Download - Unit 1
FINANCIAL STRUCTURE P2112/1/1
FINANCIAL STRUCTURE
OBJECTIVES
General Objective : To understand the structure of financial system in Malaysia.
Specific Objectives
At the end of the unit you will be able to :
explain the evolution, function, role and structure of the financial system in
Malaysia which consist of banking system, non-bank financial intermediaries and
financial market.
explain the role and function of financial institution and financial intermediaries in
the country’s development.
explain the assets, sources and uses of fund and steps taken to develop the system.
explain in details about the flow of funds and the direction of credits.
explain in details about the latest monetary policies.
UNIT 1
FINANCIAL STRUCTURE P2112/1/2
explain the acts that regulate financial institution – BAFIA 1989, the Offshore
Banking Act 1990 and Islamic Banking Act 1983.
explain the role and purpose of regulatory body in Malaysian financial system.
explain the characteristics, roles and objectives of International Offshore Financial
Centre (IOFC).
discuss the factors that contribute to the successful operation of the International
Offshore Financial Centre’s (IOFC).
describe the financial services which is offered by International Offshore Financial
Centre (IOFC). Discuss the incentives given to the participants who operate in
Labuan.
identify the challenges faced by the financial sector in the global economy.
FINANCIAL STRUCTURE P2112/1/3
1.0 EVOLUTION, ROLES AND STRUCTURE OF THE FINANCIAL
SYSTEM
In this chapter, we will discuss about the Malaysian financial structure. Let us begin
with the:
EVOLUTION OF THE FINANCIAL SYSTEM
The development of a sound and financial system is a necessary pre-condition for a
stable and balanced economic and social development in Malaysia. In this regard,
Bank Negara Malaysia (BNM) has consciously and systematically developed a
modern and sophisticated financial system. The financial system has effectively
mobilized and allocated resources for productive use in tandem with the rapid
transformation of the economy.
The development can be divided into four phases:
First phase.
The first priority of BNM in the early 1960s was to create the basic infrastructure for
the financial system. It is also to develop a truly Malaysian-oriented banking system
to complement the presence of strong foreign banking in the economy. Therefore,
early efforts were focused on institutional building in order to develop an extensive
domestic banking network and re-orientate the operations foreign banks branches to
domestic needs.
Second phase
In the 1970s, BNM’s efforts were focused on introducing other financial
intermediaries. The establishment of merchant banks, the first of which was set up in
1970, satisfied the growing need for financial expertise in wholesale banking and
corporate financing. This is caused by the expansion of the public and private
INPUT
FINANCIAL STRUCTURE P2112/1/4
enterprises which progressed towards more technology-oriented activities, involving
more complicated forms of financing. In addition, BNM was also instrumental in
establishing a number of development finance institutions and the Credit Guarantee
Corporation to ensure a better position for the financial system to serve the financing
needs of a more diversified economy. Another significant development during the
decade was the enactment of a new legislation, the Banking Act 1973, to strengthen
the regulation and supervision of banking institutions.
Third phase
In the 1980s, BNM’s efforts were focused on further strengthening the regulatory
and supervisory framework for the banking system. The latter part of the 1980s was
a period of prudential re-regulation and significant structural changes in the banking
system. These changes were comprehensive and prompted by lessons from domestic
development as well as the global recession in the early 1980s. As a result, the
Malaysian banking system was strengthened considerably, and was able to remain
sound and intact despite the severe consequences of the sharp recession following
the Asian financial crisis.
Fourth phase
The 1990s was characterized by rapid changes shaped by the forces of liberalization
and globalization, aided by technology which broke new frontiers in the functioning
of financial markets and in the development of financial products. The Asian crisis
was a catharsis that catalyzed national and international efforts to strengthen
domestic financial system and the financial architecture. These issues will remain on
the Malaysian agenda in the years ahead, including an acceleration of on-going
efforts to consolidate the banking industry and to inject greater dynamism and
competition into the system.
FINANCIAL STRUCTURE P2112/1/5
ROLES OF THE FINANCIAL SYSTEM
Banking System
The banking system consists of BNM, the banking institutions and other
financial institutions, namely the discount houses, the representative offices of
foreign banks and offshore banks in the International Offshore Financial Centre
in Labuan (Labuan IOFC).
- BNM, as the central bank, is at the apex of the banking system, and is
responsible for the regulation and supervision of the banking system, with the
exception of the offshore banks operating in the Labuan IOFC which comes
under purview of the Labuan Offshore Financial Services Authority
(LOFSA).
- The commercial banks are the main players in the banking system. They are
the largest and most significant providers of funds in the banking system. The
range of transaction accounts typically offered are savings account, current
account, fixed deposits and negotiable instruments of deposits (NIDs). They
provide facilities for making payments or monetary transfers in domestic or
foreign currencies, both locally and internationally; makes commercial and
industrial loans and trade finance.
- Finance companies form the second largest group of deposit-taking
institutions in Malaysia. They provide finance (credit) , e.g. to operate hire
purchase transactions on behalf of retailers of consumer goods such as cars
and electronic and electrical equipment.
- Merchant banks filled the need for large corporations which require bulky
financing and complex banking services, by complementing the facilities
offered by commercial banks which are more focused on providing short-
term credit for working capital and trade financing. They also play a role in
the short-term money market and capital raising activities.
- Discount houses specialized in short-term money market operations and
mobilize deposits from the financial institutions and corporations in the form
of money at call, overnight money and short-term deposits. The funds
mobilized are invested in The Malaysian Treasury bills (TB), Malaysian
FINANCIAL STRUCTURE P2112/1/6
Government Securities (MGS), bankers acceptances (BA), negotiable
instrument of deposit (NID) and Cagamas bonds.
Non-bank financial intermediaries
- These institutions are generally under the supervision of various government
departments and agencies. All of them deal with funds. They mobilize funds
from certain sources and channel them to the deficit units. Like their sources,
the uses of these funds varies.
- Development finance institutions help to promote the development of certain
economic sectors through long-term investment financing. On the other hand,
provident and pension funds is designed to meet contingent financial needs of
their clients and further assist the public sector’s development efforts by
subscribing to government securities. Finally, saving institutions are
important to the small-time savers ant the rural population who usually have
less opportunities to utilize existing banking facilities.
● Financial Market
- The financial market in Malaysia comprise the money and foreign exchange
market, the capital markets, the derivatives markets and offshore markets.
- The money market is an avenue for the channeling of short-term funds with
maturities typically not exceeding 12-month. It provides a ready source of
funds for market participants facing temporary shortfalls in funding, while at
the same time, providing short-term investment outlets for those with
temporary surplus funds.
- Unlike the money market, capital markets are markets for raising long-term
funds containing the equity and bond markets.
- The derivatives markets are for trading instruments that provide contingent
claims on underlying assets, and whose values depend on the price of the
underlying assets or securities.
FINANCIAL STRUCTURE P2112/1/7
- The Labuan IOFC is aimed at enhancing the attractiveness of Malaysia as a
regional financial centre, as well as to promote the economic development of
Labuan and its vicinity.
STRUCTURE OF THE FINANCIAL SYSTEM
The structure of Malaysian Financial System is presented in Figure 1.1.
FINANCIAL INSTITUTIONS FINANCIAL MARKETS
Banking System
Bank Negara Malaysia
Banking Institutions
- Commercial Banks1
- Finance Companies
- Merchant Banks
● Others
- Discount Houses
- Representative Offices of Foreign
Banks
- Offshore Banks in Labuan IOFC
Non-Bank Financial Intermediaries
● Provident and Pension Funds
● Insurance Companies2
● Development Finance Institutions
● Savings Institutions
- National Savings Bank
- Co-operative societies
● Other Non-Bank Financial Intermediaries
- Unit Trusts
- Pilgrims Fund Board
- Housing Credit Institutions
- Cagamas Berhad
- Credit Guarantee Corporation
- Leasing Companies
- Factoring Companies
- Venture Capital Companies
Money & Foreign Exchange Markets
● Money Market
● Foreign Exchange Market
Capital Market
● Equity Market
● Bond Market
- Public Debt Securities
- Private Debt Securities
Derivatives Market
● Commodity Futures
● KLSE CI Futures
● KLIBOR Futures
Offshore Market
● Labuan International Offshore FinancialCentre
(IOFC)
1Including Islamic banks 2Including Takaful
Figure 1.1 Financial System
( Source: The Central Bank and the Financial System in Malaysia – A Decade of Change; BNM 1999)
FINANCIAL STRUCTURE P2112/1/8
1.1 ROLES OF FINANCIAL INSTITUTIONS AND FINANCIAL
INTERMEDIARIES IN THE DEVELOPMENT OF COUNTRY.
1) Intermediation function
The financial system, comprising both financial institutions and markets, acts as
an intermediary of resources in the economy. This intermediation function
involves the mobilization of resources by providing the means for savers to hold
monetary and financial assets, and allocating these resources for productive
investment. An efficient financial intermediation system helps channel resources
efficiently towards activities with high rate of return, as well as allow
implementation of projects that are larger in scale, and with longer gestation
period and riskier prospects. In addition, efficiency also means that information
is processed well, allowing investment opportunities to be identified so that
resources can be channeled to these activities.
2) Operation of the payment system
A payment system essentially refers to a network of services that facilitates
transactions involving the exchange a means of payment in return for goods,
services, real assets and financial assets. The means of payment can take on
many forms such as currency, cheques and credit cards, as well as modern
electronics means such as stored-value cards. The instruments, institutions and
services that facilitate the transfer of value to discharge the payment obligation,
serve as the payment system architecture. Therefore the payment system is a
central element in the economic infrastructure that facilitates the efficient
clearing and settlement process. Therefore, it has a significant effect on the
operating efficiency of an economy. As key players in the payment system,
strong and efficient financial institutions are essential for the efficient
functioning of the payment system.
FINANCIAL STRUCTURE P2112/1/9
3) As a channel for transmission of monetary policy
In addition to its contribution to the development of the economy, a well-
functioning and efficient financial system is vital for the effective conduct of
monetary policy. This is because monetary policy is transmitted primarily
through the banking system. On the other hand, an inefficient banking system,
usually characterized by financially weak banking institutions and inefficient
market mechanisms may render monetary policy less effectively in achieving its
objectives. In an environment of emerging inflationary pressure, the ability of a
central bank to raise interest rates would be constrained if the financial
institutions are weak. This is because higher interest rates would weaken the
health of the corporate sector and lead to the deterioration in the asset quality of
the banking institutions.
FINANCIAL STRUCTURE P2112/1/10
1.2 ASSETS, SOURCES AND USES OF FUND AND STEPS TAKEN TO
DEVELOP THE SYSTEM.
ASSETS OF THE FINANCIAL SYSTEM
Assets of the financial system are presented in Table 1.1.
Banking system1
Bank Negara Malaysia
Banking Institutions
Commercial banks2
Finance companies
Merchant banks
Discount Houses
Non-bank Financial Intermediaries
Provident and Pensions Funds
Insurance funds
Development Finance Institutions
Saving Institutions
Other Non-bank Financial Intermediaries
Growth (% per annum) Outstanding (end-period)
1988 –
1997
(Avg.)
1998
1988 –
1998
(Avg.)
RM billion
As % of
financial
system
1987 1998 1987 1998
19.2
16.2
19.7
18.9
21.8
21.5
21.4
17.2
15.4
18.6
12.5
13.3
25.0
-5.6
14.5
-8.8
-5.4
-18.9
-11.4
-4.6
8.5
12.6
11.1
28.0
-4.2
-1.6
16.7
16.1
16.7
16.5
17.3
18.0
18.8
16.4
15.2
17.9
13.8
11.6
22.3
140.6
24.2
113.4
85.8
21.3
6.3
3.0
61.6
36.8
6.4
4.8
5.4
8.3
766.7
124.7
622.0
459.2
123.6
39.2
20.2
326.6
174.0
39.3
19.8
18.0
75.5
69.5
12.0
56.1
42.4
10.5
3.1
1.5
30.5
18.2
3.2
2.4
2.7
4.1
70.1
11.4
56.9
42.0
11.3
3.6
1.8
29.9
15.9
3.6
1.8
1.6
6.9
Total Assets 18.6 -1.8 16.6 202.2 1,093.3 100.0 100.0
1Excludes Offshore Banks in Labuan IOFC 2Includes Bank Islam Malaysia Berhad
Table 1.1 Assets of the financial system
(Source: The Central Bank and the Financial System in Malaysia – A Decade of Change; BNM 1999)
FINANCIAL STRUCTURE P2112/1/11
SOURCES AND USES OF FUNDS
Table 1.2 summarizes the structure of the sources and uses of funds of the financial system
in selected years of the period.
Sources of funds: Capital, reserve & profit
Currency
Demand deposits
Other deposits1 (of which):
Public sector
Other financial institutions2
Private sector
Foreign
Borrowings
Funds from other financial institutions
Domestic2
Foreign
Insurance, provident & pension funds
Other liabilities
1988 1993 1998
RM million % RM million % RM million %
17,866
9,037 11,387
93,347
25,130
18,615
49,328
274
5,612
12,208
7,567 4,641
47,438
32,913
7.8
3.9 5.0
40.6
10.9
8.1
21.5
0.1
2.4
5.3
3.3 2.0
20.6
14.3
41,936
14,649 33,450
198,015
28,351
38,868
127,237
3,558
5,768
56,403
27,014 29,389
99,653
119,460
7.4
2.6 5.9
34.8
5.0
6.8
22.3
0.6
1.0
9.9
4.7 5.2
17.5
21.0
102,445
20,547 65,111
457,954
40,393
103,870
305,699
7,993
14,400
66,074
39,600 26,474
189,791
176,998
9.4
1.9 6.0
41.9
3.7
9.5
28.0
0.7
1.3
6.0
3.6 2.4
17.4
16.2
Total liabilities 229,808 100.0 569,335 100.0 1,093,321 100.0
Uses of funds:
Currency
Deposits with other financial institutions
Domestic
Foreign
Bills
Treasury
Commercial
Loans & advances
Public sector
Other financial institutions
Private sector
Foreign
Securities
Malaysian government
Foreign
Corporate
Others
Gold & foreign exchange reserves
905
33,479
28,418
5,061
5,962
4,472
1,490
93,084
2,242
2,264
87,562
1,016
62,717
51,349
2
11,366
0
17,271
0.4
14.6
12.4
2.2
2.6
1.9
0.6
40.5
1.0
1.0
38.1
0.4
27.3
22.3
0.0
4.9
0.0
7.5
1,597
115,827
108,768
7,060
7,825
2,737
5,088
209,802
2,860
3,767
201,787
1,388
105,245
61,047
69
41,703
2,427
75,309
0.3
20.3
19.1
1.2
1.4
0.5
0.9
36.9
0.5
0.7
35.4
0.2
18.5
10.7
0.0
7.3
0.4
13.2
3,224
151,578
136,138
15,440
14,648
3,796
10,852
485,712
5,567
28,995
448,318
2,832
225,569
71,575
1,269
141,781
10,944
96,265
0.3
13.9
12.5
1.4
1.3
0.3
1.0
44.4
0.5
2.7
41.0
0.3
20.6
6.5
0.1
13.0
1.0
8.8
FINANCIAL STRUCTURE P2112/1/12
Other assets
16,390
7.1
53,729
9.4
116,324
106
Total Assets 229,808 100.0 569,335 100.0 1,093,321 100.0
1Equal savings, fixed and other (NIF,LPHT, etc) deposits + NIDs + repos 2Effective 1998, the statutory reserves of the banking institutions have been reclassified as
“ Funds from other financial institutions” rather than “ Other deposits from other financial institutions”.
In this regard, data for prior years have also been revised accordingly.
Table 1.2 Sources and uses of funds of the financial system
(Source: The Central Bank and the Financial System in Malaysia – A Decade of Change; BNM 1999)
STEPS TAKEN TO DEVELOP THE SYSTEM
The development of Malaysia’s financial system has evolved over several decades against
the backdrop of rapid changes in the economy and the international financial environment.
This development has been significantly shaped by BNM, and the approach of BNM in this
regard has been pragmatic and flexible. Consequently, policies have been modified
according to the changing circumstances, to achieve the objective of financial sector
development, that is, to develop an efficient and sophisticated financial system that can
support balanced economic development.
The steps taken are as discussed below:
1. Leveling the playing field
Several measures were introduced during the period of 1989-99 to level the playing field
to allow commercial banks, finance companies and merchant banks to compete on equal
ground with each other. These include the adoption of a standard ratio for the statutory
reserve requirement (SRR), as well as the introduction of the risk-weighted asset
approach as the uniform method of capital adequacy assessment for the three groups of
banking institutions. The harmonization of standards was aimed at enhancing
competition among the three groups of banking institutions, which were essentially
engaged in the same type of business.
FINANCIAL STRUCTURE P2112/1/13
2. Interest rate reforms
In line with the objective to develop a more market-driven financial system, the process
of interest rate reforms resumed, following its abandonment during the period of tight
liquidity from 1985-87.The pegged deposit rate arrangement was dismantled in 1987.
Meanwhile, with effect from 1st February 1991, the base lending rate (BLR) of the
banking institutions was completely freed from administrative control, with banking
institutions allow to charge a maximum of 4 percentage points above their declared
BLR. With the freeing of the BLR, both the deposit and lending rates were expected to
be determined competitively by the banking institutions, taking market forces into
consideration.
There was, however, a long transmission lag for policy (approximately 2-3 months). To
reduce this lag, a new BLR framework was introduced in November 1995, whereby the
BLR was linked to the weighted monthly average of the 3-month BNM interbank rate.
In 1998, the BLR was linked to the 3-month BNM intervention rate instead of the 3-
month interbank rate. This has reduced the transmission lag to within one week. In
addition, the maximum margin over the quoted BLR was also reduced from 4
percentage points to 2.5 percentage points.
3. Institutional development
- International Offshore Financial Centre (IOFC) was established on 1st October 1990
in Labuan, in order to enhance the attractiveness of Malaysia as a regional financial
centre, increase the contribution of the financial services sector to the nation’s GDP and
promote the economic development of Labuan and its vicinity. The IOFC conducts a
variety of international banking, insurance and investment activities.
- As part of the institutional building to develop the capital markets, BNM initiated the
establishment of the Securities Commission (SC) on 1 March 1993. A separate
institution is necessary to consolidate the regulation and supervision of the capital
markets as well as oversee future measures to broaden and deepen the markets. In
FINANCIAL STRUCTURE P2112/1/14
addition, it is also recognized that there is a need to further develop the capital markets as
an alternative source of funding primarily for the private sectors.
- BNM also developed the private debt securities market and the Rating Agency
Malaysia Berhad (RAM) to rate debt issues by corporations.
- To further develop Kuala Lumpur as a key financial centre, the decade also saw
initiatives being taken to promote trading in options and financial futures. On 15th
December 1995, with the launching of KLOFFE’s stock index futures contract,
Malaysia becomes the fourth Asian country after Singapore, Hong Kong and Japan to
offer domestic equity derivatives product. Another milestone during the decade was the
commencement of trading on the Malaysian Exchange of Securities Dealing &
Automated Quotation Bhd. (MESDAQ), a stock exchange targeted specifically at
growth and technology companies, on 30 April 1999.
- In the banking system, the launching of the interest-free banking scheme in March
1993 provided the foundation for developing a viable and comprehensive Islamic
banking system.
4. Consolidation and restructuring of the financial system
The consolidation of the banking institutions over the past decade, in essence, begin with
efforts by BNM to restructure the banking system following the banking crisis in the mid-
1980s. While the banking sector entered the financial crisis in 1997 from a position of
strength, the severity of the crisis weakened the health of the banking sector, as reflected
in the deterioration in capitalization and asset quality. Following these developments and
anticipation of further adverse implications of the crisis on the banking system, BNM
adopted a pre-emptive and comprehensive four-pronged plan to restructure the financial
system. This involved a strategy to consolidate the finance company industry, and
establishing Danaharta, Danamodal and Corporate Debt Restructuring Committee to deal
with the emerging problems of deteriorating asset quality and capitalization, as well as
corporate debts, respectively.
FINANCIAL STRUCTURE P2112/1/15
Nonetheless, the crisis exposed the vulnerability of small banking institutions and the
need for these institutions to maintain a high level of capital. In this regard, it has always
been on the agenda to encourage banking institutions to merge in order to achieve
economies of scale and higher level of efficiency. This move is aimed at strengthening
the capacity, capability and ability of domestic banking institutions to meet the
challenges arising from an increasingly competitive global environment.
5. Payment system
The design and development of effective and efficient payment systems have been an
integral part of BNM’s initiative to further enhance the operations of the financial system.
The forces of financial globalization and rapid technological advancements have also
provided the impetus for the promotion for payment mechanism that are inexpensive,
secure, reliable and efficient.
Towards this, BNM launched the payment system masterplan in 1996 to chart the
development and implementation of payment system in Malaysia. The masterplan was
formulated along the lines of the four major modes of payment instruments, namely,
cash, cheques, card-based payment instruments and electronic-based payment
mechanism.
6. Prudential and regulatory reforms
In Malaysia, the regulatory and supervisory framework of the banking system has been
continually reviewed since the early 1980s in order to ensure that it remains relevant in
the light of structural changes in the domestic economy and external environment. This
review led to the introduction of the Banking and Financial Institution Act 1989
(BAFIA) in October 1989. BAFIA provides a framework for an integrated supervision of
the Malaysian financial system and enhances the powers and duties of the auditors of
licensed institutions and made a director, officer or controller of a licensed institution
liable to indemnify the institution in full for any loss or damage in any form arising from
or caused by on offence committed by any person.
FINANCIAL STRUCTURE P2112/1/16
Another major related development was the transfer of regulation and supervision of the
insurance industry to BNM with effect from 1st May 1988. The main rationale behind the
relocation was to streamline and adopt an integrated approach to the supervision of the
entire financial system in the country and to realize economies of scale in regulation and
supervision.
On its part, BNM has also reviewed its supervisory approach by focusing on areas of high
risk that have adverse implications on the soundness of the banking institutions. In this
regard, BNM has adopted risk-based supervision which emphasizes a combination of
dynamic off-site surveillance and on-site examination.
7. Liberalization of the financial sector
Malaysia recognizes that the opening up of the domestic financial sector to foreign
competition would contribute towards a more efficient, competitive and market-driven
financial sector, thus enabling the sector to play a more efficient and effective role in the
economy. At the same time, it is recognized that for the benefits of liberalization to be
fully realized, the pace of liberalization has to be in tandem with the capacity and ability
of the system to absorb these changes without undermining financial stability. This policy
has resulted in a high foreign participation in the Malaysian financial sector.
FINANCIAL STRUCTURE P2112/1/17
Activity 1A
TEST YOUR UNDERSTANDING BEFORE YOU CONTINUE WITH THE
NEXT INPUT…!
1.1 Describe briefly the structure of the financial system in Malaysia.
1.2 What are the roles of the financial institutions and financial intermediaries in the
development of a country?
1.3 List down three sources and uses of the financial system funds.
FINANCIAL STRUCTURE P2112/1/18
Feedback To Activity 1A
1.1 a) Financial institution
i. Banking system
ii. Non-bank financial intermediaries
b) Financial markets
i. Money and foreign exchange markets
ii. Capital market
iii. Derivative market
iv. Offshore market
1.2 a) Intermediation function
b) Operation of the payment system
c) As a channel for transmission of monetary policy
1.3 Sources of fund: a) Deposits
b) Insurance, provident and pension funds
c) Capital, reserve and profit
Uses of fund: a) Loans and advances
b) Securities
c) Deposits with other financial institutions
FINANCIAL STRUCTURE P2112/1/19
1.3 FLOW OF FUNDS AND DIRECTION OF CREDITS
FLOW OF FUNDS IN AN ECONOMY
The evolution of a financial system can be broadly categorized into four basic stages.
1. Barter trade to monetary system
The first stage is when the economy moves from a barter trade system into a monetary
system, whereby commodity money was used as the basic transmission unit. Under this
system, tokens, often made of precious metals served as a standard unit of account and
measures of value to facilitate trade.
2. Saving and borrowing practices
The second stage came when the practice of borrowing began. Funds accumulated by
wealthy persons were loaned to other individuals or companies who were willing to pay
for these funds for a fee or interest. This is where those economic units who are in need
of funds “deficit” units came to terms with those who have excess funds to be lent out or
called “surplus” units. At this stage, however, there are some problems such as the
difference in amount, maturity and the element of risks.
3. Establishment of financial intermediaries
The third stage came following the establishment of financial intermediaries to
overcome the problems of primary debt in the direct borrowing-lending process. During
this stage, financial intermediaries mobilize from the surplus units and reduce their risk of
default by issuing relatively risk-free liabilities. At the same time, through their
specialized knowledge of the credit market, they were able to supply funds to deficit units
INPUT
FINANCIAL STRUCTURE P2112/1/20
in the amount and terms that these units were willing to pay to meet its financing needs.
The liabilities of these financial intermediaries are known as secondary or indirect debt.
4. Varied financial instruments
The final stage is when a complete set of financial intermediaries were established to
form a financial system which provide a variety of financial instruments as saving media
for the surplus units, as well as a varied range of credit and investment facilities to meet
the financing requirements of the deficit units. In of Malaysia, the country can be
considered to have arrived at the final stage of the evolution process in establishing a
complete monetary system.
Major sectors of the economy
To illustrate how fund flows in an economy with a developed financial system, it can be
divided into five major institutional sectors. These sectors are:
a) households
b) enterprises
c) government
d) financial institutions
e) external sectors
Each sector has different sources and uses of funds from the other sectors and behaves
relatively homogeneous as a group.
The household sector, as a group is usually the major net surplus unit in an economy since
they save a large proportion of their income and invest their savings in the form of real and
financial assets. However, not all households are surplus units as a significant proportion of
the funds mobilized by the financial intermediaries are channeled back to household in the
form of consumer credits and housing loans.
FINANCIAL STRUCTURE P2112/1/21
The private enterprises and the government sectors are usually the deficit units since they
are the sectors primarily involved in the investment process in an economy. These sectors
mobilize resources mainly through the financial system in the form of loans equity capital,
bills and long-term securities.
The financial system basically serves to assist in the allocation of scarce resources in an
economy from the surplus units to the deficit units. To do this, an efficient recycling
mechanism is essential in order that scarce resources would be used to their optimum for
the development of the nation.
Financial intermediaries primarily operate in two markets. First is the saving markets
where they operate as borrowers while meeting the demand for financial assets by surplus
units. To fulfill this function, financial institutions have introduced various savings and
investment instruments to attract funds from the surplus units. The other one is the credit
market where financial intermediaries supply the financial resources required by the deficit
units. Here, again, they offer various financial instruments as a conduit to supply funds to
the deficit units.
Under the present situation, financial intermediaries operate in various markets such as the
money and foreign exchange markets, the capital markets and the financial futures and
option markets.
FINANCIAL STRUCTURE P2112/1/22
Table 1.3 The flow of funds in an economy
SOURCES OF FUNDS
SURPLUS
UNIT
FINANCIAL
INSTRUMENTS
FINANCIAL
INTERMEDIARIES
USES OF FUNDS
FINANCIAL
INSTRUMENTS
DEFICIT
UNITS
Currency Deposits
Bills
Loans Bonds
Unit trusts Share capital
Insurance premiums
Provident funds Pension funds
Foreign loans Investments
Central bank
Commercial banks Finance companies
Merchant banks Discount houses
Industrial Fin. Inst. Saving inst.
Provident funds Pension funds
Insurance companies Unit trusts
Building societies Cooperatives
Other fin. inst.
Money at call
Overdrafts Bills
Term loans Hire purchase Bridging loans
Leasing
Securities Bonds
Debentures External reserves
Investment or
expenditure of:
Households
Enterprises
Government
Financial institutions
External sector
Saving or Investment
of:
Households
Enterprises
Government
Financial institutions
External
sector
FINANCIAL STRUCTURE P2112/1/23
DIRECTION OF CREDITS
The financial system extended credit to the non-financial private sector in the form of loans
and advances, as well as through the holding of corporate securities. Figure 1.2 below
provides a graphic illustration of the change in the direction of credit to the non-financial
private sector over the period.
Sector 1988 1998
Investment in corporate securities 11.5% 24.0%
Manufacturing 15.6% 9.7%
Construction 18.8% 15.6%
Housing 13.7% 11.1%
Consumption credit 4.1% 8.5%
Purchase of shares 1.1% 4.8%
Others 35.3% 26.3%
Table 1.4 Direction of credit. (% of total credit outstanding)
(Source: The Central Bank and the Financial System in Malaysia – A Decade of Change; BNM 1999)
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
Investment in
corporate
securitiesManufacturing
Construction
Housing
Consumption
credit
Purchase of
shares
Others
Figure 1.2: Direction of credit (1988)
FINANCIAL STRUCTURE P2112/1/24
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%Investment in corporate
securities
Manufacturing
Construction
Housing
Consumption credit
Purchase of shares
Others
Figure 1.3: Direction of credit (1998)
1.4 LATEST MONETARY POLICIES
The Malaysian economy was fundamentally strong prior to the start of the crisis. In the
first two quarters of 1997, real GDP continued to grow at about 8%. The government
continued to record fiscal surpluses and, very importantly, the level of external debt was
low at 43.2% of GNP. At the end of 1997, the fundamentals of the economy were
strengthened further. The economic growth was achieved resulting in a lower inflation
rate and an improved balance of payments position. In the banking sector, the structural
reforms undertaken since the mid-1980s strengthened the banking system.
Given the strong macroeconomic and institutional fundamentals at the outset of the
crisis, Malaysia had greater flexibility in responding to the crisis. While there were
structural imbalances present such as the current account deficit, asset inflation and high
credit growth, policies were already in place to address these weaknesses and positive
results began to emerge.
FINANCIAL STRUCTURE P2112/1/25
Despite strong fundamentals, the East Asian financial crisis affected Malaysian
economy in numerous ways. In addition to instability of financial markets, the crisis
affected the real sector and weakened the financial sector. Towards the end of 1997, the
real GDP increased by 7.5% (10% in 1996). However, in 1998, the real GDP declined
by 7.5%. That was the first negative growth registered since 1985 and the trough was
reached in the third quarter of 1998. The crisis affected all the broad sectors in
Malaysian economy including the financial, real and external sectors. However, due to
the stronger fundamentals and affirmative action to eradicate poverty, the social
consequences from the crisis was less severe on Malaysia.
The impact of the crisis on Malaysian economy was discussed as below:
Depreciation of Ringgit
The crisis was felt in the KL foreign exchange and stock markets. Between end of
June 1997 and end of December 1998, ringgit was depreciated by 33.6% against the
United States Dollar. It was further depreciated to a historic low of RM4.88 against
the US Dollar on 7th January 1998, but strengthened thereafter. From February to
June 1998, the value of ringgit was relatively stable between US$1= RM3.84-3.98.
From June to August 1998, the downward pressure on ringgit was intensified
following the depreciation of the Japanese Yen, the contraction in the domestic
economy and increased speculative activity.
The immediate impact of the ringgit depreciation was on the stock market, with the
Kuala Lumpur Stock Exchange Composite Index (KLSE CI) declining about 144.8%
in the second half 1997. As the contagion spread in the region, investors’ confidence
was further eroded, the reversal of short-term capital flows caused the ringgit to be
depreciated further by as much as 20% on 7th January 1998 and the KLSE CI to
decline to as low as 286 points on 1st September 1998.
FINANCIAL STRUCTURE P2112/1/26
State of the banking system
The sharp depreciation of ringgit combined with the fall in share prices had a
material adverse effects on earnings and overall performance of the banking sector.
The decline in the property and stock markets, the debt-servicing capacity of
borrowers was also affected by the economic contraction, resulting in deterioration
in the asset quality of the portfolio of the banking institutions. The reluctance of the
banking institutions to lend, combined with higher interest rate led to severe
difficulties for individuals and businesses, including viable businesses in productive
economic activities, to obtain financing. These development caused loan growth
(including loans sold to Danaharta) to slow down from of 26.5% at the end of 1997
to 1.3% at the end of 1998.
Inflation
The price pressures arose from the depreciation of ringgit became apparent towards
the end of 1997. Inflation, in terms of CPI, peaked at 6.2% on an annual basis in
June 1998, and moderated thereafter. In 1998 alone, the CPI rose by 5.3%, the
highest increase since 1982. The PPI also increased by 10.7% in 1998 (2.7% in
1997). The rather “mild” inflation, despite the severe depreciation, was due mainly
to the contraction of domestic demand.
FINANCIAL STRUCTURE P2112/1/27
Policy response to the crisis.
Initial Policy Response
Initially, Malaysia did follow some of the standard IMF prescriptions adopted by other crisis
countries, but subsequently choose a different route. While the policy direction was changed
early in the crisis, the ultimate objective of ensuring growth with the price stability remained
unchanged. The selective exchange control measures were a necessary part of the efforts to
stabilize domestic financial markets to ensure that the prospects for an economic recovery
would not be jeopardized by external developments and contagion.
High interest rate to contain speculation against the ringgit was adopted only for a brief
period. When it proved ineffective, interest rate were restored to pre-crisis levels soon after,
and were maintained till September 1997. Thereafter, interest rates were adjusted to reflect
higher rates of inflation to ensure a positive real rate of return to savers.
As higher interest rates were considered detrimental to the real sector, a credit plan was
introduced in September 1997 to moderate loan growth. The target loan growth rate was set
as 25% by the end 1997 (from 29% at end September 1997), a 20% by the end of the first
quarter of 1998 and 15% by the end of 1998. In addition, more stringent guidelines were
imposed on hire purchase loans for non-commercial passenger vehicles.
With respect to fiscal policy, the government reduced its expenditure and deferred
implementation of selected infrastructure projects. The government, however, ensured that
budget allocations with respect to health, education and the provision of other basic
amenities were maintained. In early 1998, the IMF advised against Malaysia’s plans to
reverse fiscal policy to a deficit position to arrest emerging signs of economic contraction.
However, in April – may 1998, when it was clear that the economy was contracting,
Malaysia unilaterally allocated additional fiscal expenditures amounting to RM3 billion.
In the financial sector, prudential regulations of the financial sector were adjusted further to
be consistent with international standards. This included reclassification of loans as non-
performing which had been in arrears for 3 months (instead of 6 month previously),
FINANCIAL STRUCTURE P2112/1/28
increasing the rate for general provisioning and requiring greater financial disclosure by
banking institutions.
The need for a change in policy direction
The combination of tight monetary policy and fiscal restraint adopted in an environment of
weakening external demand caused aggregate demand to fall more sharply than anticipated.
Then, the Malaysian Government adopted a more comprehensive and forward-looking
policy approach. Policies were formulated taking into account the likely developments and
the associated risks. The approach was a pragmatic one to adjust the policy direction to the
changing economic circumstances.
Economic Recovery Plan – Mid 1998
Beginning mid-1998, the policy focus shifted towards reviving the economy. In view of this
objective, the government eased its monetary and fiscal policies. Amidst the deteriorating
economic conditions, the National Economic Action Council (NEAC) was established on 7
January 1998 to make concrete recommendations to the government to arrest the worsening
economic situation and revitalize the economy. On 23 July 1998, the NEAC launched the
National Economic Recovery Plan (NERP) to provide a comprehensive framework for
economic recovery and to counter the negative impact of the ringgit depreciation and the
decline of the stock market.
The NERP had six objectives, which included the short-term focus of stabilizing the ringgit;
restoring market confidence; and maintaining financial market stability. These were
complemented with structural reform objectives of strengthening economic fundamentals;
continuing the socio-economic agenda; and restoring adversely affected sectors.
Since early August 1998, monetary policy has become accommodative by reducing interest
rates and the SRR to reinforce expansionary fiscal policy and revive the economy. The 3-
month intervention rate of BNM was reduced in three successive steps, from 11% to 9.5%
FINANCIAL STRUCTURE P2112/1/29
during the month of August. The SRR was reduced from 8% to 6 % on 1 September, when
the selective exchange controls were imposed and further to 4% on 16 September in order to
ensure adequate liquidity in the banking system and to reduce their cost of funds.
The importance of the efficient functioning of the intermediation role of the banking
institutions came to the forefront during the crisis period. In an environment of uncertainty,
banking institutions had become excessively cautious in their lending decisions, causing a
sharp slowdown in credit. To avoid a credit crunch situation, banking institutions with
sufficient capacity were encouraged to achieve a minimum loan growth rate of 8% for 1998.
Pre-emptive measures were also introduced to strengthen the resilience of the financial
sector to avoid systemic risks and to ensure the continued efficient functioning of the
banking sector and promote market confidence in the face of deteriorating economic
conditions. The measures were multi-pronged - aimed at strengthening all aspects of the
financial system. The measures included the consolidation of the finance companies, the
establishment of Danaharta, to purchase NPLs from banking institutions and manage these
NPLs in order to maximize their recovery value; Danmodal, to facilitate the recapitalisation
of banking institutions; and the Corporate Debt Restructuring Committee (CDRC), a
platform for both the borrowers and the creditors to work out feasible debt restructuring
schemes without having to resort to legal proceedings.
Selective Exchange Control Measures
The selective exchange control measures were designed to achieve specific objectives. The
controls were aimed specifically at eliminating access to ringgit by speculators by reducing
the offshore market in ringgit and limiting the supply of ringgit to speculators. In addition,
the measures were also aimed at stabilizing short-term capital flows. They were carefully
designed to have minimal impact on economic activities. Thus, rules that governed trade
transactions and foreign direct investment were left unchanged. Current account
convertibility continued to be maintained. The only requirement was for trade settlements to
be carried out in foreign currencies. These measures were essentially aimed at curbing the
FINANCIAL STRUCTURE P2112/1/30
internationalization of the ringgit. As such, the exchange controls affect only short-term
flows. Medium and long-term flows of foreign funds into the country continue to be
unaffected by the controls.
The main selective exchange control measures were:
control the transfer of funds in the external accounts to immobilize trading of ringgit
offshore;
control on ringgit loans to non-residents;
imposition of the 12-month holding rule on the repatriation of funds in external
accounts (replaced by repatriation levy on portfolio funds on 15 February 1999
which was subsequently liberalized further on 21 September 1999);
limiting the amount of ringgit that could be imported or exported and the amount of
foreign currency that could be exported.
1.5 ACTS THAT REGULATE FINANCIAL INSTITUTION
The Banking and Financial Institutions Act 1989 (BAFIA)
A major event which took place in 1989 was the introduction of the Banking and
Financial Institutions Act 1989 (BAFIA) to replace the Banking Act 1973 and Finance
Companies Act 1969. The introduction of BAFIA was intended to provide an integrated
supervision of the Malaysian financial system and to modernize and streamline the laws
related to banking and banking institutions.
Rationale for BAFIA
The growing competition in the banking system had resulted in the blurring of lines of
business between the three traditional groups of banking institutions under the Central
Bank supervision, namely, commercial banks, merchant banks and finance companies.
This had let to the extent that the methodology of supervision of these institutions had
increasingly converged although the legislative basis for supervision was legally
FINANCIAL STRUCTURE P2112/1/31
separated under the repealed Banking Act 1973 and repealed Finance Companies Act
1969.
BAFIA placed all banking institutions supervised by the Central Bank, including
discount houses and money and foreign exchange brokers which were previously
supervised on an administrative basis, under one supervisory and regulatory scheme.
BAFIA was built on the strength of the regulatory regime in the two repealed acts, while
the prudential and structural regulatory features essential for ensuring the stability of the
banking system have not been changed under the BAFIA.
The Institutions under BAFIA
a) Licensed institutions
Comprising commercial banks, merchant banks, finance companies, discount
houses, money brokers and foreign exchange brokers.
b) Scheduled institutions
Comprising the major non-bank sources of credit and finance and representative
offices of foreign banks or foreign institutions which carry out the business or
activities similar to the scheduled institutions.
c) Non-scheduled institutions
Comprising all other statutory bodies and institutions involved in the provision of
finance and credit.
The Offshore Banking Act 1990
The Offshore Banking Act 1990 (OBA) governs the activities of offshore banking
and offshore investment banking. Bank and financial institutions intending to
operate as an offshore investment bank in Labuan are required to seek a license from
the Minister of Finance through Labuan Offshore Financial Services Authority
(LOFSA).
In the amendments to OBA in 1996, major changes were made, among others, by
expanding the definition of offshore banking business to include a wide range of
financial services that could be undertaken by offshore banks instead of only
providing credit facilities and accepting deposits.
FINANCIAL STRUCTURE P2112/1/32
The Islamic Banking Act 1983
An act which came into effect on April 7th
1983, to provide for the licensing and
regulation of Islamic banking business. The act inter alia has provisions on the
financial requirements and duties of an Islamic Bank, ownership, control and
management of Islamic banks, restriction of its business, powers of supervision and
control over Islamic bank and other general provision such as penalties etc.
1.6 ROLE AND PURPOSE OF REGULATORY BODIES
i. Bank Negara Malaysia
Bank Negara Malaysia (BNM) is a regulatory body to have primary oversight of the
monetary and banking system in Malaysia. To enable BNM to meet its objectives, it is
vested with comprehensive legal powers under various Acts and Ordinances to regulate and
supervise the financial system. BNM was also as agent of the government on exchange
control matters. Furthermore, effective 1 May 1988, BNM was also responsible for the
supervision, regulation and development of the insurance industry as part of the financial
system.
ii. Security Commission
To streamline the regulatory structure of the capital markets, the Security Commission (SC)
was established under the Securities Commission Act 1993, as a self-funding statutory body
with investigate and enforcement powers. The mission is to promote and maintain fair,
efficient, secure and transparent securities and futures markets and to facilitate the orderly
development of an innovative and competitive capital market.
The SC’s many regulatory functions include:
Supervising exchanges, clearing houses and central depositors;
Registering authority for prospectuses of corporations other than unlisted recreational
clubs;
Approving authority for corporate bond issues;
Regulating all matters relating to securities and futures contracts;
FINANCIAL STRUCTURE P2112/1/33
Regulating the take-over and mergers of companies;
Regulating all matters relating to unit trust schemes;
Licensing and supervising all licensed persons;
Encouraging self-regulation; and
Ensuring proper conduct of market institutions and licensed persons.
FINANCIAL STRUCTURE P2112/1/34
Activity 1B
TEST YOUR UNDERSTANDING BEFORE YOU CONTINUE TO THE NEXT
INPUT…!
1.4 List down five major sectors in the economic fund flow.
1.5 Name three special mechanisms which are established to overcome the serious increas
NPLs banking industry.
1.6 Name the regulatory bodies in Malaysian financial system.
FINANCIAL STRUCTURE P2112/1/35
Feedback To Activity 1B
1.4 i) Households
ii) Enterprises
iii) Government
iv) Financial institutions
v) External sectors
1.5 Danaharta, Danamodal and Corporate Debt Re-structuring Committee (CDRC)
1.6 Bank Negara Malaysia and Security Commission
FINANCIAL STRUCTURE P2112/1/36
1.7 CHARACTERISTICS, ROLES AND OBJECTIVES OF IOFC
The Characteristics of an IOFC
An offshore is basically a small territory or jurisdiction that imposes low or no taxes
on income, profit, dividend and interest earned or derived from the offshore business
activities or transactions carried out by offshore multinational corporation in or from
those jurisdictions. Generally also, it does not have any exchange control or
limitation or transboundary movement of funds into and out of the jurisdiction by the
offshore company, no stamp death, inheritance or estate duties and no value added
tax. An IOFC maintains a high degree of secrecy through limitation on public
inspection of company files, prohibition from disclosure of the shareholding or
beneficial ownership and management of the business, financial or other affairs of
the company other than in compliance with the law.
The roles and objectives of IOFC
In summary, the objectives of establishing Labuan IOFC are as follows:
a) to enhance the attractiveness of Malaysia as an investment centre.
b) to supplement the onshore financial system centre in Kuala Lumpur by
tapping the growing demand for tailored financial and related services.
c) to strengthen the contribution of broad financial sector to the progress of
diversified economic growth.
d) To form part of the broad national strategy to spread out and diversify the
growth opportunities of the nation, focusing attention on the further
development of East Malaysia in terms of industrial and services (including
tourism) development.
INPUT
FINANCIAL STRUCTURE P2112/1/37
1.8 FACTORS THAT CONTRIBUTE TO THE SUCCESSFUL OPERATION OF
IOFC
There are some factors that contribute to the success of the existing IOFC:
a) Political stability in the country which is a crucial factor in the investment decisions
of the potential players.
b) Stable currency with minimum or no exchange control.
c) Banking secrecy and confidentiality coupled with minimum rules and regulations.
d) A competitive tax regime. The tax rate imposed on offshore companies is among the
lowest in the world.
e) Lower operating costs compared to other financial centres in the region.
f) Good infrastructural support facilities such as excellent communications and
transportation system with other financial centres.
g) Professionally qualified and experienced workforce.
1.9 FINANCIAL SERVICES WHICH IS OFFERED BY IOFC AND
INCENTIVES GIVEN TO THE PARTICIPANTS
Financial services offered in Labuan IOFC
Some of the international business activities that can be conducted in Labuan IOFC are:
a) offshore banking operations
b) offshore insurance and offshore insurance-related businesses
c) corporate funding
d) investments and trust management
e) offshore investment holding companies
f) professional services and other related services.
FINANCIAL STRUCTURE P2112/1/38
Incentives to operate in Labuan IOFC
Some of the incentives offered to financial institutions to attract them to operate in
Labuan IOFC are:
a) Low or no taxes on income, profit, dividend and interest earned from offshore
business activities or transactions carried out by the offshore multinational
corporation in or from the territory.
b) No limitation or exchange control on the movement of funds in or out of the territory
(other than the standard exchange control requirements on resident and nonresident
institutions).
c) No levy stamp, inheritance, death or estate duties and no value added tax.
d) Strict rules on confidentiality in the territory or accounts in the territory’s banks.
1.10 CHALLENGES OF THE FINANCIAL SECTOR IN GLOBAL ECONOMY
The rapid intensification of globalization in recent years has significantly affected the
structure and operations of financial institutions all over the world, including Malaysia.
Globalisation is rapidly and irreversibly changing the way business and policy are
conducted. For instance, the global trend towards liberalization in the financial system
has led to the blurring of traditional demarcation lines separating the activities of the
different groups of financial institutions and removed artificial barriers to competition.
As a result, the array of activities that can be undertaken by different groups of financial
institutions is converging.
Technological advances in telecommunications, information processing and computing
have been a key factor in integrating financial markets across the globe, and in enabling
the design of innovative and complex financial instruments that have helped to improve
risk management and shifted risks to those who are better able to manage them.
Consequently, economic agents have become willing to assume greater risk, while
short-term capital funds have flowed rapidly in large amounts from developed
economies into emerging economies since the late 1980s.
FINANCIAL STRUCTURE P2112/1/39
The measures that have been undertaken so far would serve as the foundation to further
enhance the capability and capacity of the domestic financial system, and to achieve the
agenda for the financial system, as follows:
To create strong, efficient, competitive and resilient banking system that would be
better able to withstand future shocks, thereby, minimizing the adverse implications
on macroeconomic stability.
To accelerate implementation of measures to broaden and deepen financial markets
and strengthen the financial infrastructure. In particular, efforts will be intensified to
increase the proportion of non-bank financing in the economy and diversify risks
away from the banking system. In this regard, the further development of the bond
market and securitization would be accelerated.
To inculcate strong risk management skills in order to ensure that there is no
excessive risk taking that could result in adverse implications, given the increasing
volatility of the financial environment.
To promote dynamism in developing new products and management systems.
FINANCIAL STRUCTURE P2112/1/40
Activity 1C
TEST YOUR UNDERSTANDING BEFORE YOU CONTINUE TO THE NEXT
INPUT…!
1.7 What are the main objectives of establishing International Offshore Financial Centre
(IOFC)?
1.8 What are the challenges faced by the financial sectors in global economy?
FINANCIAL STRUCTURE P2112/1/41
Feedback To Activity 1C
1.7 To complement Kuala Lumpur as a regional financial centre, strengthen the
contributions of the financial services sector to the gross national product of Malaysia
and promote the economic development of Labuan and its vicinity.
1.8 i) Liberalization in the financial system
ii) Technological advances in telecommunications, information processing and
computing.
FINANCIAL STRUCTURE P2112/1/42
KEY FACTS
1. Briefly the structure of the financial system is as follow:
a) Financial institutions
i.i Banking system
i.ii Non-bank financial intermediaries
b) Financial markets
i. Money and foreign exchange markets
ii. Capital market
iii. Derivative market
iv. Offshore market
2. The roles of financial institutions and financial intermediaries in the country’s
development:
a) Intermediation function
b) Operation of the payment system
c) As a channel for transmission of monetary policy
3. The main assets of the financial system:
a) Commercial banks
b) Provident and pension funds
c) Bank Negara Malaysia
d) Finance companies
FINANCIAL STRUCTURE P2112/1/43
4. Financial intermediaries primarily operate in two markets. First in the saving market
where they operate as borrowers while meeting the demand for financial assets by
surplus units. The other one is the credit market where financial intermediaries supply
the financial resources required by the deficit units.
5. The main objectives of establishing International Offshore Financial Center (IOFC) are
to complement Kuala Lumpur as a regional financial center, strengthen the contributions
of the financial services sector to the gross national product of Malaysia and promote the
economic development of Labuan and its vicinity.
FINANCIAL STRUCTURE P2112/1/44
SELF-ASSESSMENT 1
You are approaching success. Try all the questions in this self-assessment section
and check your answers with those given in the Feedback on Self-Assessment 1 given
on the next page. If you face any problems, discuss it with your lecturer. Good luck.
1. The Malaysian financial system can be broadly divided into banking system and non-
bank financial intermediaries.
Distinguish the groups of institutions that fall into the two categories.
2. In an economy, the financial system acts as the conduit for the flow of funds, channeling
savings of the economy for productive investment.
The more efficient the system of financial intermediation, the more effective it would be
in mobilizing previously idle resources for development in those areas that need these
funds the most.
Describe how funds flow an economy. Identify the units that are considered having
surplus funds and those in need of funds.
FINANCIAL STRUCTURE P2112/1/45
Feedback To Self-Assessment 1
1. a) Financial Institutions
The banking system which is the major component of the financial sector consists of:
- Bank Negara Malaysia
- Commercial banks (include Bank Islam Malaysia Berhad and Bank Muamalat
Malaysia Berhad)
- Finance companies
- Merchant banks
- Discount houses
- Foreign bank’s representative offices
They are regulated and supervised by the central bank.
b) Non-bank financial intermediaries
The non-bank financial intermediaries are mainly supervised by other government
agencies.
These institutions can be divided into five major groups consisting of:
i. Provident and pension funds
ii. Insurance companies
iii. Development financial institutions
iv. Saving institutions
v. Other non-bank financial intermediaries comprising Unit trusts, Pilgrims
Fund board, Housing Credit Institutions, Cagamas Berhad, Credit Guarantee
Corporation, Leasing Companies, Factoring Companies and Venture Capital
Companies.
FINANCIAL STRUCTURE P2112/1/46
2. The flow of fund is presented in graphical form table below to provide information on
how savings are mobilized through the organized financial system including banking
institutions. It also illustrate how these funds are utilized.
The units that are considered having surplus funds and those in need of funds:
- Household: usually the major net surplus unit
- Enterprises: usually the deficit units
- Government: usually the deficit units
- External sector: usually the deficit units
CONGRATULATIONS!!!!…..
May success be with you
always….
Private sector
savings
Net Inflow of
Long-Term
Funds
Public sector
savings
Financial
Intermediaries:
Saving and
Other Financial
Institutions
TOTAL
FLOWS OF
CAPITAL
FUNDS
Private
Investment
R
I
GF
F
FF
r
iv
a
t
e
i
nv
e
st
m
e
nt
Accumulation of
International
Reserves
c
cu
m
u
la
t
io
n
o
f
in
t
er
n
a
ti
o
na
l
r
e
s
er
v
es
Unidentified
private payments
abroad
Public
investment