinance Berhad

Sabah Development Bank BerhadBorneo Development Corporation (Sabah) Sendirian BerhadBorneo Development Corporation (Sarawak) Sendirian BerhadCredit Guarantee Corporation Malaysia BerhadSabah Credit CorporationLembaga Tabung Haji

Sub-total

Total1 Development Financial Institutions Act 2002

14 – 690103 119 2,866393 599 5,258

3277363

691 860 11,867

– 17883

16

3617 32510 206

119 1,581

153 – 2,425

844 – 14,292

13100398

–––

692

7–

–

–1711

118

153

845

–112591

–––

845

––

–

––––

–

845

6402,8045,041

3037359

11,265

22882

18

37272206

1,543

2,386

13,651

– –

––

–––––

7

––Bank Pertanian Malaysia 2,590181 142 2,345 142181

––––

P76

Table A.74Development Financial Institutions: Government Special Funds

Loans (RM million)

Approved Disbursed Outstandingas at end-

2003 2004 2004 20042003 2003

Bank Pembangunan dan Infrastruktur Malaysia BerhadFinancing Programme for Wholesalers and Distributors (Tanmiah 2)Financing Scheme for Indian Rural Economic DevelopmentFinancing Scheme for Rural Economic DevelopmentFood and Furniture SchemeFund for Film IndustryFund for PublicationGraduate Entrepreneurs FundSeed Capital SchemeSmall Scale Enterprises1

Special Fund for Tourism 2Terengganu Entrepreneurs FundThird Window Financing Scheme (Tanmiah1)Tourism Infrastructure FundVenture Capital Fund

Bank Kerjasama Rakyat Malaysia BerhadFinancing Scheme for Rural Economic Development

Bank Industri & Teknologi Malaysia BerhadEasy Financing Scheme - PAKSIHigh Technology FundNew Ship Financing FacilityWomen Entrepreneurs Fund

Export-Import Bank of Malaysia BerhadExport Credit Refinancing (ECR) Scheme2

Bank Pertanian MalaysiaAgricultural Mechanisation and Automation SchemeBumiputera Commercial and Industrial Community SchemeCommercial Agriculture Graduate Entrepreneurs SchemeCredit Scheme for Paddy

Special Fund for Terengganu-based Small and Medium Enterprises

Financial Credit Scheme1

Hardcore Poor Development Programme1

Low Intensity Tapping System

1 Fund has been fully utilised2 Inclusive of funds from Bank Negara Malaysia and these funds are channelled through 24 participating banks… Negligible

Oil Palm Replanting SchemeSpecial Agriculture Financing Scheme1

Special Fund for Fishery

Malaysian Industrial Development Finance BerhadMalaysian Industrial Energy Efficiency Improvement ProjectModernisation Automation Scheme1 Soft Loan for Factory Relocation

Soft Loan for Small and Medium EnterprisesSoft Loan for Information and Communication Technology

3.5 – –– 0.2 0.3

5.6 5.3 29.52.4 1.6 19.9

4.0– – 0.2

5.4 2.827.1 13.8 56.1

– – 4.9187.2 33.4 33.2

14.5 – –11.0 17.3 10.6

132.5 9.2 16.3– 0.6 7.6

11.0 9.0 15.6

– 0.8 7.816.8 7.6 34.3

4.2 21.4 49.9– 3.2 8.3

2.0 – –

3.2 4.0 9.019.6 9.1 16.2

0.7 0.6 0.931.2 31.5 27.6

– 0.2 19.3– – –– – –

– – 6.4– – 0.2

0.4 0.2 0.2

8.8 5.0 4.4– … 0.3

8.8 5.2 29.07.6 1.9 19.2

2.6– – 0.2

5.9 5.052.5 27.6 66.8

– – 5.6211.0 100.5 132.4

5.0 15.2 8.44.4 14.9 15.0

83.766.8205.0– 0.2 8.2

9.3 5.9 20.2

– 0.1 6.741.4 15.6 38.035.0 29.2 71.7

– 1.1 7.3

6,611.2 6,611.2 1,128.76,770.8 6,770.8 1,189.7

4.0 2.2 0.3

0.9 1.7 8.817.0 6.6 17.6

1.4 1.4 2.230.4 30.2 25.3

– 0.4 15.74.5 1.1 1.12.3 0.3 0.3

46.8 37.7 63.326.1 42.2 88.0

1.2 0.8 0.80.8 0.7 1.4

– – 6.4– – …

0.2 0.2 0.143.6 10.9 30.05.7 12.8 42.2

– – 1.5 –

8.0 11.7

– – 51.3– – 40.90.5 1.1 16.21.6 1.6 15.9

Annex

P77

Table A.75Development Financial Institutions: Bank Negara Malaysia Funds1

Loans (RM million)

OutstandingApproved Disbursed as at end-

2003 2004 2004 20042003 2003

Bank Pembangunan dan Infrastruktur Malaysia Berhad New Entrepreneurs Fund2

New Entrepreneurs Fund 2Fund for Small and Medium Industries2

Fund for Small and Medium Industries 2Bumiputera Industrial Fund2

Industrial Adjustment Fund2

Rehabilitation Fund for Small and Medium Industries3

Fund for FoodSpecial Fund for Tourism2

Bank Industri & Teknologi Malaysia BerhadNew Entrepreneurs Fund2

Fund for Small and Medium Industries2

Fund for Small and Medium Industries 2Industrial Adjustment Fund2


Ship Financing Facility

Malaysian Industrial Development Finance BerhadNew Entrepreneurs Fund2

New Entrepreneurs Fund 2Fund for Small and Medium Industries2

Fund for Small and Medium Industries 2Bumiputera Industrial Fund2

Industrial Adjustment Fund2


Bank Pertanian MalaysiaFund for Small and Medium Industries2

Fund for Small and Medium Industries 2Rehabilitation Fund for Small and Medium Industries3

Fund for Food

Credit Guarantee Corporation Malaysia Berhad4

New Entrepreneurs Fund 2Fund for Small and Medium Industries 21 Bank Negara Malaysia fund for the ECR scheme administered by EXIM Bank of Malaysia Berhad is merged with the Government fund in Table A.76 2 Funds have been fully utilised 3 Fund was closed on 1 November 2003 and replaced by the Rehabilitation Fund for Small Businesses4 Administers and channels the funds through various lending institutions

New Entrepreneurs Fund 2

106.5–

–

–

4.1

–

17.9

–

–

–

––

–

–

––

3.1––

––

22.1

–

–121.0

––

0.3115.1

0.9

––

–

–

0.34.4

––

20.2

15.9–––

5.1–

0.9

–

4.2

1.2

–

0.5

171.0

71.499.9

128.9167.6108.2

19.90.3

39.95.18.1

2.21.8 0.5 0.5

22.9

9.94.6

341.1

7.9

13.8

6.5

25.5

19.431.4

1.73.72.9

84.96.8

193.3–

–

12.8

27.4

–

18.5

–

–

–

––

–

–

–––––

––

79.7

–

–117.6

––

8.5

1.3

182.5–

–

8.4

12.9

–

11.4

–

–

–

––

–

–

–––––

––

38.9

0.1

–119.2

–1.2

8.3

1.2

328.569.4

96.9

14.4

16.6

282.1

35.1

1.4

19.5

5.6

4.06.3

17.6

–

7.74.2

38.6–

11.8

3.71.4

46.9

81.3

12.3595.8

305.0276.7

8.8

4.33.1 3.014.1

551.1

350.4450.0

P78

Table A.76Development Financial Institutions: Funds from Multilateral and International Agencies

Loans (RM million)

Approved Disbursed Outstandingas at end-

2003 2004 2004 20042003 2003

– 2.0 57.8

24.9 9.7 49.5

19.9 9.3 96.3– 2.0 1,116.6

4.0 – 14.3

––

–17.53.3

––

–

––

––

– –

––

–

3.31.1

16.3153.530.3

18.1 24.7 69.6

186.1116.3

20.3 14.0 93.1

20.4 22.3 74.8

1.2

6.0

16.9

48.8––

––

–52.3

––

–

45.9

22.2

30.8

– 0.1

25.1

17.8

33.244.115.7

––

–39.76.4

––

–

26.0

47.2

24.2

– 14.3

109.6

78.5

50.5

110.51,191.5

49.0741.0 – –– – –

5.829.3

21.6161.843.9

64.3

227.5142.2

95.0

57.9

17.5– – –– 0.61.3

121.8

Bank Pembangunan dan Infrastruktur Malaysia BerhadASEAN-Japan Development Fund-Overseas Economic

Japan Bank for International Cooperation-Fund for Small andMedium Scale Industry Promotion Programme

Japan Bank for International Cooperation-Fund for Small andMedium Industries

Japan Bank for International Cooperation 1- JEXIMIslamic Development BankJapan Bank for International Cooperation 2

Bank Industri & Teknologi Malaysia BerhadASEAN-Japan Development Fund-Overseas Economic

Cooperation Fund

Cooperation Fund

1

1

The Export-Import Bank of Japan1

1

1

Overseas Economic Cooperation Fund-Fund for Small and Medium Scale Industry Promotion Programme1

Japan Bank for International Cooperation 300Japan Bank for International Cooperation 200

1

1

Japan Bank for International Cooperation-Fund for Small andMedium Industries1

Export-Import Bank of Malaysia BerhadJapan Bank for International Cooperation 300

1Japan Bank for International Cooperation 200

1

Malaysian Industrial Development Finance BerhadJapan Bank for International Cooperation-Fund for Small and

Medium IndustriesASEAN-Japan Development Fund-Overseas Economic

Cooperation FundJapan Bank for International Cooperation-Fund for Small and

Medium Scale Industry Promotion Programme

Bank Pertanian MalaysiaASEAN-Japan Development Fund-Overseas Economic

Cooperation Fund1

1 Funds have been fully utilised

ASEAN-Japan Development Fund/EXIM

Annex

P79

As at end-2004, 317 leasing companies and 29 factoring companies had registered with Bank NegaraMalaysia. However, only 137 leasing companies and 17 factoring companies submitted statistics pertaining totheir operations to the Bank Negara Malaysia. Total assets of the 137 leasing companies and 17 factoringcompanies amounted to RM13.1 billion and RM2.3 billion respectively at end-2004. Nevertheless, of the 137leasing companies, only 24 were pure leasing companies, while of the 17 factoring companies, only eight werepure factoring companies. The remaining companies only undertook leasing and factoring business as part oftheir overall business activities.

Table A.77Leasing Companies : Sources and Uses of Funds1

As at end-

2000 2001 2002 2003 2004

RM million

SourcesCapital and reservesBorrowings from financial institutionsInter-company borrowingsOthers

Total

UsesCash and bank balancesInvestmentsReceivables

LeasingFactoringHire purchaseOthers

Others1 Statistics shown are for pure leasing companies only

1,017839 839 7701,8161,711 1,923 2,141

6051,316 1,343 1,4542,0952,447 2,400 2,684

5,5336,313 6,505 7,049

157191 229 225327279 309 323

2,1803,107 3,014 3,1181,4871,495 1,423 1,420

17 209 1014531,331 1,275 1,307139273 299 182

2,8692,736 2,953 3,384

8

1,5541,7591,3752,342

7,030

198387

2,3701,508

204503155

4,074

P80

Table A.78Leasing Companies : Income and Expenditure1

During the period

20032000 2001 2002 2004

RM million

IncomeIncome from


Others

Total

ExpenditureInterest paid

Financial institutionsBlock discounting

Bad debts written off and provisionOthers

Total

Pre-tax Profit1 Statistics shown are for pure leasing companies only

167315 313 302107223 217 212

35190 85 76

11303224 188 306

469539 501 607

122180 187 165117156 166 155

524 21 109133 108 3595168 165 199

309381 460 398

161158 41 209

5320

392

326226

67520

200

526

141134

75

183

329

197

Table A.79Leasing Companies : Financing by Sector1

During the period

20032000 2001 2002 2004

RM million

SectorAgricultureMining and quarryingManufacturingElectricityGeneral commerceProperty sector

ConstructionReal estateResidential property

Transport and storageBusiness, insurance and other servicesConsumption creditOthers

Total1 Statistics shown are for pure leasing companies only

17 33172317 172 102

011689 266 1259761 50 386857 46 36

20

5583 805 54184

3147 113 121

4826 108 128

709771 1,535 585

4

28100

4 4

03 1

3325 17 14

00

9126

0106207179

280

53116

53

695

0 0

25

Annex

P81

Table A.80Factoring Companies : Sources and Uses of Funds1

As at end-

2000 2001 2002 2003 2004

RM million

SourcesCapital and reserves 116 164 164 81Borrowings from financial institutions 324 445 293 267Inter-company borrowings 697 600 416 267Others 896 658 1,092 425

Total 2,033 1,867 1,964 1,040

UsesCash and bank balances

00

4

0

4

25 45255 202 234

Investments 35Receivables 1,458 998 1,170

Leasing

4Factoring 1,312 872 1,111Hire purchaseOthers 142 122 55

Others 295 622 525

9977

644121

941

185

2022

614

72298

59285

0

1424

602

4542

57401

1 Statistics shown are for pure factoring companies only

Table A.81Factoring Companies : Income and Expenditure1

During the period

20032000 2001 2002 2004

RM million

IncomeIncome from


Others

Total

ExpenditureInterest paid

Financial institutionsBlock discounting

Bad debts written off and provisionOthers

Total

Pre-tax Profit

1 Statistics shown are for pure factoring companies only

5147 37 38100

0 069

28

2 02038 29 299

1208

3899 129

28

297

89146 166 335

1817

0001828 28 17

01114 28 142149 33 45

5091 89 76

3955 77 259

310

2406

75

106

1515

05

17

37

68

P82

Table A.82Factoring Companies : Financing by Sector1

During the period

20032000 2001 2002 2004

RM millionSector

AgricultureMining and quarryingManufacturingElectricityGeneral commerceProperty sector

ConstructionReal estateResidential property

Transport and storageBusiness, insurance and other servicesConsumption creditOthers

Total

1 Statistics shown are for pure factoring companies only… Negligible

00

5876 66 572 0

94127 140 17928245 270 10326195 222 76

050 48 270

22 20 203725 541 513

264584 1,096 927

1…0300

18 5 3

34

200

4177 5051

1

46

1204336

16

37

18

286

0

1

3

17 0

Annex

P83

Table A.83Capital Market Debt Securities1: Amount Outstanding

As at end-

20032000 2001 2002 2004p

RM million (nominal value)

Malaysian Government Securities


Khazanah Bonds

Malaysia Savings Bonds

Merdeka Savings Bonds2

Danaharta Bonds

Danamodal Bonds

Cagamas Bonds

Other Corporate Bonds

Total

154,35089,050 103,450 109,550

9,1004,000 4,000 5,000

10,00010,000 10,000 10,000

359 –– 464

79611,140

–11,000

26,75217,312 18,427 22,595

160,057102,220 120,584 108,416

362,983245,081 278,601 278,165

11,140 11,140

11,000 11,000 –

130,800

7,000

11,000

455

25,628

144,595

328,018

8,539

1,929– – – –

1 Refer to debt securities with an original maturity period of more than one year2 Merdeka Savings Bonds were introduced in 2004p Preliminary

a01 p1 statutory requirements - bank negara malaysia...seri dr. samsudin bin hitam resigned from the...

Documents